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China Profits Sinking May Pressure Wen to Reduce Taxes: Economy

Photographer: Nelson Ching/Bloomberg

Employees work on the manufacture of construction machinery in Sany Heavy Industry Co.'s assembly shop in Changsha, Hunan Province, China. Close

Employees work on the manufacture of construction machinery in Sany Heavy Industry... Read More

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Photographer: Nelson Ching/Bloomberg

Employees work on the manufacture of construction machinery in Sany Heavy Industry Co.'s assembly shop in Changsha, Hunan Province, China.

Profit declines for hundreds of Chinese companies in the first half may increase pressure on the government to reduce corporate taxes as part of efforts to stem the economy’s slowdown.

Net income declined from a year earlier for more than half of 760 listed companies to report results, worse than in the first six months of 2009, Societe Generale SA said yesterday. Credit Agricole CIB sees tax cuts as a likely policy tool.

The breadth of the declines raises the urgency for Premier Wen Jiabao to move beyond boosting investment and monetary stimulus in dealing with the worst deceleration in the world’s second-largest economy since the global financial crisis. Wen this month repeated his call for structural tax changes and the State Council may be poised to announce measures to support growth, the China Securities Journal reported July 16.

“The stakes are very high -- it’s about the corporate world’s confidence in the whole economy,” said Yao Wei, China economist at Societe Generale in Hong Kong. “The positive sign is that the central government has realized the problem and is talking more frequently about the issue.”

Tax cuts are among “fundamental changes” that can’t wait much longer, Yao said.

The government may loosen policies through tax cuts as well as fiscal measures and reductions in banks’ reserve requirements, Dariusz Kowalczyk, senior economist and strategist at Credit Agricole in Hong Kong, said July 9.

Private Investment

Vice Premier Li Keqiang said this month that the government should implement structural tax reductions and encourage and guide private investment, the official Xinhua News Agency reported.

Corporate income tax is 25 percent and the nation also has a 17 percent value-added tax.

The benchmark Shanghai Composite Index fell 0.4 percent today at the 11:30 a.m. local-time break, the first drop in four days. The gauge has declined 22 percent over the past year, compared with a 16 percent fall in the MSCI Asia Pacific Index.

Among companies reporting profit declines, telecommunications equipment maker ZTE Corp. (000063) said first-half net income may have fallen as much as 80 percent from a year earlier on reduced investment income, foreign-exchange losses and delayed contracts.

Air China Ltd. (601111), the world’s second-biggest carrier by market value, said profit may have declined more than 50 percent on weaker demand and higher fuel costs. China Southern Airlines Co. and China Eastern Airlines Corp. forecast similar slumps.

Sany Forecast

Sany Heavy Industry Co. (600031), China’s biggest maker of excavators, has lowered its annual unit-sales forecast, Vice Chairman Xiang Wenbo said in a July 11 interview. A “meaningful recovery” in demand for earth-moving equipment may not be visible until the first quarter of next year, Xiang said.

Sany is postponing a $2 billion share sale in Hong Kong after struggling to attract investors, two people with knowledge of the matter said.

“Many people think our industry will see a substantial decline, which I think is reasonable,” Xiang said in the interview, adding that the government’s past stimulus measures had provided a growth opportunity that was “abnormal” and “irrrational.”

A government report last month showed industrial companies’ profits fell for a second month in May, dropping 5.3 percent from a year earlier to 390.9 billion yuan ($61 billion). Revenue in the first five months rose 11.9 percent to 34.5 trillion yuan. The statistics bureau releases June data on July 27.

Depressed Prices

“Despite the rapid disinflation of input costs like raw materials, profit margins continued to shrink as weakened demand has depressed finished goods prices while some cost components such as wages have remained sticky,” UBS AG analysts led by Wang Tao said in a report yesterday. They were commenting on industrial companies’ profits, and said that net income is likely to rebound in the fourth quarter as growth accelerates on additional policy support.

Some U.S. companies doing business in China indicated this month that they’re struggling with the deceleration of economic expansion.

Dell Inc. Chief Executive Officer Michael Dell said July 17 that the computer maker is seeing a slowdown. Yum! Brands Inc. (YUM), owner of the KFC and Pizza Hut restaurant brands, reported second-quarter profit gains that were short of analysts’ projections as labor and commodity costs increased in China.

Gao Shanwen, chief economist for Essence Securities in Beijing, said tax cuts are “more symbolic than serious.” More government spending is necessary to help the economy, even as corporations bear the brunt of the slowdown, said Gao, who previously worked for the People’s Bank of China and the State Council’s Development Research Center.

Revenue Growth

Government revenue is rising at a faster clip than economic expansion, up 12 percent in the first half from a year earlier to 6.38 trillion yuan. The official target of 9.5 percent growth in fiscal revenue for this year compares with a 7.5 percent goal for GDP.

China has “relatively large” room to boost fiscal spending to support economic growth and can allow the fiscal deficit to widen if necessary to a size similar to 2009’s gap, Zhang Peng, a Beijing-based researcher with the Fiscal Research Institute at the Ministry of Finance, said in a telephone interview this week.

Wen Jiabao said in March that the government plans a deficit of 800 billion yuan this year; the shortfall was 950 billion yuan in 2009, ministry data show.

Right Decisions

Even with the deceleration, China is likely to “continue to grow very well” and leaders will make the right decisions in their management of the economy, David Cote, chief executive officer of Honeywell International Inc., said on a July 18 conference call, according to a transcript. “You should bet on them, not against them,” he said.

Elsewhere today in the Asia Pacific region, import prices in Australia rose 2.4 percent in the second quarter from the prior period, while export prices gained 1 percent, both faster than forecast. Taiwan may say export orders fell in June from a year earlier for a fourth straight decline.

In Europe, Germany’s producer prices may have declined 0.2 percent in June from the previous month, based on the median estimate in a Bloomberg survey of economists. It would be the second consecutive drop following four increases.

Mexico’s central bank is forecast to leave its benchmark interest rate unchanged at 4.5 percent, where it’s been since 2009. Canada will report a 1.7 percent increase in the consumer price index from a year earlier, according to analysts.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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