December 27, 2019 / 1:59 AM / a month ago

China's industrial profits grow at fastest in eight months, but sustained recovery uncertain

BEIJING (Reuters) - Profits at China’s industrial firms grew at the fastest pace in eight months in November, but broad weakness in domestic demand remains a risk for company earnings next year.

FILE PHOTO: A worker pours molten iron into a mould at a mill manufacturing marine engine components in Huaian, Jiangsu province, China February 11, 2019. REUTERS/Stringer

China’s industrial sector has faced persistent pressure in the past year, with manufacturers battling sluggish demand and a profit-denting trade dispute with the United States. But recent factory activity surveys have pointed to a nascent recovery in the manufacturing sector, following Beijing’s accelerated stimulus measures to steady growth.

Industrial profits in November rose 5.4% from a year earlier to 593.9 billion yuan ($84.93 billion), snapping three months of decline, as production and sales quickened, data from the National Bureau of Statistics (NBS) showed on Friday. That compared with a 9.9% drop in October.

For January-November, industrial firms notched profits of 5.61 trillion yuan, down 2.1% from a year earlier, but slightly better than a 2.9% fall in the first 10 months.

The expansion was mostly due to quickening production and sales, while factory-gate prices contracted at a slower pace, said Zhu Hong, an official with the statistics bureau in a statement released alongside the data.

But he cautioned that the rebound may not be an indication of a sustained recovery.

“Although the profit growth turned to positive in November, we have to see that the current downward pressure on the economy is still big, and the volatility and uncertainty of profit growth still exist due to multiple factors such as market demand and industrial prices.”

In November, profits at state-owned industrial firms rose 0.6% from a year earlier, reversing a declining trend since the second half this year, while private sector profits also posted a significant acceleration in growth.

Among sectors, the chemical, petroleum processing and steel industries reported recovering profits last month due to rebounding market demand and rising prices.

“We expect the surge in industrial profit growth to be just short-lived, given strong growth headwinds and still-elevated uncertainty amid U.S.-China trade tensions,” analysts at Nomura said in a report after the data.

“In our view, Beijing will likely continue to roll out moderate easing measures amid limited policy room.”

EASING TRADE HOSTILITIES

The upbeat figures come amid patchy recoveries in industrial output against broad weakness in demand at home and abroad.

Industrial production rose at the fastest clip in five months in November amid easing trade hostilities with Washington, but exports continued to hover in the contractionary zone.

China and the United States cooled their 17-month long trade war earlier this month, announcing a Phase 1 agreement that would reduce some U.S. tariffs in exchange for more Chinese purchases of American farm products.

Analysts said the deal could boost China’s export activity and corporate investment in the near term, but its economic outlook would continue to be challenged by lackluster global growth.

U.S. President Donald Trump said on Tuesday he and Chinese President Xi Jinping will have a ceremony to sign the first phase trade deal agreed to this month.

China’s economy is expanding at the slowest pace in nearly 30 years and could face greater downward pressure next year, but policymakers have vowed more support to stabilize growth and prevent risks.

The vast industrial sector shed more than 25 million jobs from end-2013 to end-2018, mostly in labor intensive industries, according to the latest economic census, as labor costs rose amid the country’s economic transition.

China plans to set a lower economic growth target of around 6% in 2020, relying on increased state infrastructure spending to ward off a sharper slowdown, policy sources said.

Beijing will study implementing more measures including broad-based and “targeted” cuts in banks’ reserve requirement ratio (RRR) and raising relending and rediscount quotas to help lower financing costs for smaller firms.

Liabilities at industrial firms rose 5.3% on-year at end-November, compared with a 4.9% increase as of end-October.

Additional reporting by Roxanne Liu; Editing by Jacqueline Wong

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