Faster growth in profits due to lower costs as prices rise

China’s major industrial companies posted faster profit growth in August as producer prices went up and production costs came down, the National Bureau of Statistics said yesterday.

Industrial companies reported profits totaling 671.97 billion yuan (US$101.31 billion) last month, up 24 percent year on year — a growth 7.5 percentage points faster than in July.

The bureau tracks companies with annual revenue of more than 20 million yuan. Among the 41 industries surveyed, 39 posted year-on-year profit growth during the first eight months.

China’s producer price index, which measures costs of goods at the factory gate, rose 6.3 percent year on year in August, 0.8 percentage points higher than in July.

The price rebound added some 127.3 billion yuan to August industrial profits, accounting for 31.2 percent of the total profit increase last month, said bureau statistician He Ping.

The trend was particularly evident in sectors such as the petroleum, steel and electronics industries.

He added that ongoing supply side reform had helped lower costs and debts for companies and accelerated turnover of products and capital.

January-August total profits rose 21.6 percent to 4.9 trillion yuan, nearly three times the pace in the same period of last year and faster than the 21.2 percent increase for the first seven months.

Profits at China’s state-owned enterprises were up 46.3 percent to 1.08 trillion yuan in the January-August period, compared with a 44.2 percent rise in the first seven months.

Private companies reported profits growing 14 percent to 1.63 trillion yuan in the first eight months, compared with 14.2 percent in the first seven months.

Last month, the oil and natural gas exploitation industry’s profits went up 4.94 billion yuan from a year ago, but in July they suffered a decrease of 1.03 billion yuan.

Meanwhile, for each 100 yuan of revenue, companies had to spend 85.44 yuan, a 0.64-yuan decrease from the same period last year, according to bureau figures.

He said that the leverage ratio of Chinese industrial firms was on the decline amid the government’s supply-side structural reform. By the end of August, their debt-asset ratio dropped 0.7 percentage points from a year ago to 55.7 percent.

The industrial sector, which accounts for about a third of China’s GDP, started to pick up last year after a bad 2015, helped by government efforts to cut overcapacity and a recovery of the property sector.

Major activity indicators, including industrial output, retail sales and trade, showed cooler growth in August.

The upbeat August profits data has added to evidence of resilience in the sector and steady improvement in the overall economy, Xinhua news agency said.

China’s value-added industrial output grew 6 percent year on year in August, previous data showed. On a monthly basis, industrial production edged up 0.46 percent in August compared to July.

CITIC Securities expects industrial profit growth to slow to between 8 to 12 percent in the next 6 to 12 months amid slower price increases. But stable economic expansion and low inventory will sustain profit growth at a relatively fast range, CITIC said.

That compares with the 8.5 percent full-year increase in 2016.

Economists expected China’s GDP to moderate in the second half from the first half’s 6.9 percent, but the whole year growth is expected to exceed the government’s target of 6.5 percent.

Asian Development Bank has projected economic growth for this year at 6.7 percent.