China’s crackdown on price wars eases industrial profit drop
[BAIJING] China’s industrial companies saw their profits fall at a slower pace in July, in a potential sign that efforts to curb overcapacity are starting to ease the strain from aggressive competition among producers.
Industrial profits declined 1.5 per cent last month from a year earlier, falling the least since they began shrinking in May, according to data released on Wednesday (Aug 27) by the National Bureau of Statistics.
Bloomberg Economics had forecast a decline of 5.8 per cent year on year in July. For the first seven months of the year, earnings contracted 1.7 per cent, versus 1.8 per cent in the first half.
Profits climbed much faster in the manufacturing sector, growing 6.8 per cent in July from a year ago after a gain of 1.4 per cent in June, statistician Yu Weining said in a separate statement accompanying the data release. Producers of raw materials, steelmakers and petroleum refiners moved from losses into profits in the month.
“Policy measures to promote a reasonable rebound in prices were gradually implemented, driving corporate profitability to recover continuously,” Yu said.
US curbs on chip exports to China have forced Beijing to double down on developing home-grown substitutes, and the effort has apparently started to yield results in the local semiconductor supply chain.
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Earnings of chip-related manufacturers, such as producers of integrated circuits, soared as much as 176 per cent on year in July “against the backdrop of strengthening home-grown semiconductor innovation capabilities,” Yu added.
Overall, profit margins are still under pressure after domestic demand softened further, even as a government-led campaign to curb excess competition begins to translate into better earnings. The world’s second-largest economy weakened across the board in July, with consumer inflation slipping to zero while retail sale growth cooled.
Factory-gate prices have declined for 34 consecutive months, pointing to entrenched deflation that could hold businesses and households back from spending and act as a drag on corporate bottom lines.
“Higher profits in raw material sectors hint at the government’s ‘anti-involution’ policies at play, but July is still too early to tell,” Goldman Sachs Group economists led by Andrew Tilton said in a report.
“China’s industrial profits fell less than expected in July for a single reason – strong earnings in high-tech sectors. This boost countered broad weakness in other industries, which are suffering from weak demand and deflationary pressures,” said Eric Zhu, Economist at Bloomberg Economics. “The problem for the economy – the high-tech boom can’t drive growth alone, as July’s activity data showed.”
While overseas shipments to non-US markets more than compensated for a drop in orders from America, a gauge of China’s new export orders fell at the quickest pace in three months, boding ill for foreign demand in the coming months.
Industrial earnings are a vital gauge of the financial health of factories, mines and utilities, shaping their investment decisions in the months to come.
Profits in the mining sector kept dropping, with a decrease of almost 32 per cent year on year for the first seven months. Coal miners and washers remained among the worst-hit given a supply glut in their industry.
Manufacturers saw earnings rise during the January-to-July period, as some continue to benefit from state subsidies that encourage companies and consumers to replace old equipment and home goods with new ones.
Profits in high-tech manufacturing surged 19 per cent in July from a year ago, Yu said, citing advancements in aerospace equipment and semiconductors.
“The jury is still out on the anti-price war policy as the government has yet to come up with a convincing action plan, despite top-level support,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “Certainly no major demand stimulus is in the offing. Meanwhile, export growth is likely to slow, after being supported by front-loading demand ahead of the original US tariff reprieve deadline.” BLOOMBERG
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