China's Aug industrial profits fall as headwinds hit firms

BEIJING (Reuters) - Profits at China’s industrial firms contracted in August, reversing the previous month’s brief gain, as weak domestic demand and the trade war with the United States weighed on corporate balance sheets.

FILE PHOTO: Workers are seen at a production line manufacturing tyres at a factory in Nantong, Jiangsu province, China April 28, 2019. REUTERS/Stringer

Industrial profits fell 2% in August from a year earlier to 517.8 billion yuan ($72.59 billion), data released by the National Bureau of Statistics (NBS) on Friday showed. That compared with a 2.6% gain in July.

Profits have slowed since the second half of 2018, despite some transitory rebounds, with falling factory-gate prices threatening to further knock profits as economic growth skidded to a near 30-year low.

As a result, policymakers are widely expected to unveil more support measures to boost a slowing economy amid sluggish consumption, rising export pressure and faltering domestic demand.

The decline in profits was in line with grim manufacturing readings in August with industrial production growth falling to its weakest in 17-1/2 years while exports also tumbled.

“Given strong growth headwinds and elevated U.S.-China trade tensions, we expect the economy to worsen before getting better and believe Beijing will likely ramp up its policy stimulus,” analysts from Nomura said in a note.

Producer prices, one key barometer of domestic demand and indicative of profitability, posted their sharpest fall in three years last month.

For January-August, industrial firms earned profits of 4.02 trillion yuan, down 1.7% year-on-year, the same as the reading in the first seven months.

Analysts expect economic growth could cool further this quarter from a near 30-year low of 6.2% hit in April-June.

Earlier this month, the People’s Bank of China (PBOC) increased support for slowing growth by cutting banks’ reserve requirement ratio (RRR) for the third time this year. China also cut a new one-year benchmark lending rate to free up credit to struggling smaller firms.

But analysts say Beijing will need to do more to ward off a steeper slowdown, although the scope for stimulus is limited as policymakers worry about rising debt risks and property bubbles.

Fuel processing industries, chemical fibers and paper manufacturing industries posted some of the steepest declines in profits over the January-August period.

Profit margins in car manufacturing and non-ferrous sectors improved slightly and the profit declines in telecommunications and electronic equipment manufacturing, which are more vulnerable to U.S. tariffs than other product classes, narrowed.

A nearly 15-month trade war between the world’s two biggest economies has shown no signs of ending. Top U.S. and China trade negotiators are expected to meet in Washington in about two weeks to determine if they can chart a path out of the bruising trade war.

Industrial firms’ liabilities increased 5.0% from a year earlier to 65.81 trillion yuan at end-August, compared with a 4.9% increase in July.

Private sector profits rose 6.5% in January-August, slowing from 7.0% growth in the first seven months.

Additional reporting by Roxanne Liu; Editing by Sam Holmes