China industrial profits grow faster in July on more favorable cost and price trends

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By Brian Jackson, China Economist, IHS Markit

Key Points:

  • China’s National Bureau of Statistics reports that industrial profits grew 6.9% in July, a four-month high. Revenue growth accelerated to a smaller degree to 3.3%, while authorities reported that profit margins were 5.67%, about 22 basis points higher than a year prior. Authorities attributed stronger financial performance to an improved sales environment for large firms, lower input costs, improving price trends for some metal products, and low base effects from July 2015, when profits contracted 2.9%.
  • Processed minerals manufacturing was the largest contributor to the improvement. In particular, profit growth for steel smelting and pressing jumped nearly 50 percentage points to over 130% year on year, although revenues in the same sector fell 5.5%. Authorities noted that ferrous and nonferrous smelting and pressing accounted for 47.5% of the acceleration in headline profit growth during July.


  • The markedly improved performance in those state dominated sectors resulted in all state-owned enterprise profits contracting at the slowest pace in fourmonths. Foreign enterprises also saw their profit growth improve to 6.8%, likely due to the gains in the auto sector. Private enterprises’ profit growth slowed marginally to 8.7%, although continued to outpace all other forms of ownership.

IHS Global Insight Views:

Improved profit growth is a positive signal for investment in the coming half. Over two-thirds of investment in China is financed via retained profits, so higher profitability enables new investment. While a strong rebound in investment is not expected, a sharper deceleration from the 8.1% growth in July is even less likely — investment growth is likely to move sideways or improve modestly in the coming months, relative to July.

The improvement in industrial profits is not yet on firm ground. Nearly half of the improvement in July was due to strong profitability in the metals sector. This is based mostly on price speculation stemming from the housing and government investment surge in the second quarter.

Given strong expectations of a moderation in the housing sector in the second half, and stagnation or contraction in 2017, this pillar of support for sentiments will prove fleeting. While this won’t throttle all industrial profits, it does represent a downside risk to current growth rates.

 

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Source: The Insiderstories
China industrial profits grow faster in July on more favorable cost and price trends

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