Profits at Chinese industrial companies surged last month, fuelled by rising commodity prices and a buoyant real estate market, but analysts warn that profit growth remains heavily reliant on government stimulus and smokestack industries.
Industrial profits increased 14.5 per cent in November from a year earlier, China’s statistics bureau said on Tuesday, the second-fastest monthly growth since June 2014. But the agency cautioned that growth was “overly reliant” on a price rebound in oil refining, steel, and other raw materials. Coal mining profits rose by 156 per cent in January through November from a year earlier.
Strong credit growth, especially mortgages loans, has fed a rally in property prices this year. Fiscal spending on infrastructure has also stoked demand for basic commodities. The price recovery has revived industrial profits, which were in decline for seven straight months through last December.
“We have to look at whether there is an overflow effect [from the commodities sector]. It’s like a heating stove. How effective it is depends not just on whether it gets hot, but also whether it can warm the surrounding area,” said Hu Yanhong, analyst at Yingda Securities Research Institute in Shenzhen.
Rising commodity price rises also have pulled China out of deflation, which was worsening the country’s heavy corporate debt burden and prompting businesses to postpone spending. The producer price index was in negative territory for more than four consecutive years through August, but producer price inflation hit a nearly five-year high of 3.3 per cent in November.
However, commodity price inflation is disrupting the government’s “supply-side reform” efforts focused on eliminating excess manufacturing capacity in sectors such as coal and steel. China’s cabinet has officially reprimanded the vice governors of Hebei and Jiangsu provinces for allowing local enterprises to illegally produce steel, the official Xinhua news agency reported on Tuesday.
Analysts warn that a frothy property market and commodity inflation are not strong foundations for corporate profit growth. The government has imposed purchase and lending restrictions in recent months to cool the property market, amid fears of a bubble and rising anger at unaffordable housing. House-price growth slowed in November, suggesting those measures are starting to have an effect.
“We are conservative about the longer-term profit outlook, as we do not see signs of a recovery in aggregate demand given a cooling property market and high corporate leverage,” wrote Nomura analysts led by chief China economist Yang Zhao.
Mr Zhao also noted that Tuesday’s data suggest an “unhealthy” profit distribution. Year-to-date profit growth at state-owned enterprises accelerated by 3.4 percentage points in November, while growth at private firms decelerated by 0.7 percentage points. State-owned firms dominate oil refining. The non-state sector boasts many small coal and steel producers, but the largest coal and steel firms are state-owned.
Additional reporting by Ma Nan
Twitter: @gabewildau
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