Chinese industrial profits are falling sharply

STR/AFP/Getty Images
  • Industrial profits in China slumped in early 2019.
  • The 14% annual decline was the largest since late 2011, when record were first kept.
  • Weaker producer price inflation was once factor that contributed to the decline.

All is not well in China’s manufacturing sector in early 2019.

Activity levels are deteriorating at the fastest pace since 2016 while industrial profits have slumped, falling at the fastest annual pace since at least 2011 in the first two months of the year.

According to China’s National Bureau of Statistics (NBS), industrial profits declined to 708.01 billion yuan in January and February, down 14.0% on the same period a year earlier.

It was the steepest drop in profits since records first began in October 2011.

The January and February figures are combined to help remove distortions created by the different timing of Lunar New Year holidays year to year.

According to Reuters, citing commentary from Zhu Hong, an official at the NBS, the steep decline in profits was mainly due to price contractions in key industrial sectors such as auto, oil processing, steel and chemical industries.

Chinese producer prices grew by just 0.1% in the year to February, well below the levels seen throughout the past two years.

Sluggish growth in factory prices helps explain the scale of the drop in profits in early 2019, well below the 1.9% decline reported in the year to December last year.

Along with weaker prices, Zhu said the timing of Lunar New Year holidays this year also had a larger negative impact on business activity than in 2018.

At China’s National People’s Congress earlier this month, Chinese Premier Li Keqiang announced tax cuts and infrastructure spending worth hundreds of billions of dollars to support economic activity.

The profits data, following a string of other weak economic releases to start the year, suggests prior attempts from policymakers to help support the economy have been slow to take effect.

China’s economy grew by 6.6% last year, the slowest increase in several decades. While economic activity slowed, due in part by a deleveraging push from policymakers, the slowdown also reflects that the Chinese economy is now significantly larger than what it once was.

China’s government is targeting economic growth of between 6.0% to 6.5% in 2019.

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