China feels the heat as profits slow down

Profits at China’s industrial firms contracted in August, reversing the previous month’s brief gain, as weak domestic demand and the trade war with the US weighed on corporate balance sheets.

Industrial profits fell 2 percent in August from a year earlier to 517.8 billion yuan ($72.59 billion), data released by the National Bureau of Statistics (NBS) showed, compared with a 2.6 percent gain in July. Profits have slowed since the second half of 2018, despite some tensions, we expect the economy to worsen before getting better and believe Beijing will likely ramp up its policy stimulus,” analysts from Nomura said in a note.

Producer prices, a key barometer of domestic demand and indicative of profitability, posted their sharpest fall in three years last month.

For January-August, industrial firms earned profits of 4.02 trillion yuan, down 1.7 percent year-onyear, the same as the reading in the first seven months.

Analysts expect economic growth could cool further this quarter from a near 30-year low of 6.2 percent hit in April-June.

Earlier this month, the People’s Bank of China (PBOC) increased support for slowing growth by cutting banks’ reserve requirement ratio (RRR) for the third time this year. China also cut a new one-year benchmark lending rate to free up credit to struggling smaller firms.

Analysts say Beijing will need to do more to ward off a steeper slowdown, although the scope for stimulus is limited as policymakers worry about rising debt risks and property bubbles.

Fuel processing industries, chemical fibers and paper manufacturing industries posted some of the steepest declines in profits over the January-August period.

Profit margins in car manufacturing and non-ferrous sectors improved slightly and the profit declines in telecommunications and electronic equipment manufacturing, which are more vulnerable to US tariffs than other product classes, narrowed.