28/09/2017 05:36 AST

Profits at China’s industrial companies rose the most in four years in August as commodities prices surged, thanks to a government-backed construction boom that is helping Beijing trim high levels of corporate debt without tripping up the economy.

The upbeat earnings report is another sweetener for authorities as China focuses on stripping out financial risks from years of credit-fuelled growth and keeping the economy on a steady footing ahead of a crucial party gathering next month.

Profits in August jumped 24 per cent year-on-year to 672 billion yuan ($101.21 billion), the National Bureau of Statistics (NBS) said on Wednesday.

Discounting the combined Jan-Feb profit rise of 31.5 per cent, the latest earnings boost would be the biggest single monthly percentage surge since August 2013. The statistics bureau does not release single-month figures for Jan-Feb due to seasonal factors. Annual profit growth was 16.5 per cent in July.

“The figures are really positive — they show China’s efforts to cut down on overcapacity is working well,” said Iris Pang, Greater China Economist at ING bank in Hong Kong.

Crucially, Pang said that Beijing is also making headway in reducing debt risks. “When you close down overcapacity factories, you are also deleveraging to an extent.” The robust industrial earnings growth in August was driven by higher prices, particularly in sectors such as oil, steel and electronics, He Ping of the National Bureau of Statistics said in a statement. He estimated that surging prices contributed nearly one third of the new profits last month. A year-long, government-led construction boom has fuelled demand and prices for building materials, while China’s push to cut excess capacity in heavy industries and its war on pollution has also appeared to intensify a short-term supply shortage and higher prices.

Looming risks

For the first eight months this year, the firms notched up profits of 4.92 trillion yuan, an increase of 21.6 per cent year-on-year, picking up slightly from the 21.2 per cent annual growth in the January-July period.

The earnings data by sector, however, highlights the uneven nature of profit growth. Earnings in the mining industry soared 5.9 times from a year earlier, coal mining enjoyed a 960 per cent jump and manufacturing saw an 18.6 per cent boost. Sectors such as electricity, gas and water production however saw their profits plunge 22.6 per cent.

A private survey of thousands of Chinese firms by China Beige Book International (CBB) noted major risks are looming for 2018, with a reversal in the commodity boom being one of the top worries.

“It was demand and hot money inflows that kept prices rising. Neither was sustainable and now demand has clearly sputtered,” it said.

Profits at China’s state-owned industrial firms, often debt-laden, were up 46.3 per cent at 1.08 trillion yuan in January-August, compared with a 44.2 per cent rise in the first seven months. But earnings for all SOEs for August alone were only up 4.3 per cent on-year, Reuters calculations show.

A raft of August data back analysts’ expectations for the economy to slow over coming months, as efforts by policymakers to clamp down on debt risks and defuse a property market bubble have raised financing costs and generally tightened monetary conditions.

S&P Global Ratings downgraded China’s long-term sovereign credit rating last Thursday, citing increasing risks from its rapid build-up debt. Chinese industrial firms’ liabilities at the end of August were 6.4 per cent higher than at the same point last year.

Still, after a robust first-half growth is expected to easily meet the government’s 6.5 per cent target for this year in a welcome sign for Beijing ahead of a Communist Party Congress (CPC), which will see a key leadership reshuffle and the setting of policy priorities for the next five years.


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