Chinese corporate profit growth, slowing on waning export demand from Europe, may be further undermined as a campaign to cool property prices reduces the value of investments.
Industrial companies’ net income rose 12.5 percent in October from a year earlier, less than half the 27 percent pace from January to September, the statistics bureau said yesterday.
The slowdown adds to evidence that Europe’s deepening financial crisis and a faltering recovery in the U.S. are weighing on profits. More than 60 percent of Chinese companies that sold bonds in the past six months invest in the real estate market, where sales are weakening under government curbs that Vice Premier Li Keqiang pledged on Nov. 25 to maintain.
“The slowdown of the economy will become more prominent in the next two quarters,” said Wang Tao, a Hong Kong-based economist for UBS AG who has also worked for the International Monetary Fund. She said that industrial companies’ profit growth may keep cooling and the government may enact “more obvious policy loosening in the first quarter of next year.”
The government can support growth by ramping up state housing construction, while moderating inflation may leave room for monetary policy loosening.
China’s economy can avoid a so-called hard landing with an expansion of more than 8 percent next year, Wang said. The economy grew 10.4 percent in 2010 and 9.1 percent in the third quarter of this year.
Noyer on Crisis
In Tokyo, Bank of France Governor Christian Noyer said the crisis in Europe, China’s biggest export market, has worsened “significantly” over the past few weeks and bond markets in the euro area “are not functioning normally.” Moody’s Investors Service said today that the “rapid escalation” in the situation is threatening all the region’s sovereign ratings.
Asian stocks jumped on stronger U.S. retail sales and speculation that the International Monetary Fund will aid Italy, a topic Noyer declined to discuss. The MSCI Asia Pacific Index rose 2 percent as of 4:11 p.m. in Tokyo, the first increase in four days.
Elsewhere in Asia, Thailand reported a slump in industrial output today, while the Philippine economy grew a less-than- forecast 3.2 percent in the third quarter from a year earlier, according to government data.
Germany, meanwhile, is due to release inflation figures. In the U.S., a report from the Commerce Department may show fallout from that nation’s housing bubble weighing on the world’s biggest economy.
New homes may have sold at a 313,000 annual rate last month, the same as the previous month, a Bloomberg News survey of analysts shows. That would put the monthly average for the year at 304,000, less than the 323,000 in 2010 that was the lowest since data-keeping began in 1963.
In China, the government intensified property measures this year with limits on mortgages and restrictions on home purchases in about 40 cities. October housing transactions declined 25 percent from September and prices fell in 33 of 70 cities.
Seventy-four of 121 companies that filed bond prospectuses since May with Chinabond, the nation’s clearinghouse, count one of their main businesses as real estate, have property subsidiaries or invest in the market. Engine maker Zongshen Power Machinery Co. said its parent company is involved in development. Kangmei Pharmaceutical Co., which makes medicine to treat high blood pressure, invests in real estate.
Behind on Payments
Most Chinese builders face payment delays from developers as the pace of construction slows amid tighter credit and a slowdown in home sales, Credit Suisse Group AG said in a report. About 80 percent of construction companies said developers were behind on payments, the brokerage said, citing a survey.
Most economists expect China’s government to loosen some fiscal or monetary policies without cutting interest rates as inflation remains elevated, a Bloomberg News survey showed this month. Europe’s sovereign-debt crisis is sapping export demand just as a crackdown on speculation damps home sales and construction.Manufacturing may contract this month by the most since March 2009, according to a preliminary purchasing managers’ index. Rising costs may erode margins, with the official Xinhua News Agency reporting that the southern city of Shenzhen will boost the monthly minimum wage by 15 percent to 1,500 yuan ($235) in January to attract workers.
Industrial companies’ sales climbed 29.1 percent to 68.18 trillion yuan for the first 10 months of the year, yesterday’s report showed. Profit declines were reported in industries such as oil processing and power production. Huaneng Power International Inc. (600011) previously reported a 79 percent slide in third-quarter net income.
“If economic growth slows further, companies’ profit outlook won’t be very optimistic,” Li Wei, an economist at Standard Chartered Plc in Shanghai, said before yesterday’s release. “Price distortions caused by the government’s administrative controls have affected the operations of power makers and energy producers.”
China’s central bank last week fueled speculation that monetary policy may be eased by letting reserve requirements fall by half a percentage point for more than 20 rural credit cooperatives.
China’s economic growth may slow to 9.2 percent this year and moderate further in 2012, as companies are squeezed by funding difficulties, labor costs, and raw-material prices, Huang Libin, an official from the Ministry of Industry and Information Technology, said Nov. 24.
Li at Standard Chartered said easing inflation may offer “a good opportunity” for the government to correct price distortions in the energy industries. “Calls for reforms are getting stronger,” he said.
The industrial profits data cover companies with annual sales from their main business of at least 20 million yuan in 39 industries including oil and gas exploration, transportation equipment manufacturing, telecommunications and power generation.
To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at email@example.com