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China's industrial profit growth quickens, signals firming economic recovery

BEIJING (Reuters) - Profits at China’s industrial firms rose for a second straight month and at the fastest pace in over a year, adding to signs the country’s economic recovery from the coronavirus crisis is gaining momentum.

FILE PHOTO: A worker welds a bicycle steel rim at a factory manufacturing sports equipment in Hangzhou, Zhejiang province, China September 2, 2019. China Daily via REUTERS/File Photo

The statistics bureau said on Monday that profits at China’s industrial firms rose 11.5% year-on-year in June to 666.55 billion yuan ($95.27 billion) - marking the quickest profit growth since March 2019.

May marked the sector’s first monthly growth in earnings since November, before the onset of the coronavirus pandemic.

For January-June, industrial firms’ profits fell 12.8% year-on-year to 2.51 trillion yuan, but easing from a 19.3% dive in the first five months.

After a record slump early in the year, China’s economy rebounded more than expected in the second quarter as virus lockdown measures ended and policymakers ramped up stimulus. But analysts warn that the rebound is heavily reliant on state-led investment, while domestic and global demand remain weak.

Steel, oil and gas extraction, oil refining and non-ferrous metals saw significant improvements in profit in June with manufacturing costs easing and demand improving, said Zhu Hong, an official at the statistics bureau, in a statement published alongside the data.

But Zhu warned about the outlook as market demand remains weak amid the effects of the COVID-19 pandemic and the international trade situation is “complex and severe,” so uncertainties remain over the sustainability of profit growth.

Major manufacturers of raw pharmaceutical ingredient and medical equipment, including Zhejiang Nhu 002001.SZ and Zhejiang Yueyue 002223.SZ, said they expect stronger profit for the first six months on better sales.

Gauges ranging from factory surveys to producer prices have all reflected signs of a further pickup in manufacturing, but analysts say factories could have a tough time maintaining momentum as pent-up demand wanes, exports struggle and heavy flooding disrupts construction and other economic activity in the Yangtze Delta.

Rising inventories and sluggish demand could also weigh on profit margins.

Earnings at China’s state-owned industrial firms were down 28.5% on year for the first six months, after slumping 39.3% in January-May, the statistics bureau data showed.

Liabilities at industrial firms rose 6.4% on an annual basis at end-June, versus 6.6% growth as of end-May.

Private sector profits fell 8.4% in January-June, narrowing from January-May’s 11.0% fall.

The industrial profit data covers large firms with annual revenue over 20 million yuan from their main operations.

Reporting by Gabriel Crossley and Roxanne Liu; Editing by Kim Coghill & Shri Navaratnam

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