Industrial profits down for 3rd straight month

Profits of large industrial enterprises dropped in June for the third consecutive month amid sluggish demand, leading to a decline of 2.2 percent year-on-year in the first half to 2.3 trillion yuan ($361 billion), the National Bureau of Statistics said on Friday.

Profits of surveyed companies declined in June by 1.7 percent year-on-year, but the situation has warmed up from declines of 5.3 percent in May and 2.2 percent in April.

Sales by industrial companies in the first six months increased 11.3 percent to 42.6 trillion yuan, the statement said.

The decrease was largely due to the shrinking profits of State-owned enterprises, which dropped by 10.9 percent year-on-year to 690 billion yuan in the first six months.

The poor performance of foreign-funded companies was another key factor. Their profits fell 13.4 percent year-on-year in the first half to 522 billion yuan.

In comparison, privately owned companies fared better, with their profits rising 16.5 percent to 695 billion yuan.

Zhang Qizi, assistant director of the Institute of Industrial Economics at the Chinese Academy of Social Sciences, said: "Private companies have more flexibility in adapting to changes in market demand than SOEs, and are better positioned in the country's economic adjustment."

The NBS survey was conducted among industrial enterprises with annual revenue of more than 20 million yuan.

Of the 41 surveyed industries, 27 reported rising profits, while profits declined in 13 industries. One sector-oil refining, coking and nuclear fuel processing-went into the red, the NBS said.

Profits of power-generating enterprises increased 24 percent, while those of agricultural and non-staple food producers rose 17 percent. Automakers also reported a surprise 10 percent increase in profits.

The ferrous metal processing industry registered the sharpest decline in profits - 57 percent. Profits in the chemical products industry fell by 23 percent.

"The industries that reported profits are due to rising prices, but upstream industries such as steel were heavily affected by sluggish demand," Zhang said.

"However, decreasing profits won't be a long-term phenomenon, as we already see the extent of the decline narrowing," he said.

Song Yu, an economist on China's macroeconomy with Goldman Sachs, said industrial profits may already be improving, and that the year-on-year decline was a result of the high base in the previous year.

"With an easing policy environment in the second half, the profits of large industrial companies may see a rebound," Song said in a research report. However, in Zhejiang province, where China's small and private businesses are the most vigorous, business owners are complaining about rising costs amid declining revenue.

According to statistics from the local authorities, interest costs have increased by 37 percent in the first five months, while labor costs were up 15 percent, resulting in the total profits of companies in the province declining 19 percent.

"Most shoe manufacturers in Wenzhou are struggling with higher labor costs and lower profits with the sharp decline in the number of orders for leather shoes," said Zheng Shili, general manager of Wenzhou Golden Emperor Shoes in Zhejiang province.