China Factory Firms Return to Profit on Investment, Base Effects

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Chinese companies returned to profit in July, driven by a comparison with weak results a year ago, a jump in electrical machinery equipment sales and an improvement in the returns of manufacturers of cars, chemicals and processed oil.

Industrial profits rose 2.6% in July from a year earlier, after dropping in June. For the first seven months of the year, profits were down 1.7%. Infrastructure investment in railways pushed up profits of electrical machine production, according to Iris Pang, an economist at ING bank NV.

With the U.S.-China trade war and slowing global growth complicating the outlook for exporters, China’s economy is increasingly reliant on domestic spending and investment, but unless profits rebound more strongly there will be a limit to how much firms can invest. Factory prices dropped in July and that decline looks to be deepening in August, which will weigh on companies’ profits going forward.

“China industrial profits turned positive in July, mostly because of support from infrastructure projects and a technically low base last year,” with fiscal stimulus in the form of railway construction masking the effects of the trade war, Iris Pang said. “Both factors will continue to support industrial profits’ yearly growth, although risks for manufacturers haven’t gone away.”

What Bloomberg’s economist says

The unexpected rise is more a reflection of the comparison with weak results a year ago than an improvement in companies’ earning power.

“The slowdown in industrial production and sluggish domestic demand should continue to weigh on profits. The economy still needs policy support, and we expect the government to deliver.”

-- David Qu, Bloomberg Economics

See here for full note.

--With assistance from Kevin Hamlin.

To contact Bloomberg News staff for this story: James Mayger in Beijing at jmayger@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Michael S. Arnold, James Mayger

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With assistance from Bloomberg