Further macroeconomic support seen as crucial to manufacturing recovery

China's policy efforts to alleviate the expense burden of manufacturers led to its industrial firms reporting narrowed profit declines for a third consecutive month in May, experts said on Wednesday.

They, however, said the recovery is not yet solid as sluggish demand weighs on revenue growth and intensifies cost pressures. The official purchasing managers index for June — scheduled for release on Friday — is likely to stay within contraction territory, or a reading below 50.

Further macroeconomic support, including additional monetary easing, will be crucial to boosting recovery in the manufacturing sector, the experts pointed out.

Industrial firms with annual main business revenue of at least 20 million yuan ($2.77 million) reported total profits of 635.81 billion yuan in May, a 12.6 percent fall from a year ago, but the decline was 5.6 percentage points narrower than in April, the National Bureau of Statistics said on Wednesday.

During the January-May period, industrial profits came in at 2.67 trillion yuan, down 18.8 percent year-on-year, versus a 20.6 percent drop in the first four months, the NBS said.

The profit slump, said Sun Xiao, an NBS statistician, has narrowed for three consecutive months, indicating "steady recovery" in corporate earnings, especially for manufacturers — a subcategory within industrial firms — whose profit decline narrowed by 7.4 percentage points from April.

Experts mainly attributed the easing dip in profits to improved profit margins, which were a result of sustained policy efforts to cut expenditure and financing costs of manufacturers.

Expenses — including sales, administrative, research and financial — per 100 yuan of income came in at 8.31 yuan in January-May, down 0.09 yuan from the first four months, according to the NBS.

There was also, concurrently, an improvement in the profit margin, which came in at 5.19 percent between January and May, up by 0.24 percentage point from the first four months of the year, the NBS data showed.

However, the improved profit margins may not be strong enough to sustain a brisk recovery among manufacturers going forward as they still face revenue and cost pressures, entailing more policy support, experts said.

NBS data showed that the operating revenue of industrial firms expanded by 0.1 percent to 51.39 trillion yuan in the January-May period, down from a 0.5 percent growth in the first four months, while the cost per 100 yuan of income came in at 85.29 yuan in the first five months of the year, up from 85.18 yuan in the January-April period.

Wu Chaoming, deputy director of the Chasing International Economic Institute, said the manufacturing PMI may improve from 48.8 in May to about 49 in June, but below the 50-mark that separates expansion from contraction, as the sector continues to face weakening export orders, sluggish domestic demand and rising uncertainties related to the recovery of the property sector.

"If stimulus measures are introduced in the middle of the year to more effectively expand domestic demand, the manufacturing PMI will likely return to the expansionary territory," Wu said.

The recovery in industrial profits is likely to continue but may still encounter obstacles, he added.

Li Chao, chief economist at Zheshang Securities, said, "Further monetary policy support would play an important role in reducing companies' operational costs as their endogenous impetus of recovery remains inadequate."

"We expect there may be a reserve requirement ratio cut in the third quarter of the year and an interest-rate cut in the fourth quarter to alleviate business cost pressures," Li said in a research note.