Growth of Industrial Profits in China Slows

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Shanghai China

Profits of industrial corporations in China continued to expand in September, but the rate of growth is reducing, according to official data just released.

Industrial profits in the world’s second-largest economy climbed 8.4 percent to 4.64 trillion yuan ($685 billion) in the first nine months of 2016, compared to the level in the same period a year ago, the National Bureau of Statistics reported on Thursday.

The growth in earnings was driven mainly by the steel and oil refining industries. Earnings from steel production in the January-September period surged 272.4 percent, compared to the same period a year earlier. Profits from oil refining soared by 263.8 percent on-year in the first nine months of this year.

However, earnings growth slowed in September. Profits climbed 7.7 percent from a year ago to 577.1 billion yuan, compared to the 19.5 percent rise seen in the previous month. The jump recorded in August was the highest in three years, according to Bloomberg.

The statistics agency explained that significant difference between earnings growth in the past two months was partly because earnings were especially poor in August 2015 before rising strongly in the following month.

“The figures aren’t bad in fact, especially in the state sector, which is doing very well,” Commerzbank AG Singapore economist Zhou Hao said. “The biggest challenge facing companies is to strike a balance between cutting debt and making a profit. Controlling debt risk now becomes a priority for the government as corporate profits have been stabilized.”

The NBS noted that industries such as electricity and electronics suffered considerable slump in profit growth.

Recent indicators of the Chinese economy showed it was becoming more stable, having recorded growth of 6.7 percent three quarters in a row. Persistent factory deflation is improving as a result of increased government spending, among other factors. Last month, producer prices climbed for the first time in about four years.

China’s government is stepping up efforts to curb overcapacity in the economy’s traditional sectors due to the effect this can have on profits. A campaign is on to cut back on capacity in the steel and coal sectors.

“We should take heed of corporate debt risks as we cut overcapacity,” warned the NBS, which noted that coal and steel companies are deeper in debt.

Some analysts have said outlook for industrial profits in China could depend greatly on the extent of success made by policy makers in cutting capacity in certain sectors.

Chinese government is working to control risks from the huge corporate debt it currently faces as well as rising property prices in the country.

Liabilities of industrial corporations in China climbed 4.7 percent in September, compared to the level in the same period last year.

The NBS data focused on large businesses with more than 20 million yuan in annual revenues from their major operations.

The 6.7 percent expansion seen in the July-September quarter put the economy on track towards achievement of the target set by China’s policy makers. A property boom and higher government spending have combined to lessen the impact of weak foreign and domestic demand.

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