China’s industrial profits post major fall

Profits at China’s industrial firms shrank at their fastest pace in eight months in October, tracking sustained drops in producer prices and exports and underscoring slowing momentum in the world’s second-largest economy.

Industrial profits fell 9.9% in October year-on-year to 427.56 billion yuan ($60.74 billion), data released by the National Bureau of Statistics showed on Wednesday, marking the biggest drop since January-February period and compared with a 5.3% decline in September.

China’s industrial sector has been under pressure in recent months as slowing demand at home and the fallout from the Sino-US trade dispute undercut earnings.

“The big drop in October profits suggests the real economy is still facing plenty of difficulties,” said Nie Wen, economist at Shanghai-based Hwabao Trust, adding that the country’s industrial firms now face a double whammy of falling prices and higher funding costs.

“Profit growth is expected to stay negative for a period of time in the future, likely prompting authorities to unveil more growth-boosting measures in a gradual and restrained way.”

Profit declines for the manufacturing sector deepened in October, as margins contracted by 4.9% in the January-October period, compared with a 3.9% drop in the first nine months of the year. Meanwhile, mining sector profit growth also moderated.

For January-October, industrial firms’ profits fell 2.9% from a year earlier to 5.02 trillion yuan, compared with a 2.1% decline in January September.

China’s producer price index, seen as key indicator of corporate profitability, posted its sharpest fall in more than three years in October as prices for raw materials weakened. The country’s official manufacturing PM also showed a contraction in activity for the sixth straight month in September with new export orders falling for their 17th straight month.

China’s exports fell in annual terms for the third straight in October, albeit at a slower-than-expected rate.

Despite recent signs of progress in trade negotiations, there is growing uncertainty about whether Beijing and Washington can reach an agreement that would put off another US tariff hike on Chinese goods scheduled to take effect on Dec 15.

“We expect industrial profit growth to remain sluggish, given the deteriorating growth outlook and elevated uncertainty amid the US-China trade conflict,” said Nomura analysts in a note to clients after the data release.

With growth at near 30-year lows, China’s central bank has recently lowered some of its key lending rates while its governor has pledged to step up credit support and lower funding costs to help those parts of the economy that have struggled with financing.

China’s central bank warned on Monday of increasing downside risks for the economy as growth continues to falter despite various fiscal and monetary stimulus introduced this year.

A Reuters poll of analysts tipped China’s growth to slip to a near 30-year low of 6.2% this year and then ease further to 5.9% in 2020, underlining the challenges faced by Beijing.

Industrial firms’ liabilities increased 4.9% from a year earlier to 66.74 trillion yuan at end-October, compared with a 5.4% increase at end-September.

Private sector profits rose 5.3% in January-October, slowing from 5.4% for January-September.

The data covers firms with more than 20 million yuan in annual revenue from their main operations.

New European proposals to launch a “carbon border tax” will damage global efforts to tackle climate change, China said on Wednesday, urging a pushback against climate “protectionism”, a week before fresh global climate talks in Madrid.

In October, the EU’s new climate commissioner, Frans Timmermans, said research would begin on the new tax, aimed at protecting European firms from unfair competition by raising the cost of products from countries taking inadequate action against climate change.

But a border tax, together with a decision by US President Donald Trump to withdraw from the 2015 Paris agreement, would seriously harm international efforts to tackle global warming, China said in a report on Wednesday, making its first formal comments on the proposals.

“We need to prevent unilateralism and protectionism from hurting global growth expectations and the will of countries to combat climate change together,” Zhao Yingmin, China’s vice environment minister, told a briefing.

Europe’s border tax, part of a proposed “green deal” aimed at making the block “climate-neutral” by 2050, is likely to face scrutiny in the latest round of annual climate negotiations set to begin in Madrid next week.

The idea has been welcomed by European steel association Eurofer but opposed by other industry groups concerned about retaliatory trade measures.

A tax would probably raise the price of Chinese goods in Europe, and Beijing believes it would violate a core principle of the Paris accord, which says richer countries should bear greater responsibility for cutting emissions.

In its national commitments to fight global warming, China - the world’s largest producer of greenhouse gas - has pledged to bring emissions to a peak by “around 2030”.

Although China has not set targets to cut absolute emission levels, it has cut its carbon intensity, or output per unit of economic growth, by 48.5% from 2005 to 2018, two years ahead of schedule, Zhao said.

The United States says the Paris accord is unfair to its firms as the pact does not do enough to tackle emissions from competitors in China and India.

China’s total annual emissions in 2018 were about 14 gigatonnes, the United Nations said this week, more than twice those of the US. Its emissions per person roughly match those of Japan and the European Union.

Reuters