China industrial profits shrink in April amid trade war

May 27, 2019 12:20
Earnings at China’s key manufacturing sector have been declining since November last year, with the exception of March. Photo: Xinhua

Profits for China’s industrial firms shrank in April as slowing manufacturing activity halted the previous month’s surge, putting more pressure on policymakers to step up support for an economy hit by a bitter trade war with the United States, Reuters reports.

Earnings at China’s key manufacturing sector have been declining since November last year, with the exception of March, as both domestic and global demand slackened.

Industrial profits dropped 3.7 percent year-on-year to 515.4 billion yuan (US$74.80 billion) in April, partly due to a high base of comparison in the previous year, according to data published by the National Bureau of Statistics (NBS) on Monday. That compared with a 13.9 percent surge in March, which was the biggest gain in eight months.

Zhu Hong of the statistics bureau said in a statement the March results benefited from companies buying industrial goods ahead of a value-added tax (VAT) cut. The firms then scaled back on purchases in April in a blow to profits.

For the first four months, industrial firms notched up profits of 1.81 trillion yuan, down 3.4 percent from a year earlier, compared with a 3.3 percent drop in the first quarter this year.

The contraction in profits was in line with the weak growth in industrial output in the January-April period. Weak fixed-asset investment has also stoked worries about demand as have new factory orders, which remained sluggish in April, while exports have fallen on a sharp drop in shipments to the US.

US-China trade frictions escalated suddenly this month, reversing the apparent progress in dialogue seen earlier this year, as US President Donald Trump raised tariffs on US$200 billion worth of Chinese goods and threatened to slap tariffs of up to 25 percent on another US$300 billion Chinese imports.

The US has also put the Chinese telecom equipment giant Huawei Technologies Co. Ltd. to a blacklist, effectively banning the company to do business with US firms.

Profits in telecommunications and electronic equipment manufacturing, which are more vulnerable to US tariffs than other product classes, declined 15.3 percent in January to April, worsening from a 7.0 percent drop in the first three months.

Iris Pang, Greater China Economist at ING, said the broadening rift between China and the US over Huawei along with increasing concerns in other countries about the security of Huawei’s products will hit China’s exports as well as earnings of its telecom sector.

“As the technology war continues, China’s industrial profits starting from May will likely deteriorate faster [than January-April],” she said, adding that a 5.0 percent year-on-year contraction in January-May profits is possible as a downturn in earnings for the telecom industry deepens.

In response to a slowing economy and higher US import tariffs on Chinese goods, Beijing has stepped up support for cash-strapped manufacturing firms. China has pledged billions of dollars in additional tax cuts and infrastructure spending, while its central bank has also announced a cut in three phases in the reserve requirement ratio for regional banks to reduce small companies’ financing costs.

Upstream sectors like oil extraction still saw the lion’s share of profit gains with faster growth in January-April. The decline in profits earned by steel mills and chemical plants moderated from the first three months.

Liabilities of industrial firms rose 5.5 percent year-on-year as of end-April, the NBS said.

The data includes companies with annual revenues of more than 20 million yuan from their main operations.

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