China Profit Rise Masks State Enterprise Weakness

Chimney stacks of a power plant in Xingtai, China Photograph by Ed Jones/AFP/Getty Images

Good news for China’s usually lumbering state-owned enterprises? Even as overall economic growth in China looks set to slow further, big industrial companies saw their profits grow 12.3 percent in the first five months of this year, to 2.08 trillion yuan ($338 billion), faster than the 11.4 percent registered January through April. Profits in May rose 15.5 percent over the same month a year earlier, as compared with 9.3 percent growth in April.

All told, 33 industries, of 41 surveyed in total, reported an increase in profit growth, China’s National Bureau of Statistics announced June 27. The survey covers companies with at least 20 million yuan ($3.22 million) in annual revenue.

Before you break out the baijiu, better take a closer look. Resource industries—usually state-dominated in China—didn’t do so well. Oil and natural gas enterprises and companies in coal mining, for example, saw profits decline, down 9.8 percent and 43.9 percent, respectively. Nonferrous metal mining and nonferrous metal smelting industries, also saw declines, albeit both in the single digits.

So what industries did well? Electricity, or thermal power production, soared 89.1 percent, more than any other industry. Falling coal prices were the primary reason for the stellar profits, according to Yu Jianxun, a researcher in the statistics bureau’s industry department (about 80 percent of China’s electricity comes from burning coal). And oil refining and nuclear fuel processing also grew strongly, said Yu, according to the official Xinhua News Agency on June 27.

Profits in telecommunications and car manufacturing both increased strongly, up 53.5 percent and 20 percent. Profits for companies producing electrical equipment and machinery also beat overall income growth, up 13.2 percent. Perhaps not surprisingly, these industries also happen to be populated by significant numbers of private and foreign-invested companies.

Ownership structure, it turns out, matters. The worst performers were state-owned enterprises whose profits grew only 3.3 percent in the first five months. When looking just at profits earned from their core businesses (many companies in China have branched out into unrelated, often speculative businesses, most notably real estate), growth was only 2.2 percent and profit margins averaged 5.25 percent.

Also a problem: the degree to which officials in China have come to rely on state-owned companies to boost GDP growth, particularly following the 2008 global economic crisis, points out GK Dragonomics research director Andrew Batson in a report on June 24. Batson cites “repeated pushes on SOEs to build stimulus projects in infrastructure and heavy industry. In other words, the political pressure on SOEs to invest looks to have trumped their response to market signals.”

By contrast, foreign-invested company profits grew a healthy 14.7 percent (with 5.28 percent profit margins on average), while private enterprises performed best of all; profits were up 17.9 percent (16.4 percent if only core businesses are included, with a much higher margin of 7.09 percent.) “Private businesses outshined other business,” Xinhua reported.

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