China Industrial Companies’ Profits Drop for Third Month

Chinese premier Wen Jiabao
Wen Jiabao, China's premier. Photographer: Michele Tantussi/Bloomberg

Chinese industrial companies’ profits fell for a third month in June, a government report showed today, as decelerating growth in the world’s second-biggest economy hurt corporate earnings.

Income fell 1.7 percent last month from a year earlier, while earnings in the first six months declined 2.2 percent to 2.31 trillion yuan ($362 billion), the National Bureau of Statistics said on its website today.

Today’s data underscore the impact on company profits of an economic slowdown that may extend into a seventh quarter, increasing pressure on Premier Wen Jiabao to roll out additional stimulus. The government will “appropriately” intensify policy fine-tuning as the momentum for rebound isn’t yet in place, Wen said this month.

“Slower activity and tighter margins are clearly impacting” profit growth, said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. “This trend is likely to remain negative over the next months as growth continues to moderate and margins are squeezed.”

The drop in June profit compares with a 5.3 percent decline in May and 2.2 percent drop in April. The first-half decrease was after a 2.4 percent slide in the first five months and 28.7 percent gain in the same period in 2011.

Increase Pressure

The benchmark Shanghai Composite Index was little changed at the 11:30 a.m. local-time break. The gauge fell 0.5 percent in each of the previous two days.

Profit declines for hundreds of Chinese companies in the first half may increase pressure on the government to step up efforts to stem the economy’s slowdown. Net income declined from a year earlier for more than half of 760 companies listed in China to report results so far, worse than in the first six months of 2009, Societe Generale SA said in a note last week.

“Corporates seem to be bearing most of the burden of the cyclical and structural slowdown,” Yao Wei, a Hong Kong-based economist with the bank wrote. “We see Beijing under great pressure to make the decision whether to use more investment and credit to save the short-term cycle or concentrate more on reforms to win back corporates’ confidence” she said.

Falling Orders

Shenji Group Kunming Machine Tool Co., a producer of machine tools, warned yesterday its first-half profit may drop more than 90 percent from a year earlier. The company, based in the southwestern city of Kunming, cited falling orders, intensified competition, higher labor and raw material costs and provisions for bad debts, according to a statement filed to the Shanghai stock exchange.

Angang Steel Co., China’s largest Hong Kong-traded producer of the metal, said July 6 that it probably swung to a first-half loss after prices plunged. Yunnan Copper Industry Co. said July 13 its first-half profit may have fallen 53 percent from a year earlier due to declining prices.

Sales by industrial companies in the first six months increased 11.3 percent to 42.6 trillion yuan, according to today’s statement, down from an 11.9 percent gain in the first five months.

Among 41 industries covered in the report, 27 reported profit growth while 13 saw a decline and one sector -- oil refining, coking and nuclear fuel processing -- fell into a loss, the statistics bureau said.

Property Crackdown

Profits at overseas-funded companies fell 13.4 percent in the first half to 522 billion yuan while earnings at state-owned and state-controlled businesses dropped 10.9 percent to 690.5 billion, the report showed. Income at private industrial companies rose 16.5 percent to 694.7 billion yuan.

China’s gross domestic product expanded 7.6 percent in the second quarter from a year earlier, the least in three years, as Europe’s debt crisis crimped exports and a campaign to cool property speculation curbed domestic demand. Nomura Holdings Inc. estimates a rebound to 8.1 percent in the third quarter, while Song Guoqing, a central bank adviser, said on July 21 growth may slow to 7.4 percent because of “problems on the export side.”

The People’s Bank of China has cut interest rates twice since early June and lowered lenders’ reserve requirement ratio three times starting in November as part of the government’s efforts to boost credit and support economic expansion.

Investment Approvals

The government has accelerated approvals for investment projects, encouraged the development of so-called strategic industries and boosted spending on social housing.

Local governments have also started announcing investment programs. The central Chinese city of Changsha this week unveiled a plan to spend 829.2 billion yuan on projects including an airport expansion and subway lines, joining the cities of Xian, Nanjing and Ningbo in outlining measures to spur growth.

The State Council said this week it will expand a value-added tax trial to 10 additional provinces and cities, as part of a pledge to implement “structural” tax cuts to boost the economy. The overhaul is expected to reduce corporate taxes by 90 billion yuan this year, Citic Securities said in a July 26 report.

The profits report covers companies in 41 industries, according to the statistics bureau. Starting last year, the bureau raised the minimum annual sales for businesses included in the survey to 20 million yuan from 5 million yuan.

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