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Why Did China’s Industrial Profits Fall in April?

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China’s industrial profits rose

According to the NBS (National Bureau of Statistics), China’s industrial profits for firms above a designated size rose 4.2% YoY (year-over-year) to 502 billion yuan ($76.6 billion) after rising 11.1% in March. According to the NBS, since 2011, enterprises “above a designated size” refers to all industrial enterprises with revenue from the principal business over 20 million yuan.

In the first four months of 2016, the profits of these firms rose 6.5% YoY to 1.8 trillion yuan—down from 7.4% in the first three months of 2016.

Profits at state-controlled firms fell 7.8% YoY year-to-date. This created a drag on total industrial profits. Private firms’ profit grew 8.4% and foreign-owned firms’ profits rose 7.3%. The inventory levels at industrial firms fell 1.2% YoY at the end April—the first fall in recent years.

The first-quarter growth isn’t sustainable—April data supported this. Sluggish demand, higher inventory levels, and availability of credit still haunt China’s industrial sector. There’s still room for policy easing. This would allow Beijing to drive growth activities in the economy.

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Impact on mutual funds

China-focused mutual funds such as the Oberweis China Opportunities Fund (OBCHX), the Matthews China Fund – Investor Class (MCHFX), and the Guinness Atkinson China and Hong Kong Fund (ICHKX) have sizable exposure to industrials. A rise in industrial profits would have a positive impact on the performance of the mutual funds mentioned above. They invest substantially in the industrials sector. The previously mentioned mutual funds invest in stocks of companies such as Taiwan Semiconductor Manufacturing Company (TSM), CNOOC (CEO), Tencent Holdings (TCEHY), and China Mobile (CHL).

Investors can get exposure to Chinese stocks through ETFs such as the iShares MSCI China ETF (MCHI) and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR).

In the next part, we’ll analyze China’s MNI Consumer Sentiment Indicator.

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