China's July industrial profit growth cools for third straight month

BEIJING (Reuters) - Profit growth for China’s industrial firms slowed for a third straight month in July, in a further indication that demand in the world’s second-biggest economy is cooling even as U.S. trade pressure mounts.

A worker looks on as a crane lifts a roll of steel wires at a factory in Nantong, Jiangsu province, China July 3, 2018. REUTERS/Stringer

Weakening consumption, rising credit defaults, high financing costs and escalating Sino-U.S. trade tensions are expected to further pressure earnings for China Inc in coming months, Nomura said in a note.

Industrial profits in July rose 16.2 percent from a year earlier to 515.12 billion yuan ($74.94 billion), easing from 20 percent in June and the slowest pace since March, data from the National Bureau of Statistics (NBS) showed on Monday.

To cushion the economy and revive investment, China is speeding up infrastructure spending. It is also keeping liquidity in the financial system ample, and is offering more help to companies struggling with high costs or having trouble obtaining financing.

But analysts at Nomura noted it will take some time for recent government stimulus and policy easing measures to be felt.

“We expect the economy to get worse before it gets better,” they said.

Profit growth slowed in July as producer price inflation moderated, He Ping, an official at the statistics bureau, said in a statement accompanying the data.

For the first seven months of the year, industrial firms have reported profits of 3.9 trillion yuan, up 17.1 percent from the same period last.

However, while headline growth remains robust, it has not been broad based. In fact, China’s profit performance has been markedly lopsided across business sectors for some time.

Producers and refiners of raw materials like oil companies and steel mills have accounted for roughly two-thirds of the gains this year. Smaller firms are facing much tougher business conditions that are squeezing profit margins.

Oil, steel, building materials and chemical sectors were key drivers behind the profit growth in the first seven months of the year. But profit growth in non-ferrous metal smelting and processing, furniture, railway and aircraft manufacturing fell during the same period from a year earlier.

China Petroleum & Chemical Corp 600028.SS0386.HK, the country's largest refiner, reported its best quarterly profit in years on a strong upstream and refining business.


A spate of weaker data in the last few months has shown investment growth has slowed to a record low. Industrial output growth has also remained soft.

Though factory price inflation cooled in July, economists expect tit-for-tat Sino-U.S. tariffs and Beijing’s continued crackdown on industrial pollution to add to wider price pressures in months ahead.

China’s steel mills, for example, are enjoying a sustained boom as the government limits production in some parts of the country to curb smog, supporting prices despite signs of softening demand. Shanghai rebar steel futures rallied to a seven-year high last week.

Jiangsu Shagang 002075.SZ, China's biggest private-owned steel mill, reported a 242.3 percent increase in net profit for the first half this year, while Shougang in the capital city of Beijing 000959.SZ saw net profits rise 50.1 percent.


The slowdown in China’s industrial profits could translate into weakening investment in the manufacturing sector, according to Betty Wang, Senior China Economist at ANZ.

“Downside risks (to fixed-asset investment growth) still outweigh the upside risks,” said Wang, adding that a low base from last year should have provided support to Monday’s data.

China’s investment growth may slow even further in the future and authorities should continue to make good use of fiscal and financial policy, the state planner said on Monday.

However, industrial profit growth is unlikely to see a sharp reversal, Wang said, noting commodity prices are likely to remain resilient.


On Thursday, U.S. and Chinese officials ended two days of talks with no major breakthrough as their trade war escalated with activation of another round of dueling tariffs on $16 billion worth of each country’s goods.

Chinese exports may only grow 2 percent in yuan terms in the second half, the China Securities Journal reported on Friday, citing the State Information Center under the National Development and Reform Commission. That compared with a 4.9 percent rise in first half.

Earlier this month, Ning Jizhe, head of the Statistics Bureau, said China is confident and capable of meeting the full year’s economic goal of around 6.5 percent, according to a Xinhua report.

“We will take targeted measures to cope with impact on employment that might brought by trade frictions.” said Ning.

Finance Minister Liu Kun told Reuters last week that taxes and fees will be cut by more than 1.1 trillion yuan this year.

Profits earned China’s state-owned industrial firms increased 30.5 percent year-on-year in January-July period, slowing from 31.5 percent growth in the first half.

The liability-to-asset ratio for state-owned industrial firms was at 59.4 percent by the end of July, the lowest since 2016 and down 1.3 percentage points year-on-year.

Liabilities of industrial firms rose 6.5 percent on an annual basis as of end-Judy, according to the Statistics bureau.

Reporting by Min Zhang, Stella Qiu and Ryan Woo; Editing by Kim Coghill