China’s industrial firms post steepest fall in profits in a decade

(C) Reuters. Employees wearing face masks work on a car seat assembly line at Yanfeng Adient factory in Shanghai

By Gabriel Crossley and Roxanne Liu

BEIJING (Reuters) – Profits at China’s industrial firms slumped in the first two months of the year to their lowest in at least a decade, with the mining, manufacturing and power sectors all seeing sharp falls, as a virus epidemic battered China’s economy.

Profits earned by Chinese industrial firms in the first two months dropped 38.3% from a year earlier to 410.7 billion yuan ($58.15 billion), worsening from a 6.3% fall seen in December last year, the National Bureau of Statistics (NBS) data showed. It marked the steepest decline in data going back to 2010.

The reading combines the results for January and February to exclude distortions caused by the week-long Lunar New Year.

The outbreak escalated just as many businesses were closing for the long holiday break in late January, and widespread restrictions on transportation and personal travel, as well as mass quarantine, delayed their reopening for weeks.

The decline in profits points to lingering trouble for the manufacturing sector, which is wrestling with fallout from the health crisis that has severely hurt output. Most analysts now expect a contraction in gross domestic product in the first quarter.

Industrial production and sales fell sharply amid epidemic control efforts, while the costs of labor and depreciation continued to put pressure on companies, a statistics bureau official said in a statement published alongside the data.

Profits for the automobiles, electrical equipment, chemicals and electronics industries saw some of the steepest declines, with those for the latter falling 87%.

Only four of the 41 industries surveyed saw profit increases: tobacco products, non-ferrous metals, oil and gas exploitation, and processing of non-staple agricultural goods.

The weakness in profits was in line with broader pressures on Chinese factories.

Manufacturing output plummeted at the sharpest pace in three decades in the first two months as the virus outbreak interrupted normal production, while factory gate prices fell more than expected in February.

Industrial profits are expected to improve as the shock of the epidemic impact wanes and firms get back to work, but rising risk of a global recession will hurt the recovery.

“The profit outlook will remain bleak before new stimulus to aggregate demand,” said Xing Zhaopeng, markets economist at ANZ in Shanghai. “The worldwide lockdowns will continue to weigh on the economy.”

Louis Kuijs, economist at Oxford Economics, expects a recovery in profits to lag that in industrial output.

“With many companies operating below capacity and facing constraints because of remaining restrictions on the movement of people, profit margins will remain under pressure.”

For the first two months, profits at state-owned industrial firms dropped 32.9% on year, while private-sector profits fell 36.6%.

Liabilities at industrial firms grew 5.3% on year at end-February, versus a 5.4% increase as of end-2019.

Citing a survey by a major Chinese recruitment website, Capital Economics said findings suggest that close to a quarter of firms had stopped paying wages by last week. A further half of firms had cut or delayed pay.