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China Economy

China’s industrial profits soar on building boom but pace slowing

Profits were up 23.8 per cent in March, down from 31.5 per cent in the first two months

PUBLISHED : Thursday, 27 April, 2017, 4:41pm
UPDATED : Thursday, 27 April, 2017, 10:54pm

Profits earned by China’s industrial firms rose 23.8 per cent in March from a year earlier, buoyed by a continued construction boom, though the pace of growth eased from multi-year highs seen in previous months.

Profits in March rose to 688.7 billion yuan (US$99.9 billion), the National Bureau of Statistics (NBS) said on its website on Thursday.

In the first quarter, industrial profits climbed 28.3 per cent to 1.7 trillion yuan, slowing from growth of 31.5 per cent in the first two months but still robust enough to suggest a further recovery in fixed asset investment in China in coming months.

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Higher government infrastructure spending and a frenzied housing market have helped spur sales and prices of building materials, reviving profits for the country’s long-ailing “smokestack” industries such as steel mills and smelters and giving them stronger cash flow to reduce a mountain of debt.

But firms further down the supply chain are seeing pressure on profit margins as they struggle to pass on higher input costs to consumers amid stiff competition.

“Purchasing prices are rising too quickly, which is increasing pressure on companies that are trying to cut raw material costs,” NBS official He Ping said in a statement accompanying the data, adding that financial costs for businesses were also rising.

Indeed, profits of equipment manufacturers rose 6 percentage points from the pace in January to February, while profits for makers of consumer products were up just 0.5 percentage points.

Profits for miners and producers of other raw materials fell 0.9 and 9.5 percentage points, respectively, likely reflecting a recent tumble in China’s highly speculative commodities futures markets.

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Shares of material companies have recoiled from their highest level since the 2015 market crash, while infrastructure stocks have pulled back from multi-month highs, though both are still up solidly so far this year.

All 13 steel companies that published first-quarter results as of April 19 reported that net profits had more than doubled, the China Securities Journal said last week, with Nanjing Iron and Steel posting a surge of 4,830 per cent.

Fatter profits for steel mills could make Beijing’s job tougher as it tries to reduce industrial overcapacity by closing inefficient and heavily polluting plants.

China’s largest oil and gas producer, PetroChina , said earlier this month that it expected a first-quarter profit of 5-6 billion yuan, down slightly from the preceding quarter, but a turnaround from a huge loss a year earlier.

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Many analysts, however, believe producer price inflation in China is peaking, which could temper profitability later this year and rob the world’s second-largest economy of some momentum.

Still, strong first-quarter profits, together with an increase of 14.1 per cent in fiscal revenue, had set “an excellent foundation” for improved growth quality in 2017, Ning Jizhe, vice chairman at the National Development and Reform Commission (NDRC), told People’s Daily in an interview on Wednesday.

China’s government has lowered its economic growth target to about 6.5 per cent this year from a range of 6.5-7 per cent last year and an actual rate of 6.7 per cent.

First-quarter growth came in at a faster-than-expected 6.9 per cent, which could give the economy enough of a tailwind to hit Beijing’s full-year target even if growth starts to fade in coming quarters as many analysts expect.

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Policymakers in China are pushing a bullish message on the world’s second-biggest economy, pointing to a slowdown in capital outflows and a stable yuan after a sell-off last year stoked fears of instability.

Ning said market watchers should not be too sensitive to minor fluctuations in the growth rate and should pay more attention to the quality of growth instead.

Earlier this month, the International Monetary Fund raised its 2017 growth projection for the Chinese economy to 6.6 per cent from 6.5 per cent.

Industrial firms’ liabilities rose 6.6 per cent from a year earlier as of end-March, unchanged from the pace seen in the first two months of 2017.

The profit data covers large enterprises with annual revenues of more than 20 million yuan from their main operations.

Data on Wednesday showed profits at China’s state-owned firms rose 37.3 per cent in the first three months of 2017 from a year earlier.