China’s Economy Shows Signs of Recovery as Industrial Profits Surge

China’s industrial sector posted a strong rebound in August, as profits rose 17.2% year-on-year, reversing the trend of decline in the previous five months. This was the first monthly growth since the second half of last year, according to the National Bureau of Statistics (NBS).

The increase in profits suggests that demand may be improving after the government ramped up measures in recent months to prop up the property market and spur consumer spending. Industrial production picked up in August, while producer price deflation eased, giving a boost to profits.

“With the steady rebound in industrial production and the improvement in the connection between production and sales, the income of industrial firms improved gradually,” NBS analyst Yu Weining said in a statement.

China’s Economy Shows Signs of Recovery as Industrial Profits Surge
China’s Economy Shows Signs of Recovery as Industrial Profits Surge

Upstream sectors benefited from rising commodity prices

The NBS data showed that the profits of upstream sectors, such as mining and raw materials, increased significantly in August, as commodity prices rose amid supply disruptions and global recovery. The profits of coal mining and washing industry surged 146.8%, while those of ferrous metal smelting and rolling processing industry jumped 86.9%.

Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd., said that output prices improved in August, and rises in commodity prices increased the earnings of upstream sectors. “If consumption improves, we can expect a continued growth of profits,” he said.

Economic growth is stabilizing but risks remain

The rise in industrial profits adds to signs that China’s economic growth is stabilizing after a slowdown earlier in the year, although the ongoing slump in the housing market remains a major risk to the outlook. Economists have downgraded their growth forecasts for China steadily during the year and expect 5% expansion now.

The NBS data also showed that manufacturers’ profits fell 13.7% in the first eight months of the year, 4.7 percentage points slower than in the January-July period. The profitability of industrial firms remained low, as the ratio of profits to revenues was 5.6%, down 0.4 percentage points from a year earlier.

Bloomberg Economics said that August’s jump in China’s industrial profits suggests that manufacturing activity may be starting to bottom out, but more stimulus will be needed to sustain the recovery. “Given the underlying weakness in domestic and external demand, it will take time before earnings rebound consistently — and more stimulus will be needed,” it said.

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