China’s slowing industrial profits growth adds further evidence to loss of economic momentum

Industrial firms’ profits in July increased 16.4 per cent on an annual basis – the slowest rate this year – to 703.67 billion yuan (US$108.5 billion)
Zhu Hong, senior statistician at the National Bureau of Statistics, attributed the slower growth to sporadic coronavirus cases, flooding and high commodity prices

China's economic recovery

Reuters

Published: 1:22pm, 27 Aug 2021

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Earnings at China’s industrial firms in July slowed for the fifth straight month, adding to growing evidence of a loss of momentum in the world’s second-biggest economy and bolstering the case for maintaining policy support for a while longer.

Elevated raw material prices and supply chain constraints from extreme weather as well as sporadic coronavirus cases dragged on earnings in the manufacturing sector, data from the National Bureau of Statistics (NBS) showed on Friday.

Industrial firms’ profits in July increased 16.4 per cent on an annual basis – the slowest rate this year – to 703.67 billion yuan (US$108.5 billion), the NBS said. That compared to a 20 per cent gain in June.

China’s economy has staged an impressive recovery from a coronavirus-battered slump, but the expansion is losing steam as businesses grapple with higher costs and supply bottlenecks, and as consumers remain cautious with spending.

On economic fundamentals, signs of a notable economic slowdown have emerged, and I expect policymakers to fine-tune the macroeconomic policy

Nie Wen

The headwinds to growth back expectations Beijing will keep, or even bolster, its accommodative stance. The People’s Bank of China in mid-July lowered the reserve requirement ratio for banks, releasing around 1 trillion yuan (US$154 billion) in long-term liquidity.

“On economic fundamentals, signs of a notable economic slowdown have emerged, and I expect policymakers to fine-tune the macroeconomic policy, currently neutral but with a loosening bias, in an pre-emptive way to counter the headwinds,” said Nie Wen, Shanghai-based economist at Hwabao Trust.

“If growth keeps sliding, the government might even roll out quantitative measures.”

Zhu Hong, senior statistician at the NBS, attributed the slower growth in July to sporadic coronavirus cases and flooding, as well as high commodity prices that have pressured profitability for small midstream and downstream firms.

“Overall, profits at industrial firms above the designated size maintained a steady growth in July, but we have to recognise that the unevenness and uncertainty in the recovery of corporate earnings still exist,” Zhu said.

In the first seven months of the year, industrial firms’ profits grew a hefty 57.3 per cent on year, due to base effects, although the pace slowed from the 66.9 per cent surge in first half of 2021.

China’s factory output growth slowed sharply in July, and analysts expect it to come under increasing pressure due to social distancing rules and tightening measures in the property sector and high-polluting industries.

Commodity prices have surged in recent months, hurting the bottom lines of many midstream and downstream factories.

01:19

China’s economy rose 7.9 per cent year on year in the second quarter of 2021

Chinese coke and coking coal futures hit record highs this week while iron ore futures rose for the fourth day on Thursday.

Coronavirus cases of the more transmittable Delta strain in July and record rainfalls in Henan province have also hurt industrial production.

A terminal at China’s major Ningbo port paused services as part of the government’s effort to curb the spread of the virus.

Liabilities at industrial firms rose 8.2 per cent on an annual basis at the end of July, down from 8.5 per cent growth as of the end of June.

This article appeared in the South China Morning Post print edition as: Slowdown in profit growth lifts hopes for policy support