In another piece of evidence that China is seeing a cyclical recovery, profit growth picked up in March. The annual growth rate went from -4.7% y/y in February to 11.1% y/y in March.
This is probably both an effect of a) higher volumes and b) higher prices for Chinese companies. As the charts below show, producer price inflation m/m was the highest in three years in March. Also a rise in PMI manufacturing suggests that volumes gained momentum in March.
Since producer price inflation is highly correlated to global metal prices and these increased further in April we look for a further rise in both profit growth and PPI inflation in April.
China has a lot of big companies in the mining industry and these are getting a lot of relief currently from both higher prices and volumes. As we have argued lately, we look for a further recovery of Chinese growth over the next couple of quarters driven by construction but also a boost to infrastructure spending and a turn in export growth, see also Research China: A turn in construction to be a game changer , 31 March 2016 and Flash Comment: Chinese data confirm signs of recovery , 15 April 2016.
The pick-up in activity and higher profit growth should support Chinese equities and EM equities overall as Chinese demand rises and commodity prices gain.
To read the entire report Please click on the pdf File Below