Softening demand still top impediment to healthier bottom-line performances

Profits of China's major industrial firms shrank at a slower pace in June thanks to supportive government measures to ease burdens on companies, though softening demand continued to squeeze margins.

Despite the improvement in industrial profits, analysts said the recovery trend is not yet solid amid still-weak demand and a downward trend in factory-gate prices, reinforcing hopes of stronger policy support to bolster the world's second-largest economy.

Industrial firms with annual main business revenue of at least 20 million yuan ($2.8 million) each reported total profits of 719.76 billion yuan in June, an 8.3 percent fall from a year ago, after a 12.6 percent decline in May, the National Bureau of Statistics said on Thursday.

In the first half, industrial firms' profits fell 16.8 percent year-on-year to 3.39 trillion yuan, narrowing from the 18.8 percent drop recorded in the first five months, the bureau said.

Sun Xiao, a statistician at the NBS, mainly attributed the easing dip in profits to the steady recovery in industrial production and improved profit margins, which were a result of sustained policy efforts to promote steady economic growth.

There was an improvement in June's profit margin, which came in at 6.44 percent, up 0.27 percentage point from the previous month. For the first six months, the profit margin stood at 5.41 percent, up from 5.19 percent between January and May, the NBS data showed.

Zheng Houcheng, chief macro economist at Yingda Securities Co Ltd, said the latest industrial profit data show that enterprises continue to be affected by a combination of unfavorable factors, such as the downward trend of the producer price index, while the improved industrial production and profit margins contributed to the easing dip in profits.

Figures released by the NBS showed China's value-added industrial output grew 4.4 percent in June from a year earlier after a 3.5 percent rise in May, while the producer price index was down 5.4 percent from a year earlier in June after the 4.6 percent annual contraction seen in May.

Looking ahead, Zhou Maohua, an analyst at China Everbright Bank, said industrial profits will likely continue to improve with sustained recovery in market demand, the likelihood that industrial product prices will bottom out, strong policy support and steadily declining production costs.

Citing the latest NBS data, Zhou said that over 70 percent of the 41 surveyed industrial sectors saw improvements in profits during the January-June period, pointing to a steady recovery in domestic demand and improvement in the overall operational scene of industrial sectors.

He said some upstream sectors were significantly affected by declining industrial product prices, while industries such as advanced equipment and new energy vehicles reported high growth in profits.

During the first half, profits recorded by industrial firms that provide electricity, heat, gas and water grew 34.1 percent year-on-year, while profits recorded by mining firms and manufacturing companies shrank 19.9 percent and 20 percent, respectively.

Notably, profits of equipment manufacturing enterprises rose 3.1 percent on a yearly basis during the January-June period, 20.8 percentage points higher than that in the first quarter, according to the NBS.

Meanwhile, Zhou said 29 industrial sectors reported declines in profits in the first six months, adding that industrial firms still face pressures and challenges from insufficient demand.

Looking into the second half, he said the government will likely step up macroeconomic policy support in terms of fiscal, monetary and industrial policies to shore up growth, with a key focus on increasing support for weak links in the real economy and key emerging sectors.

"That will help drive the continued improvement in industrial firms' business conditions."