Low profits show a cooling in China

Growth in Chinese industrial companies’ profits slowed in March, adding to evidence the nation’s economic recovery is losing steam.

Net income increased 5.3 percent from a year earlier to 464.9 billion yuan ($75 billion), down from a 17.2 percent pace in the first two months, the National Bureau of Statistics said on its Web site yesterday. Profit in the first quarter rose 12.1 percent to 1.17 trillion yuan, it said.

China’s stocks fell for a third straight month in April amid investor concern that the recovery in the country’s economic expansion is losing momentum and will hurt corporate earnings. The benchmark Shanghai Composite Index closed 1 percent lower on Friday, the last trading day before a three-day holiday ending Wednesday.

“Profits are only growing in line with sales and with problems of overcapacity and the sluggish global picture, it doesn’t bode well for a speedy return to higher profit margins,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group in Hong Kong. “Heavy industries especially still face destocking and higher costs, but if there is a silver lining, industries catering to the consumer, like textiles, food and beverages, seem to be doing much better.”

Industrial companies’ revenue rose 11.9 percent in the first three months to 22.2 trillion yuan, according to yesterday’s statement. That’s down from 13.1 percent in the first two months. The bureau doesn’t break down January and February data due to distortions caused by the timing of the Lunar New Year holiday. No figure was given for March sales.

Profit margins in the first quarter were 5.3 percent, the same as the first three months of 2012, the data show. The report covers companies with annual sales of 20 million yuan and above in 41 industry categories.

Gross domestic product in world’s second-biggest economy expanded 7.7 percent in the first three months of 2013 from a year earlier, down from 7.9 percent in the fourth quarter and trailing the 8 percent median estimate in a Bloomberg News survey. Goldman Sachs Group, Royal Bank of Scotland and JPMorgan Chase cut their estimates for full-year growth to 7.8 percent after the GDP data were released April 15. That would be the same pace as 2012 which was the weakest in 13 years.

Industrial growth is facing downward pressure amid slowing domestic and international demand, Ministry of Industry and Information Technology spokesman Xiao Chunquan said Tuesday. Profits at industrial companies are at “very low levels” compared with the past few years because of falling prices and surging costs, Xiao said.

Vehicle manufacturing earnings dropped 1 percent last month from a year earlier after a 20 percent increase in the first two months, the statistics bureau said in a separate statement. The drop in coal industry profit accelerated in March to 50 percent from 35 percent in the first two months, it said.

Earnings in some industries have rebounded after falling for most of last year when slowing economic expansion damped demand for steel, cement and machinery. Restocking and higher product prices are supporting profit gains even as growth in GDP moderates. Profit in the ferrous metals industry, which includes steel, doubled in March from a year earlier, the bureau said.

Earnings in oil processing, coking and nuclear fuel processing tripled in March from a year earlier, after swinging to a profit in the first two months from a loss a year ago, the bureau said.

Bloomberg