China’s industrial firms posted their worst slump in profits since late 2011 in the first two months of this year, data showed yesterday, as increasing strains on the economy in the face of slowing demand at home and abroad took a toll on businesses.
The sharp decline in profits suggests further trouble for the world’s second-largest economy, which expanded at its slowest pace in almost three decades last year.
The government has already lowered the economic growth target this year to 6 to 6.5 percent, from last year’s 6.6 percent.
Profits notched up by China’s industrial firms in the first two months slumped 14 percent year-on-year to 708.01 billion yuan (US$105.50 billion), the Chinese National Bureau of Statistics (NBS) said on its Web site yesterday.
It marked the biggest contraction since Reuters began keeping records in October 2011.
The data combines figures for January and last month to smooth out distortions caused by the week-long Lunar New Year.
The drag was mainly due to price contractions in key industrial sectors, such as auto, oil processing, steel and chemical industries, bureau statistician Zhu Hong (朱虹) said in a statement accompanying the data, adding that production and sales are slowing as well.
Profits in the auto sector were down 37.1 billion yuan from a year earlier, while those in the oil processing industry fell 31.7 billion yuan, according to official data.
Zhu said that the timing of Lunar New Year holidays, which fell early last month, also had a bigger negative impact on business operations this year than last year.
The trade dispute with the US has put a dent on factory activity, corporate earnings, business sentiment and overall consumption in a blow to the economic outlook.
January-February growth in Chinese manufacturing output slumped to a 17-year low, while factory-gate inflation remained subdued in the same period in a reflection of the deepening strains across the economy.
“Although it’s possible the US and China could come to a trade deal in the near future, it still remains a question that it will help reverse the decline in China’s exports,” ANZ senior China economist Betty Wang (王蕊) said, adding that waning global demand remains a concern.
Policymakers have acknowledged that the nation’s economy is facing increasing downward pressure, hurt by multiyear campaigns to curb debt risks and pollution, while the trade dispute with the US took a toll on export orders and employment.
Beijing is beefing up measures to support the manufacturing industry by cutting the value-added tax, increasing infrastructure spending and reducing direct government intervention.
The profit margin in the manufacturing sector is less than 5 percent and many companies are suffering losses, TCL Corp chief executive Li Dongsheng (李東生) told a Guangdong delegation meeting on the sidelines of the annual National People’s Congress earlier this month.
“I advise the government to further lower value-added tax, and if implemented, it will effectively boost the profit-making ability of the manufacturing industry,” Li said.
Lots of other firms are already facing margin pressure. Jiangsu Shagang (江蘇沙鋼), China’s biggest privately owned steel mill, expects its first-quarter net profit to decline as much as 68.6 percent year-on-year.
Industry data out on Monday also showed China’s automobile sector in reverse gear, with annual sales last month down 13.8 percent year-on-year, marking the eighth consecutive month of decline in the world’s largest auto market.
Earlier this month, Beijing announced hundreds of billions of dollars in additional tax cuts, which included a 3 percentage point reduction in value-added tax for the manufacturing industry that has been grappling with rising costs and lower profit margins in the face of the economic slowdown.
The Chinese General Administration of Customs yesterday said that the VAT cuts would help reduce the tax burdens of importers by 225 billion yuan.
Yet, the support measures are taking time to kick in. Most analysts believe economic activity might not convincingly stabilize until the middle of the year.
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