China's slowing industrial profit growth bolsters policy support hopes

© Reuters. FILE PHOTO: A worker works on a production line at a factory of a ship equipments manufacturer, in Nantong, Jiangsu province, China March 2, 2020. China Daily via REUTERS

BEIJING (Reuters) -Earnings at China's industrial firms in July slowed for the fifth straight month, adding to growing evidence of a loss of momentum in the world's second-biggest economy and bolstering the case for maintaining policy support https://www.reuters.com/article/us-china-economy-policy-idUSKBN2F013X for a while longer.

Elevated raw material prices and supply chain constraints from extreme weather as well as sporadic coronavirus cases dragged on earnings in the manufacturing sector, data from the National Bureau of Statistics (NBS) showed on Friday.

Industrial firms' profits in July increased 16.4% on an annual basis - the slowest clip this year - to 703.67 billion yuan ($108.51 billion), the NBS said. That compared to a 20% gain in June.

China's economy has staged an impressive recovery from a coronavirus-battered slump, but the expansion is losing steam as businesses grapple with higher costs and supply bottlenecks, and as consumers remain cautious with spending.

The headwinds to growth back expectations Beijing will keep, or even bolster, its accommodative stance. The People’s Bank of China in mid-July lowered the reserve requirement ratio for banks, releasing around 1 trillion yuan ($154.19 billion) in long-term liquidity.

"On economic fundamentals, signs of a notable economic slowdown have emerged, and I expect policymakers to fine-tune the macro-economic policy, currently neutral but with a loosening bias, in an pre-emptive way to counter the headwinds," said Nie Wen, Shanghai-based economist at Hwabao Trust.

"If growth keeps sliding, the government might even roll out quantitative measures," said Nie.

Zhu Hong, senior statistician at the NBS, attributed the slower growth in July to sporadic COVID-cases and flooding, as well as high commodity prices that have pressured profitability for small mid-stream and downstream firms.

"Overall, profits at industrial firms above the designated size maintained a steady growth in July, but we have to recognise that the unevenness and uncertainty in the recovery of corporate earnings still exist," Zhu said.

In the first seven months of the year, industrial firms' profits grew a hefty 57.3% on year, due to base effects, although the pace slowed from the 66.9% surge in first half of 2021.

China's factory output growth slowed sharply in July, and analysts expect it to come under increasing pressure due to COVID-19 social distancing rules and tightening measures in the property sector and high-polluting industries.

Commodity prices have been on a tear in recent months, hurting the bottom lines of many mid- and downstream factories. Chinese coke and coking coal futures hit record highs this week while iron ore futures rose for the fourth day on Thursday.

COVID-19 cases of the more transmittable Delta strain in July and record rainfalls in transportation hub Henan province have also hurt industrial production. The terminal at China's major Ningbo port paused services as part of the government's effort to curb the spread of the virus.

Liabilities at industrial firms rose 8.2% on an annual basis at end-July, down from 8.5% growth as of end-June.

($1 = 6.4850 Chinese yuan renminbi)