China’s crackdown on price wars eases industrial profit drop

China’s industrial companies saw their profits fall at a slower pace in July, in a potential sign that efforts to curb overcapacity are starting to ease the strain from aggressive competition among producers.

Industrial profits declined 1.5% last month from a year earlier, falling the least since they began shrinking in May, according to data released Wednesday by the National Bureau of Statistics. 

Bloomberg Economics had forecast a decline of 5.8% year-on-year in July. For the first seven months of the year, earnings contracted 1.7%, versus 1.8% in the first half.

Profits climbed much faster in the manufacturing sector, growing 6.8% in July from a year ago after a gain of 1.4% in June, statistician Yu Weining said in a separate statement accompanying the data release. Producers of raw materials, steelmakers and petroleum refiners moved from losses into profits in the month.

“Policy measures to promote a reasonable rebound in prices were gradually implemented, driving corporate profitability to recover continuously,” Yu said.

Profit margins are still under pressure after domestic demand softened further, even as a government-led campaign to curb excess competition begins to translate into better earnings. The world’s second-largest economy weakened across the board in July, with consumer inflation slipping to zero while retail sale growth cooled.

Factory-gate prices have declined for 34 consecutive months, pointing to entrenched deflation that could hold businesses and households back from spending and act as a drag on corporate bottom lines.

While overseas shipments to non-US markets more than compensated for a drop in orders from America, a gauge of China’s new export orders fell at the quickest pace in three months, boding ill for foreign demand in the coming months.

Industrial earnings are a vital gauge of the financial health of factories, mines and utilities, shaping their investment decisions in the months to come. 

Profits in the mining sector kept dropping, with a decrease of almost 32% year-on-year for the first seven months. Coal miners and washers remained among the worst-hit given a supply glut in their industry.

Manufacturers saw earnings rise during the January-July period, as some continue to benefit from state subsidies that encourage companies and consumers to replace old equipment and home goods with new ones.

Profits in high-tech manufacturing surged 19% in July from a year ago, Yu said, citing advancements in aerospace equipment and semiconductors.

Source: The Edge Malaysia