China's industrial profits declined the most since late 2011, as the economy cooled

BEIJING (Reuters) – China's industrial enterprises have recorded the worst fall in profits since the end of 2011 in the first two months of this year, according to data released on Wednesday as rising tensions weigh on the economy in the face of slowing domestic and foreign demand have wreaked havoc on businesses.

The sharp drop in profits points to new problems for the world's second-largest economy, which experienced the slowest growth in three decades last year. The government has already lowered the goal of economic growth this year from 6.6 to 6.5% vs. 6.6% in 2018.

China's industrial profits in January-February fell 14.0 percent year-on-year to 708.01 billion yuan (105.5 billion US dollars), the National Bureau of Statistics (NBS) said on Wednesday . This is the biggest contraction since the start of Reuters' records in October 2011.

The data combine the January and February figures to mitigate the distortions caused by the Chinese Lunar New Year, which lasts one week.

The slowdown is mainly due to the contraction of prices in key industrial sectors such as the automotive, oil processing, steel and chemical industries, said Zhu Hong of the statistics bureau in a statement accompanying the data, adding that production and sales were also slowing down.

Profits in the automotive sector fell 37.1 billion yuan from the previous year, while profits in the oil processing industry fell 31.7 billion yuan, according to data official.

Zhu said the lunar New Year holiday schedule, which fell in early February, also had a negative impact on business operations this year compared to 2018.

The trade war with the United States has had a negative impact on factory operations, corporate performance, business climate and overall consumption, to the detriment of the economic outlook.

China's manufacturing output growth reached its lowest level in 17 years in January-February, while out-of-plant inflation remained moderate over the same period, reflecting the worsening of labor market tensions. 'economy.

"While it is possible that the United States and China will reach a trade agreement in the near future, it remains to be determined that it will help reverse the decline of Chinese exports," Betty said. Wang, chief economist of China at ANZ, adding that the decline in global demand remains a concern as well.

Policymakers recognized that the country's economy was facing increasing downward pressure, penalized by multi-year campaigns to reduce debt risk and pollution, while the US trade war had adverse effects on export orders and employment.

Beijing is strengthening measures to support the manufacturing sector by reducing the value-added tax, increasing infrastructure spending and reducing direct government intervention.

Tax breaks to the rescue?

The profit margin in the manufacturing sector is less than 5% and many companies are suffering losses, said Li Dongsheng, CEO of TCL Corp, at a meeting of the Guangdong delegation on the sidelines of a meeting annual meeting of parliament in March.

"I advise the government to further reduce the value-added tax and, if implemented, it will effectively strengthen the manufacturing industry's ability to make a profit," Li said.

Many other companies are already facing pressure on their margins. Jiangsu Shagang, the largest private steel mill in China, expects a decline in its first-quarter net profit of 68.6% year on year.

Industry data released on Monday also showed the Chinese auto sector was in reverse, recording a 13.8% drop in sales in February, the eighth consecutive monthly decline in the largest market. automobile of the world.

Earlier this month, Beijing announced additional tax cuts of several hundred billion dollars, including a 3 percentage point reduction in value-added tax for the manufacturing industry, facing rising costs and reduced profit margins in the face of the economic downturn. .

The country's customs agency announced on Wednesday that the VAT cuts would reduce the tax burden of importers by 225 billion yuan.

However, support measures take a long time to materialize. Most badysts believe that economic activity might not stabilize convincingly before the middle of the year.