China's industrial profits grow at fastest pace since mid-2018

BEIJING (Reuters) - Profits at China’s industrial firms grew for a third straight month in July and at the fastest pace since June 2018, marking a bright spot in the economy as the manufacturing sector slowly recovers from its coronavirus slump.

FILE PHOTO: A worker stands on scaffolds at a construction site in Shenzhen, south China's Guangdong province April 25, 2011. REUTERS/Jason Lee

Profits at China’s industrial firms grew 19.6% on-year to 589.5 billion yuan ($85.58 billion), the statistics bureau said on Thursday, following an 11.5% increase seen in June, the National Bureau of Statistics (NBS) data showed on Thursday.

China’s recovery had been gaining momentum after the pandemic paralysed huge swathes of the economy as pent-up demand, government stimulus and surprisingly resilient exports revived activity.

However, some signs of weakness have emerged in July, with industrial output growing slower than expected. Some analysts said flood and torrential rain have dampened activity and demand for electricity.

Factories’ profits also face risks from increasingly tense U.S.-China relationship ahead of the U.S. presidential elections in November, which could impact overseas orders and confidence from investors and consumers.

For January-July, industrial firms’ profits fell 8.1% on an annual basis to 3.1 trillion yuan, improving from a 12.8% slump in the first six months.

Automobiles and electronics industries notched up significant recoveries in profits in July, seeing growth rates of 125.5% and 38.6% respectively, according to Zhu Hong, an official at the statistics bureau.

Despite the acceleration in profits in July, accumulated profit declines in the mining and raw materials industries remain large, company cash flow pressures are high, and a “complex and severe” environment at home and abroad means that future profit growth has a degree of uncertainty, said Zhu.

Profit growth was mainly driven by higher margins, with reveune growth slowing modestly from June, said analysts from Goldman Sachs in a note.

Earnings at China’s state-owned industrial firms were down 23.5% on an annual basis for the first seven months of the year, versus a 28.5% decline in the first half of the year, the statistics bureau data showed.

Liabilities at industrial firms rose 6.5% on-year at end-July, up from a 6.4% growth as of end-June.

Private sector profits fell 5.3% in January-July, narrowing from January-June’s 8.4% fall.

The industrial profit data covers large firms with annual revenue over 20 million yuan ($2.90 million) from their main operations.

Reporting by Gabriel Crossley and Roxanne Liu; Editing by Sam Holmes and Muralikumar Anantharaman