Stimulus is important measure, analysts say

Large manufacturers, struggling against falling profits and slower growth, are pinning their hopes on government stimulus measures and reform, economic analysts said.

Earnings among manufacturers with annual income exceeding 20 million yuan ($3.2 million) suffered a 1.6 percent drop in the first four months this year compared with the same period last year. Combined incomes of these companies, in that period, reached 1.45 trillion yuan, the National Bureau of Statistics said on Sunday.

Weakening profit growth signaled that the economic slowdown could go beyond the second quarter, analysts said.

April saw corporate net income for these large companies decelerate by 2.2 percent from a year earlier to 407.6 billion yuan. This occurred after a 4.5 percent increase in March, the bureau said.

A rebound in profit growth, at least in the short term, depends on government measures, Yuan Zhigang, head of the School of Economics at Fudan University in Shanghai, said.

"The expansion of investment, supported by loosening macroeconomic policies, is likely to increase industrial profits after the second quarter," Yuan said.

Recent indicators, covering exports, investment and bank loans, have been worse than expected.

The State Council called for proactive policy adjustments to stabilize economic growth on May 23 as the World Bank downgraded the full-year GDP increase to 8.2 percent from 8.4 percent and emphasized that the prospects for a gradual slowdown still remain high.

Many economists lowered growth expectations to less than 8 percent in the second quarter, the sixth quarterly deceleration and the lowest since 2009, compared with the 8.1 percent expansion in the first three months.

HSBC released the preliminary Purchasing Managers' Index on Thursday, a key gauge of manufacturing.The index stood at 48.7 in May, from 49.3 in April, indicating economic contraction. A reading above 50 indicates expansion.

According to the bureau, earnings of State-owned companies fell 9.9 percent year-on-year to 457.8 billion yuan, while net income for private business increased by 20.9 percent.

Among the 41 surveyed industries, 11 experienced slower profit growth. Black metal smelting decreased the fastest at 54 percent. Energy sectors, including coking and nuclear, plunged into losses in the first four months, the bureau said.

Cai Weici, vice-chairman of the China Machinery Industry Federation, told China United Business News that the machine sector may hit a low in the second quarter before rebounding after June. Full-year profit growth may drop to 12 percent from more than 20 percent last year.

"This sector has seen losses and its development will face severe challenges amid the sluggish economic environment," Cai said.

Tightened property policies, and the eurozone crisis, have dragged down both heavy and light industrial profit, said Wang Tao, chief China economist with the UBS AG.

"Industrial profit growth this year is expected to be slower than last year, but it may slightly rebound in the second half as the easing policies may gradually take hold," Wang said.

Government fine-tuning may include cutting cooperate tax especially for small and medium-sized companies together with initiating a set of large investment projects for the 12th Five-Year Plan (2011-15), analysts said.

However, a huge stimulus package similar to that in 2008 after the global financial crisis is inadvisable, said Chen Changhua, director at the research department of the Credit Suisse in China.

"The key to increase corporate profit is to boost the private economy, accelerate market-oriented reform of State-owned companies, and reduce administrative controls from the local governments," Chen added.