Surging industrial profits point to recovery

The profits of China's major industrial firms grew for a third straight month in July, suggesting that the country's economy is gradually gaining momentum with the help of effective government measures to control the COVID-19 outbreak and resume production.

A worker debugs a special robot at a workshop in the Tangshan Hi-tech Industrial Development Zone in Tangshan, north China's Hebei province, July 17, 2020. [Photo/Xinhua]

Analysts said the acceleration in profits in July was mainly due to government measures to boost resumption of work and production across the whole industrial chain at a faster pace, as well as a rebound in production and sales. They expected the rising demand will continue to boost industrial profit growth in the next few months.

The National Bureau of Statistics said on Thursday that profits at China's major industrial firms rose 19.6 percent year-on-year to 589.51 billion yuan (US$85.71 billion) in July, improving from 11.5 percent growth in June.

Total industrial profits in the first seven months of this year fell 8.1 percent year-on-year to 3.1 trillion yuan, but easing from a 12.8 percent dive in the first half, NBS data showed.

Profit growth in August was aided by significant recoveries in key sectors, including equipment and high-tech manufacturing as well as higher returns in business investment, said Zhu Hong, a senior NBS statistician.

In July, profits in the equipment manufacturing sector jumped by 44.3 percent from a year earlier, with automotive manufacturing seeing a profit growth rate of 125.5 percent, according to Zhu.

"The continuous recovery of industrial profits in July was mainly affected by the rebound in global commodity prices, the narrowing decline in industrial product prices and the government's proactive fiscal policies and active moves to lower costs for enterprises," said Wu Chaoming, deputy dean of the Chasing Institute of Chasing Securities.

NBS data showed 32 out of 41 surveyed industries recorded growth in profits in July, nine more than in June. High-tech manufacturing recorded 36.5 percent growth in profits in July, 27.5 percentage points higher than in June.

Wu said the high-tech manufacturing profit growth was fueled by the government's strong financial support, rising demand for new infrastructure during the year and residents' growing need for consumption upgrading.

"I expect profits in high-tech manufacturing to keep rising in the future, with an accelerated pace in the replacement of old growth drivers with new ones.

"While the rebound in production and sales and the lower costs will help boost profit growth, those factors will also be affected by the slow pace of recovery in consumption," Wu added.

"Mounting global uncertainties may lead to increased capital market volatility, which will then affect business investment. I expect industrial profits will record positive but slower growth in the coming months."

Business activity in China is significantly improving after a steep slump amid the coronavirus outbreak earlier this year, as the country has made considerable progress in containing the pandemic.

Liu Chunsheng, an associate professor at the Beijing-based Central University of Finance and Economics, spoke highly of the Chinese government's effective measures to fight the pandemic, saying that these paved the way for the gradual and steady recovery in the economy.

Citing JP Morgan's recent decision to boost its 2020 China growth forecast to 2.5 percent from 1.3 percent in April, he said China could be the only major economy to see growth this year.

"The recovery in the Chinese economy will definitely give a strong boost to industrial profit growth," Liu said.

"Currently, China is building a new model of development in which domestic economic networks play the primary role, and domestic and international economic networks complement each other. That will also boost demand and help increase profits."

Liu called for increased fiscal and monetary support for consumption and infrastructure investment, saying the government also needs to make a big push to encourage the smooth flow of production factors, build a unified domestic market, create a more business-friendly market, further reduce taxes and fees for enterprises, and deepen reforms and opening-up.

Zhou Maohua, an analyst at China Everbright Bank's financial market department, expected to see a continuous improvement in industrial profits.

"The government's strong support for the real economy and the rising demand from both home and abroad will help boost the profit growth," Zhou said.