Profits up at big firms amid tightening

PUBLISHED : Thursday, 28 July, 2011, 12:00am
UPDATED : Thursday, 28 July, 2011, 12:00am


Profits at mainland industrial companies jumped 28.7 per cent to 2.41 trillion yuan (HK$2.89 trillion) in the first half of this year, but economists say the growth momentum will likely run out of steam.

The National Bureau of Statistics said yesterday that a survey of enterprises in 39 industrial sectors, all with annual revenues of more than 20 million yuan, showed net profit growth ranged from 14.5 per cent to 47.2 per cent, despite Beijing's recent monetary tightening measures.

Some economists said the strong growth disguised the funding difficulties of smaller enterprises, which they said could inhibit economic growth.

'The strong growth [shows] there is an uneven distribution of the impact of monetary tightening,' Societe Generale economist Yao Wei said. 'Bigger and state-owned enterprises have easier access to bank borrowing, but smaller firms don't. This is an unhealthy situation.'

To combat inflation, Beijing has squeezed bank lending by raising interest rates by a total of 1.25 percentage points since October and increasing banks' reserve ratio requirement - the proportion of assets they must hold in reserve - six times this year, to a record 21.5 per cent, limiting the amount they can lend out. Interest rates are likely to rise by another 25 basis points next month if consumer price inflation doesn't drop, say economists at China International Capital Corp, Mizuho Securities Asia and Royal Bank of Scotland.

Many of the firms surveyed attributed their performance to rising prices and strong demand for commodities and fuel. Chemical fibre producers saw 49.8 per cent profit growth; refiners of non-ferrous metals saw profits rise 48.5 per cent; firms in oil and gas exploration recorded a 37.7 per cent rise in profits. However, refiners of oil and coking coal and companies processing nuclear fuel recorded profit drops of 66 per cent.

Some economists anticipate the growth in industrial profits will taper off. 'The impact of the tightening will be more obvious in the remaining half of the year,' Yao said.

Manufacturing activity shows signs of contraction, with an HSBC/Markit flash purchasing managers' index slipping to 48.9 this month, from 50.1 last month, to its lowest level in 28 months. A figure below 50 indicates manufacturing is contracting.

Daiwa Securities Asia's chief economist, Sun Mingchu, called on the central government to relax lending restrictions on smaller companies or risk some defaulting on loans or going bust.

Some economists expect Beijing to roll out initiatives to ease the funding problems of smaller firms after Vice-Premier Wang Qishan conducted a fact-finding mission to Shijiazhuang in Hebei province this month to look into the issue.

The government was caught in a dilemma, they said. On the one hand, it had to avoid an economic hard landing; on the other it was battling inflation. They expect consumer and producer price inflation to stay high.

The statistics bureau used to survey companies with annual revenue of 5 million yuan or more. Since January, it has raised the threshold to 20 million yuan.