June 27, 2018 / 2:11 AM / 21 days ago

China's solid industrial profits tamp trade war worries for now

BEIJING (Reuters) - Profits at China’s industrial firms rose sharply in May, maintaining the previous month’s sizzling pace despite signs of slowing momentum in the world’s second-largest economy and an intensifying trade spat with the United States.

Beijing is trying to walk a tightrope between supporting economic growth and tamping down financial risks, with policymakers freeing up more funds for lending by cutting required reserve levels for banks twice since April.

The latest cut came on Sunday as authorities moved fast to temper any potential drag on growth from the heated Sino-U.S. trade dispute.

Industrial profits rose 21.1 percent to 607.1 billion yuan ($92.00 billion) in May, according to data published by the National Bureau of Statistics (NBS) on Wednesday, compared to 21.9 percent growth in April.

For the first five months, industrial firms notched up profits of 2.73 trillion yuan, an increase of 16.5 percent from a year earlier, versus a 15 percent increase in the January-April period.

The earnings jump in May was driven by price gains and lower costs, statistics bureau official He Ping said in a statement accompanying the data.

He’s comments were backed by data earlier this month showing China’s producer price inflation picked up for a second month in a row in May to 4.1 percent.

In the first five months of the year, profit growth was largely underpinned by heavy industry, including ferrous metals processing, chemicals, and oil and natural gas extraction, He said.

Profits for computer, telecommunications and other electronics rose 1.9 percent year-on-year in the Jan-May period, recovering from losses over the first four months.

Some analysts say the strong profit growth reflects a recovery in output from an easing in a long-running crackdown on pollution that had shuttered production at many factories.

“We would argue that’s (profit growth) mostly a recovery from the pollution crackdown, which in our figures resulted in quite a significant slowdown in industrial production during the winter,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.

A man works at a furnace at a steel plant of Dalian Special Steel Co Ltd. in Dalian, Liaoning province, China June 20, 2018. REUTERS/Stringer

“If we’re right then there’s no reason to expect that pick up to be sustained. In our view, the more medium term outlook is still not great.”

TRADE HEADWINDS

China’s industrial firms have benefited from a hot property and infrastructure construction market over the past two years, which helped stimulate demand for building materials from steel bars to copper pipes, glass and cement.

And while sales have cooled in the face of government restrictions on home purchases, new construction starts rose 20.5 percent in May and property investment also picked up, suggesting any property slowdown is likely to be relatively modest.

China Petroleum & Chemical Corp (Sinopec) (600028.SS) in the first quarter reported its best quarterly profit since June 2015 on strong earnings from its refining business, which saw higher margins.

China’s steel output surged to a record in May as mills ramped up production to chase fat profit margins, with a strong outlook for demand likely to keep mills running at nearly full capacity for the rest of the year.

Liuzhou Iron & Steel (601003.SS) said in April that its first quarter profit rose 416 percent.

But activity in some parts of the economy including infrastructure investment and industrial output point to softening economic growth.

While industrial commodity prices have been strong this year, the intensifying trade dispute between Beijing and Washington has rattled China’s commodity markets this month as both sides threatened new import tariffs.

The war against pollution, with government-ordered suspension of production for steel, cement, coal-fired power plans and petrochemical makers in recent months also add to the challenge for industrial producers ahead.

There are signs Beijing is worried about a slow down in the economy, and Sunday’s reserve requirement cut suggests policy makers want to keep liquidity flush even as they extend a years-long effort to reduce debt and let “zombie” firms fail.

While a campaign to reduce corporate leverage has pushed up some measures of corporate borrowing costs, a survey of Chinese firms by China Beige Book International (CBB) found companies borrowed the most in five years in the second quarter at interest rates that were lower than a year ago.

Profits at China’s state-owned industrial firms rose 28.7 percent year-on-year in Jan-May period, quickening from a 26.2 percent increase in the first four months.

Reporting by Min Zhang and Elias Glenn; Editing by Shri Navaratnam

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