September 27, 2018 / 1:50 AM / 20 days ago

China's industrial profit growth hits five-month low, points to cooler demand

BEIJING (Reuters) - Profit growth at China’s industrial firms slowed to a five-month low in August, fanning concerns about faltering domestic demand in the world’s second-largest economy as escalating trade frictions with the United States cloud its outlook.

FILE PHOTO: A labourer works inside an electronics factory in Qingdao, Shandong province, China January 29, 2018. REUTERS/William Hong/File Photo

Demand for raw materials and industrial products has taken a hit this year as business expansion plans slowed, restrained by tighter funding due to China’s multi-year campaign to curb corporate debt and crack down on risky borrowing. A softer property market has also sapped construction-related demand.

Industrial profits rose 9.2 percent in August to 519.69 billion yuan ($76 billion), data from the National Bureau of Statistics (NBS) showed on Thursday. The pace of growth slowed for a fourth straight month and almost halved from the 16.2 percent gain in July.

Last month’s slowdown was mainly due to a double whammy of slower revenue and factory price gains, the statistics bureau said in a statement accompanying the data release.

“Corporate profitability will continue to worsen, as the recent policy boost to spur investment growth will take time to set in,” said Yang Yewei, an analyst at Southwest Securities. He noted both inventories and money owed to companies had edged up, a sign that business conditions were becoming increasingly challenging.

The profit slowdown points to persistently weakening demand under the ongoing deleveraging campaign, despite policymakers shifting their focus to growth-boosting strategies. These measures include accelerating approvals for infrastructure projects and financing support for the private sector.

Taxes and fees are being cut while banks have been told to keep credit lines open to firms hit by the Sino-U.S. trade dispute.

The profit growth in August was the slowest since March, when profits expanded 3.1 percent. Analysts from Capital Economics had forecast a 15.5 percent increase for August.

Upstream sectors such as mining and metal producers and state-owned firms still commanded the lion’s share of profit gains but their growth softened notably in August. Profits at China’s state-owned industrial firms rose 26.7 percent year-on-year in January-August versus a 30.5 percent increase in the first seven months.

The biggest slowdown in growth came from oil and gas production and ferrous metal smeltering, whose year-on-year growth in January-August were 11 and 17.2 percentage points lower from January-July, respectively.

For the first eight months of the year, industrial firms notched up profits of 4.4 trillion yuan, a 16.2 percent increase from the same period last year, lower from 17.1 percent growth in January-July, the statistics bureau said on Thursday.

SLOWING TREND

The latest quarterly survey of thousands of Chinese firms by China Beige Book International suggested both revenue and profit growth slowed in July-September from the previous quarter, and only retailers and commodities companies saw improved margins.

The survey cautioned there are “alarming” parallels with the sudden slowdown in China in 2015, with companies continuing to borrow heavily even as the economy weakens and before any meaningful U.S. tariffs kicked in.

As of the end of August, industrial firms’ liabilities grew 6.6 percent from a year earlier to 62.8 trillion yuan, compared with an increase of 6.5 percent by end-July.

Slowing corporate profits will put pressure on jobs, ultimately tapping the brakes on household consumption and hurting overall growth.

Fitch Ratings has cut its gross domestic product (GDP) growth forecast for China next year to 6.1 percent from 6.3 percent. Some economists’ measures suggest growth is already well below 6 percent.

The latest round of tit-for-tat tariffs could further hurt China’s already slowing economy.

The United States and China imposed fresh tariffs on each other’s goods on Monday as both sides showed no signs of backing down from an increasingly bitter trade dispute that is expected to hit global economic growth.

Commodity-related and component manufacturing sectors are most immediately exposed to the new U.S. tariffs, Moody’s said in a report on Tuesday, particularly those related to electronic products, consumer appliances, furniture and vehicle parts.

Some analysts say producer prices - an important gauge of profitability - could prove more resilient than expected due to domestic and global factors.

The producer price index increased 4.1 percent in August, slowing from the previous month’s 4.6 percent growth but beating expectations for a 4.0 percent rise.

Reporting by Yawen Chen and Ryan Woo; Additional Reporting by Min Zhang and Stella Qiu; Editing by Kim Coghill & Sam Holmes

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