China’s industrial profits rise on improving sales, good margins

Bolstered by improving sales and better margins, profits for China’s industrial companies rose in May, bucking a months-long downtrend. But analysts are unsure if the modest gains can last. China’s industrial profits have been faltering for over a year as the economy slows and the US-Sino trade war escalates, weighing on manufacturing investment and output.

Profits rose 1.1% in May from a year earlier to 565.6 billion yuan ($82.21 billion), according to data released by the National Bureau of Statistics (NBS) on Thursday, following a 3.7% fall in April.

In the first five months, industrial firms earned profits of 2.38 trillion yuan, down 2.3% from a year earlier, compared with a 3.4% drop in January-April.

The uptick in May was driven by quicker sales and slower increases in corporate costs, Zhu Hong of the statistics bureau said in a statement accompanying the data, adding that better margins in equipment manufacturing and the coal sector attributed to the bulk of the increase.

Moreover, profits in high-tech manufacturing and emerging industries both turned positive in May after declining the month before.

“The modest pick-up in high-tech industry might suggest the effect of value-added tax (VAT) cuts is kicking in,” said Lu Ting, chief China economist at Nomura.

Ting noted, however, that the rebound was still relatively weak and was likely to be short-lived as the trade war drags on.

Leaders from both countries will meet in Japan on Saturday to see if they can get trade negotiations back on track after talks broke down in May.

US President Donald Trump said on Wednesday that a trade deal with Chinese President Xi Jinping was possible this weekend but he is prepared to impose US tariffs on virtually all remaining Chinese imports if the two countries continue to disagree.

Even if further tariff action is suspended, worries are growing that the trade standoff with the United States is morphing into a technology war that will put more strain on China’s higher-value manufacturing.

Washington last month effectively banned US firms from doing business with Huawei Technologies, the world’s largest telecoms network gear maker, citing national security concerns. Many governments and tech companies around the world have fallen in line with the US curbs.

While China’s overall tech industry profits rose last month, earnings for telecommunications and electronic equipment manufacturers, which are more vulnerable to US tariffs than other product classes, declined 13.0% in Jan-May.

Producer price inflation, one gauge of industrial profitability, has been easing since early 2017. It slowed to 0.6% in May, while industrial output growth unexpectedly cooled to a 17-year low of 5%.

To support the economy and spur domestic demand, policymakers have stepped up approvals for big infrastructure projects, freed up more funds for lending and cut taxes. The People’s Bank of China (PBOC) has slashed banks’ reserve requirement ratios six times since early 2018, with further cuts expected in coming months.

The biggest share of profits was still dominated by upstream sectors in January-May, seeing faster growth.

China’s crude steel output hit a record high in May, even as a jump in prices of raw materials, particularly iron ore, cut into mills’ profit margins.

Steel demand from downstream sectors in China has turned “very strong”, Singapore-based data analytics company Tivlon Technologies said this week. But a continued crackdown on air pollution has weighed on smokestack industries. The country’s top steelmaking city of Tangshan last week summoned 48 companies and ordered them to trim output to reduce smog.

Profits at China’s state-owned industrial firms were down 9.7% on an annual basis for the first five months, according to the statistics bureau.

Liabilities of industrial firms rose 5.3% year-on-year as of end-May versus a 5.5% increase by end-April.

Private sector profits rose 6.6% in Jan-May, from 4.1 per cent in the first four months.

The yuan ticked up on Thursday on hopes China and the United States will refrain from escalating their trade war, but gains were capped by strength of the dollar, which was propped up by a reversal in rate cut expectations.

The South China Morning Post, citing unidentified sources, said the two governments have agreed to a tentative pause in their dispute ahead of this weekend’s G20 summit in Osaka, Japan, where US President Donald Trump will hold talks with Chinese President Xi Jinping.

Trump said on Wednesday a deal was possible, but warned of taxing the Chinese imports not yet impacted if the two countries continue to disagree.

Reuters