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China’s industrial profit crunch continues

Normally, markets and economists ignore the monthly industrial company profits in China – it’s a third-tier economic data series that is usually overlooked because of its imprecision, but every now then a trend emerges that is worth examining, and so it was at the weekend when the data showed a fourth successive month of falling profits for the sector – the world’s largest.

Reuters reckoned the data shows Chinese industrial companies continuing to struggle with margin pressures and soft demand amid the faltering economic recovery.

Profits fell 20.6% in four months to April from the same period in 2022 compared with a 21.4% decline in the March quarter.

The news saw Chinese shares fall to 2023 lows on Monday as they failed to join the debt ceiling deal boom triggered by Sunday’s announcement in Washington.

As well, more reports emerged on Monday that China is facing a new round of Covid infections with the central government reporting that the virus has overtaken influenza as the most pervasive infection in Shanghai in the past four weeks – an eerie replay of what happened a year ago, but without the harsh lockdowns and controls.

The profits data from the National Bureau of Statistics (NBS) showed an 18.2% slump in April alone after a 19.2% in March.

Reuters pointed out that the NBS only occasionally gives monthly figures – it usually provides year to data for each month.

Profits sagged for 27 of 41 major industrial sectors in the four months, with the ferrous metal smelting and rolling processing industry reporting the biggest slump at 99.4%.

Reuters pointed out that the NBS data showed foreign firms experiencing a 16.2% slide in profits for the four months to April, while private-sector firms recorded a 22.5% plunge, according to a breakdown of the data.

“Overall, today’s data shows that industrial enterprises, especially private and equity-owned enterprises, continue to be affected by a combination of unfavourable factors such as the base effect, short-term pressure on the economic recovery and the downward trend of PPI (producer prices),” said Bruce Pang, chief economist at Jones Lang Lasalle, told Reuters.

The monthly activity surveys for manufacturing for the first four months of this year in particular, and services in April, have showed a clear slowing across the economy, matched by the sharp fall in consumer inflation to the edge of deflation, while producer price deflation has deepened.

Producers of steel and other industrial metals are also hurting. Prices for steel reinforcing bars used in construction hit the lowest level in three years last week (dragging iron ore prices lower), and only a third of the country’s mills are currently operating at a profit, according to consultancy MySteel.

Chinese copper imports – a traditional western benchmark for the health f the Chinese economy – are weak and unresponsive to dips in global prices for the metal. Imports of copper in concentrate have been stronger than for metal.

Beijing has set a modest growth target of around 5% for this year. Signs of a brisk recovery in the wake of the country’s abrupt end of Covid curbs late last year had seen many institutions including the World Bank and IMF, to raise their China growth estimates for 2023.

But some private forecasters have started trimming their 2023 China growth forecasts after the April data disappointment, – Nomura dropped its prediction to 5.5% from 5.9% previously and Barclays revising its view down to 5.3% from 5.6%.

The industrial profit data reaches down deep into Chinese business, covering firms with annual revenues of at least 20 million yuan ($US2.89 million) from their main operations.