uploads///Chinas Industrial Profits Decelerated in May

Why China’s Industrial Profits Have Slowed Down

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China’s industrial profits fell slightly in May

According to the National Bureau of Statistics (or NBS), China’s industrial profits for firms above a designated size rose 3.7% year-over-year to 537.2 billion yuan ($81.2 billion) in May after rising 4.2% in April. According to the NBS, since 2011, “enterprises above a designated size” refers to all industrial enterprises with revenue from their principal business above 20 million yuan. Slowing industrial profits raised concerns that China’s economy may be losing momentum after recording strong growth in the first quarter.

In the first five months of 2016, these companies’ profits rose 6.4% year-over-year to 2.4 trillion yuan—marginally down from 6.5% in the first four months of 2016.

According to the Ministry of Finance, profits at China’s state-owned companies fell 9.6% year-over-year in the first five months of 2016, higher than the 8.4% fall in the first four months, dragging down total industrial profits.

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Can uneven growth last?

According to the NBS, performance was uneven across sectors. The profits in China’s energy and raw material sectors rose while that the mining sector fell sharply from a year earlier. NBS official He Ping said in a statement, “Growth in industrial profits slowed down slightly in May compared with the previous month, but positive changes have emerged from the industrial sectors.” He added that profits for the energy and raw material sectors—including coal, steel, and non-ferrous industries—resumed growth in May.

The pick-up in profits in these sectors may indicate that Beijing’s efforts to remove excessive capacity, particularly in the coal and steel sectors, is starting to show some results. China might make a comeback, provided its government supports the economy with added stimulus measures. China’s top economic planner said the country planned to cut steel capacity by 45 million tons and lower coal output capacity by 280 million tons.

Impact on funds

China-focused funds such as the Oberweis China Opportunities Fund (OBCHX), the Matthews China Fund – Investor Class (MCHFX), the iShares MSCI China ETF (MCHI), and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) have considerable exposure to industrials. A rise in industrial profits would have a positive impact on the performance of these mutual funds. They invest in stocks such as Taiwan Semiconductor Manufacturing Company (TSM), CNOOC (CEO), Tencent Holdings (TCEHY), and China Mobile (CHL).

In the next part of this series, we’ll look at China’s Westpac MNI Consumer Sentiment Indicator.

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