China’s July industrial profits swing to growth but outlook clouded

FILE PHOTO: An employee works on the production line of a tyre factory under Tianjin Wanda Tyre Group in Xingtai
FILE PHOTO: An employee works on the production line of a tyre factory under Tianjin Wanda Tyre Group, which exports its products to countries such as U.S. and Japan, in Xingtai, Hebei province, China May 21, 2019. REUTERS/Jason Lee/File Photo

August 27, 2019

BEIJING (Reuters) – Profits at China’s industrial firms returned to growth in July helped by improvements in the petrochemical and auto sectors but a broader economic slowdown and the protracted U.S. trade war are expected to weigh on the business outlook.

Industrial profits rose 2.6% in July year-on-year to 512.7 billion yuan ($72.28 billion), according to data released by the National Bureau of Statistics (NBS) on Tuesday, recovering from a 3.1% fall in June.

Despite the turnaround, China’s statistics bureau said more effort is needed to promote steady growth in corporate profits amid strong economic headwinds.

“The downward pressure on the economy is relatively high, the market demand is slowing down, the prices of industrial products are falling,” statistics bureau’s senior statistician, Zhu Hong, said in a statement accompanying the data.

“There will still likely be volatility and uncertainty in profits of industrial enterprises,” Zhu said.

For January-July, industrial firms earned profits of 3.50 trillion yuan, down 1.7% from a year earlier. That compared with a 2.4% fall in the first six months.

The uptick in July came mainly from petrochemical and auto sectors, the statistics bureau said in a separate statement on the data.

China’s industrial profits have broadly slowed since the second half of 2018 as economic growth skidded to a near 30-year low while an escalating U.S.-China trade war slashed already lean earnings for businesses.

The July expansion in industrial profits contrasts with sluggish producer inflation and waning industrial output growth, which sank to record lows in July, indicating weakness in both the demand and supply sides.

As the trade dispute fuels global recession worries, investors and analysts have been expecting new stimulus measures from Beijing to boost domestic demand and lower funding costs for firms.

To offset the effect of the U.S. trade war, Chinese policymakers have rolled out various growth measures including reserve requirement ratio cuts, tax cuts and a push for banks to lend to smaller companies. But Beijing has also maintained it would not resort to a “flood-like stimulus.”

Profitability in Beijing’s oil refining sector has improved, with margins at refineries boosted by demand for diesel. But analysts warn this could be temporary as the industry still has to cope with overcapacity and ample supply of refined oil products.

The decline in the auto sector’s net profit also narrowed in July, but overall car sales were down for a 13th consecutive month in July. The prolonged sales decline has made local carmakers like Geely <0175.HK> and Great Wall <601633.SS> cut earnings forecast.

China’s exports unexpectedly returned to growth in July on improved global demand despite escalating U.S. trade pressure.

Profits at China’s state-owned industrial firms dropped 8.1% on an annual basis for January-July, the statistics bureau data showed.

Liabilities of industrial firms were up 4.9% on-year at end-July, compared with a 5.6% increase as of end-June.

Private sector profits rose 7.0% in Jan-July, quickening from a 6.0% growth in the first six months.

(Reporting by Yawen Chen, Roxanne Liu and Se Young Lee; Editing by Sam Holmes)

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