June 26 (Bloomberg) -- Chinese industrial-company profits fell at a slower pace as commodity prices declined from a year earlier and a 4 trillion yuan ($585 billion) stimulus package boosted demand.

Net income sank 22.9 percent in the five months through May to 850.2 billion yuan ($124.4 billion), the statistics bureau said today. Profits plunged 37.3 percent in the first two months. The data is released at three-month intervals.

Oil refiners and power producers led the improvement as falling costs, rising demand and more stable prices aided China’s industries, the statistics bureau said. The world’s third-biggest economy is at a “critical” stage as the government counters a slump in export demand, the central bank said yesterday.

“It looks like the real economic recovery is beginning,” said Paul Cavey, an economist with Macquarie Securities in Hong Kong. “Things are looking quite promising.

JPMorgan Chase & Co. raised today its forecast for China’s growth this year to 7.8 percent from a previous estimate of 7.2 percent. The Shanghai Composite Index closed 0.1 percent higher, extending this year’s advance to 61 percent.

Electricity industry profits climbed 14.6 percent, compared with a 74 percent decline a year earlier.

‘Earnings Momentum’

Oil processors and the coking industry reported 44.8 billion yuan of net income, versus a previous loss of almost the same size. Increases this year in government-controlled fuel prices have also aided refiners.

“The earnings momentum is mostly driven by these two sectors, which suffered massively last year when oil and coal prices were high,” said Isaac Meng, a senior economist at BNP Paribas SA in Beijing.

While the Reuters/Jefferies CRB Index of 19 raw materials, including oil and copper, is down 45 percent from a year ago, it has climbed 10 percent in 2009.

The profit decline slowed to 15.4 percent for the three months to May 31 from a year earlier, Moody’s Economy.com calculated. The average monthly profit from March to May was 92 percent higher than in the first two months of the year, according to JPMorgan Chase & Co.

“Corporate earnings are not yet out of the woods,” Meng said. “Overcapacity and the strong surge in commodity prices will continue to pressure margins.”

Steel, Chemical Fibers

Sinopec Shanghai Petrochemical Co., China’s biggest ethylene maker, said June 10 that it expects to post a first- half profit because of lower prices for oil and changed tax and pricing rules.

While steel reported a 97 percent drop in earnings, the industry is back in profit after a loss in the first two months, the statistics bureau said. Non-ferrous metal refiners and processors are also making money again, along with the chemical fiber industry, it said.

The stimulus package has driven record lending and a surge in investment. Chinese banks may extend as much as 1.2 trillion yuan of new loans this month, the China Securities Journal reported today, citing unidentified industry sources. That would be close to four times the amount a year earlier.

Tentative signs of improved profitability “are in line with the broad-based economic recovery in China,” said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong. Corporate profits will “improve significantly in the second half of 2009 and 2010.”

Auto Sales

Auto sales have surged this year because of tax cuts and subsidies, pushing China past the U.S. as the biggest market for new vehicles. That hasn’t translated into better profits, partly because of increased sales of lower-margin small vehicles.

Combined profit at the country’s top 19 automakers fell 28 percent in the first four months, while revenue declined 11 percent, according to the China Association of Automobile Manufacturers. Five automakers boosted profit, 10 reported declines and the rest had losses, the association said.

Sinotruk (Hong Kong) Ltd., China’s biggest heavy-truck maker, forecast a “substantial” drop in first-half profit on June 18, citing increased competition and a decline in domestic and overseas demand caused by the global recession

The Organization for Economic Cooperation and Development raised this week its forecast for China’s growth in 2009 to 7.7 percent. The World Bank’s estimate, increased last week, is 7.2 percent.

The World Bank cautioned June 18 that it’s “too early” to call a sustained recovery because of weak private investment and excess manufacturing capacity.

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

Last Updated: June 26, 2009 04:28 EDT