China’s industrial profit growth slows to five-month low as trade war deepens


Profit growth at China’s industrial firms slowed to a five-month low in August, fanning concerns about faltering domestic demand in the world’s second-largest economy as escalating trade frictions with the United States cloud its outlook.

Demand for raw materials and industrial products has taken a hit this year as business expansion plans slowed, restrained by tighter funding due to China’s multi-year campaign to curb corporate debt and crack down on risky borrowing. A softer property market has also sapped construction-related demand.

Industrial profits rose 9.2 per cent in August to 519.69 billion yuan (US$76 billion), data from the National Bureau of Statistics (NBS) showed on Thursday. The pace of growth slowed for a fourth straight month and almost halved from the 16.2 per cent gain in July.

Last month’s slowdown was mainly due to a double whammy of slower revenue and factory price gains, the statistics bureau said in a statement accompanying the data release.

“Corporate profitability will continue to worsen, as the recent policy boost to spur investment growth will take time to set in,” said Yang Yewei, an analyst at Southwest Securities. He noted both inventories and money owed to companies had edged up, a sign that business conditions were becoming increasingly challenging.

The profit slowdown points to persistently weakening demand under the ongoing deleveraging campaign, despite policymakers shifting their focus to growth-boosting strategies.

These measures include accelerating approvals for infrastructure projects and financing support for the private sector.

Taxes and fees are being cut while banks have been told to keep credit lines open to firms hit by the US-China trade war.

The profit growth in August was the slowest since March, when profits expanded 3.1 per cent. Analysts from Capital Economics had forecast a 15.5 per cent increase for August.

Upstream sectors such as mining and metal producers and state-owned firms still commanded the lion’s share of profit gains but their growth softened notably in August.

Profits at China’s state-owned industrial firms rose 26.7 per cent year-on-year in January-August versus a 30.5 per cent increase in the first seven months.

The biggest slowdown in growth came from oil and gas production and ferrous metal smeltering, whose year-on-year growth in January-August were 11 and 17.2 percentage points lower respectively from January-July.

For the first eight months of the year, industrial firms notched up profits of 4.4 trillion yuan, a 16.2 per cent increase from the same period last year, lower from 17.1 per cent growth in January-July, the statistics bureau said on Thursday.

The latest quarterly survey of thousands of Chinese firms by China Beige Book International suggested both revenue and profit growth slowed in July-September from the previous quarter, and only retailers and commodities companies saw improved margins.

The survey cautioned there are “alarming” parallels with the sudden slowdown in China in 2015, with companies continuing to borrow heavily even as the economy weakens and before any meaningful US tariffs kicked in.

As of the end of August, industrial firms’ liabilities grew 6.6 per cent from a year earlier to 62.8 trillion yuan, compared with an increase of 6.5 per cent by the end of July.

Slowing corporate profits will put pressure on jobs, ultimately putting the brakes on household consumption and hurting overall growth.

Fitch Ratings has cut its GDP growth forecast for China next year to 6.1 per cent from 6.3 per cent. Some economists’ measures suggest growth is already well below 6 per cent.

The latest round of tit-for-tat tariffs could further hurt China’s already slowing economy.

The US and China imposed fresh tariffs on each other’s goods on Monday as both sides showed no signs of backing down from an increasingly bitter trade dispute that is expected to hit global economic growth.

Commodity-related and component manufacturing sectors are most immediately exposed to the new US tariffs, Moody’s said in a report on Tuesday, particularly those related to electronic products, consumer appliances, furniture and vehicle parts.

Some analysts say producer prices – an important gauge of profitability – could prove more resilient than expected due to domestic and global factors.

The producer price index increased 4.1 per cent in August, slowing from the previous month’s 4.6 per cent growth but beating expectations for a 4.0 per cent rise.


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