China’s Industrial Profits Suffer Steepest Drop on Record
China’s industrial profits fell 14% year-on-year in the first two months of 2019, marking the steepest drop since official monthly data on the subject became available in October 2011.
Over the first two months of this year, the total profits of the country’s industrial sector slumped to 708 billion yuan ($105 billion), according to data released on Wednesday by the National Bureau of Statistics (NBS).
In China, January and February economic data are usually combined to reduce distortion caused by the weeklong Lunar New Year holiday, which typically falls in the first two months of the year.
The drop in profits was mostly due to the declining profits of major industries, said Zhu Hong, a senior statistician of the NBS. If the automotive, oil processing, nonferrous metals and chemical manufacturing industries had been excluded from the data, China’s industrial profits would have grown 0.2% year-on-year.
This year’s Lunar New Year holiday impacted the production and operation of industrial enterprises for a longer period than it did last year, Zhu said, adding that growth of industrial production and sales have also slowed, contributing to the profit decline to some extent.
Still, there were some sectors that outperformed. The iron ore mining, transport equipment, machinery and consumption sectors posted profit growth over the first two months of this year. “Upstream sectors had a great time over the past three years thanks to the supply-side reform and the property up-cycle,” said economists of Macquarie Capital Ltd., adding that the industry will come under more pressure in the coming quarters as the supply-side reforms fade and the housing market continues to cool.
Analysts also predicted that the decline in industrial profits will turn around in March. “For industrial profit growth, we view a short-lived rebound as likely in March due to last year’s low base, but the downcycle should resume in April and May as the economy slows,” Nomura analysts said in a note.
The weak profit data is further evidence of weakening growth momentum, the Nomura analysts said, adding that they maintain their forecast for real gross domestic product (GDP) growth to slow to 6.2% year-on-year in the first quarter and further to 5.7% year-on-year in the second quarter.
China’s GDP expanded by 6.6% in 2018, the lowest rate since 1990, underscoring growing economic headwinds. While reducing taxes and fees, China lowered the official economic growth target for 2019 to a range of 6% to 6.5%, compared with a target of around 6.5% for 2018. It was only the second time that China has set a growth target in the form of a range — the first was in 2016.
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