China industrial profits grow fastest since 2014

Mar 29, 2016

Profits at Chinese industrial companies have risen at their fastest pace in more than 18 months, in a sign that stimulus measures are helping to cushion the slowdown in China’s manufacturing sector.

China’s economy grew at its weakest pace in 25 years last year, and analysts expect a further slowdown this year. The factory sector, the main engine of growth over the past two decades, has been the hardest hit, as rampant excess capacity and weak demand have led to price declines.

But monetary easing has fuelled a modest revival in housing construction, while increased fiscal spending on infrastructure has also buoyed demand for China’s factory output this year, analysts say.

Official data released on Sunday showed industrial profits rose 4.8 per cent in January and February compared to a year earlier and in contrast to a fall of 4.7 per cent in December. The rise ends a seven-month string of negative growth and marks the fastest growth since July 2014.

“Sales and profit margins in sectors exposed to the consumer [are] holding up much better than in those where the downturn in real estate construction has exposed major excess capacity and unleashed relentless downward pressure on margins,” Louis Kuijs, head of Asia for Oxford Economics in Hong Kong, wrote last week. “Employment has already been cut significantly in the badly hit sectors.”

China’s statistics bureau reports a single figure for the first two months of each year to eliminate seasonal distortions from the irregular timing of the lunar new year holiday. Producer price inflation, which measures changes in wholesale prices, has been negative for 48 consecutive months but price declines narrowed in February, helping to boost profits.

Signs of a bottoming-out in prices for global commodities such as crude oil and iron ore are also welcome news for China’s factory sector, where much of the deflationary pressure is imported. Throughout the slowdown in the factory sector, profit margins have held up better than nominal growth in profits, due to the fall in raw material prices. But for Chinese companies with high debt levels fixed in nominal terms, maintaining revenue growth in nominal terms remains crucial.

Li Keqiang, premier, told an annual parliament session this month that “supply-side reform”, which focuses on dealing with industrial overcapacity, would be a top priority for 2016.

But analysts have said initial targets for cutting steel capacity are short of what is needed to restore balance between supply and demand and revive prices. Opposition from local governments and workers also highlights the challenges of shutting down “zombie” factories.

“The government’s plans to cut overcapacity seem modest compared to the scale of the problems,” Mr Kuijs said. “The downward pressure on profit margins in the affected sectors is likely to remain substantial.”

Source: THE FINANCIAL TIMES