BEIJING—Profits at China’s industrial firms returned to growth in July, helped by public works spending and improved margins in the petrochemical and auto sectors, but an economic slowdown and the U.S. trade war are expected to weigh on the business outlook.
Industrial profits rose 2.6 percent in July year-on-year to 512.7 billion yuan ($72.28 billion), according to data released by the National Bureau of Statistics (NBS) on Aug. 27, swinging from a 3.1 percent decline in June.
Despite the turnaround in headline growth, worsening conditions for businesses exposed to global trade and smaller private sector firms are likely to add to case for more government support to shore up slowing economic growth.
“The downward pressure on the economy is relatively high, the market demand is slowing down, the prices of industrial products are falling,” the statistics bureau’s senior statistician, Zhu Hong, said in a statement accompanying the data.
“There will still likely be volatility and uncertainty in profits of industrial enterprises,” Zhu said.
ING Greater China Economist Iris Pang said public infrastructure spending had supported firms’ return to profit growth, particularly for electric products companies. However, persistent cash flow pressures felt by export firms and smaller businesses supported arguments for the government to do more.
“We believe that most private enterprises suffer from long account receivable cycles,” Pang wrote in a note. “They may be the low-end subcontractors of infrastructure projects. We worry that they may be the last to receive payments from their construction works.”
She expects more central bank support, such as added liquidity and cuts to banks’ reserve requirements, which would free up the flow of credit to smaller firms.
For January-July, industrial firms earned profits of 3.50 trillion yuan, down 1.7 percent from a year earlier. That compared with a 2.4 percent fall in the first six months.
The uptick in July came mainly from petrochemical and auto sectors, the statistics bureau said in a separate statement on the data.
China’s industrial profits have broadly slowed since the second half of 2018 as economic growth skidded to a near 30-year low while an escalating U.S.-China trade war slashed already lean earnings for businesses.
The July expansion in industrial profits contrasts with sluggish producer inflation and waning industrial output growth, which sank to record lows in July, indicating weakness in both the demand and supply sides.
As the trade dispute fuels global recession worries, investors and analysts have been expecting new stimulus measures from Beijing to boost domestic demand and lower funding costs for firms.
To offset the effects of the U.S. trade war, Chinese policymakers have rolled out various growth measures including reserve requirement ratio cuts, tax cuts and a push for banks to lend to smaller companies. But Beijing has also maintained it would not resort to a “flood-like stimulus.”
Profitability in Beijing’s oil refining sector has improved, with margins at refineries boosted by demand for diesel. But analysts warn this could be temporary as the industry still has to cope with overcapacity and ample supply of refined oil products.
The decline in the auto sector’s net profit also narrowed in July, but overall car sales were down for a 13th consecutive month in July. The prolonged sales decline has made local carmakers like Geely and Great Wall cut earnings forecast.
China’s exports unexpectedly returned to growth in July on improved global demand despite escalating U.S. trade pressure.
Profits at China’s state-owned industrial firms dropped 8.1 percent on an annual basis for January-July, the statistics bureau data showed.
Liabilities of industrial firms were up 4.9 percent on-year at end-July, compared with a 5.6 percent increase as of end-June.
Private sector profits rose 7.0 percent in Jan-July, quickening from a 6.0 percent growth in the first six months.
By Roxanne Liu and Se Young Lee