MNI EXCLUSIVE: China Industrial Profits May Fizzle Without Aid

The recent rebound in profits for China's large industrial enterprises may not be sustainable without continued support from the government, which cut taxes and fees to mitigate the effect of the Covid-19 pandemic, policy advisors told MNI.

Industrial profits surged 19.1% y/y in August, growing at a double-digit pace for the third consecutive month, although they were still down 4.4% y/y in the Jan-Aug period.

"This profit improvement is supported by recovered market demand as the epidemic has come under control, but more of it is the result of reduced costs," said Liu Xiangdong, deputy director of Economic Research at China Center for International Economic Exchanges, adding that the government should maintain support for the industrial sector, whose return on investment remains low.

Industrial firms have benefited most from subsidies to help pay salaries and from reductions in contributions to employees' social security as well as from discounts on rent in the past few months, according to Zhang Hangyan, researcher at the Institute of Industrial Economics of Chinese Academy of Social Sciences. Profits growth may ease in coming months, she said, noting rising inventories reflecting poor demand.

RECOVERY

The petroleum processing sector led industrial profit gains with an increase of 148.2% y/y, up 101.6 percentage points from the previous month, as crude prices rose. Driven by government-led infrastructure investment, steel companies saw profits jump 68.3% y/y in August, up 46.2 percentage points from July.

The rebound of upstream sectors signals a deeper economic recovery, said Su Jian, director of the National Center for Economic Research at Peking University. Q3 GDP growth may reach 5-5.5%, while Q4 could see 5.5-6% growth even without significant additional stimulus, bringing the whole year's expansion to about 2%, Su said.

RETURN ON INVESTMENT

But, while profits have improved, the ratio of total profits to total assets by end-August was 3.04%, according to MNI calculations, lower than the one-year benchmark deposit and lending interest rates, which are above 4%.

Companies need lower costs to sustainably improve profits, which will require reforms including opening monopolised areas like oil, gas and electricity to private and foreign investment, Su and Liu said.

Companies should also strengthen R&D, diversify markets and ensure they are catering to their customers, Liu added.