Industrial profits slump

China produced less steel in the first quarter of the year due to shrinking demand amid slowing economy and government's effort to overhaul the saturated sector. [Photo provided to China Daily]

Decline in factory gate prices and rise in unit costs blamed for poor performance in June

China's industrial profits dropped 0.3 percent in June from a year earlier, the worst in three months, indicating further deflationary pressures despite an alleviation in the debt servicing burden.

Total profit of industrial enterprises declined to 588.6 billion yuan ($94.8 billion) last month, compared with a 0.6 percent increase in May, the National Bureau of Statistics said on Monday.

A statement from the bureau attributed the year-on-year drop to the high base of last year. But the growth accelerated by 13.1 percent in terms of month-on-month calculation, compared with a 0.1 percent expansion in May.

The weakness in the industrial profit growth will further lower entrepreneurs' confidence on future income, curb potential manufacturing investment and have negative implications for corporate cash flows and government tax revenue, experts said.

During the first six months, industrial profit declined by 0.7 percent year-on-year, compared with a fall of 0.8 percent from January to May, mainly because of the sharp drop in factory gate prices and higher production costs, according to the NBS.

Policies to stabilize growth will not be withdrawn in the third quarter as the figures indicate great downward pressure, said Zhang Yu, an analyst at Minsheng Securities Co Ltd.

Economists said that the recent equity market sell-off has partly driven down the industrial profits, and the recent suspension of initial public offerings may also impede industrial companies' near-term capital raising plans.

Chinese stocks plunged on Monday with the benchmark index slumping by 8.5 percent, the largest daily drop since February 2007. Shares of nearly 1,800 companies that are listed in the Shanghai and Shenzhen bourses declined by 10 percent, the daily limit.

Industrial deflation intensified in June, as evidenced by the continued deterioration in the Producer Price Index that declined further by 4.8 percent from a drop of 4.6 percent in May, which directly led to a fall in industrial profits, said He Ping, an economist at the NBS.

The central bank's monetary easing measures have to some extent helped in reducing industrial companies' debt burden, said He.

"After three cuts in benchmark interest rates this year, industrial companies' interest payment has declined by 6.2 percent year-on-year in June, the largest drop in six months," the NBS economist said.