Rising industrial profits propel recovery

China's industrial profits rose in July at their fastest pace in five months, propelled by stable industrial production and robust new growth drivers, official data showed on Tuesday, amid signs of steady economic recovery coupled with a gradual improvement in domestic demand.

Analysts said that China's economic recovery will likely gain a firmer footing with a range of economic stimulus measures taking effect gradually in the remainder of the year.

As policymakers have pledged to consider new incremental policies in the second half, analysts said that potential moves will include further property easing measures, the accelerated issuance of local government special bonds, and reductions in the reserve requirement ratio and interest rates.

Their comments came as data from the National Bureau of Statistics showed on Tuesday that industrial enterprises with annual revenue of at least 20 million yuan ($2.8 million) saw their total profits in July rise 4.1 percent from a year earlier, compared with a 3.6 percent year-on-year increase in the previous month.

For the January-July period, China's industrial profits increased 3.6 percent year-on-year, following a 3.5 percent growth in the first six months.

"Steady industrial production growth, coupled with the continued development of new growth drivers, has promoted the continued recovery of corporate revenue," said NBS statistician Yu Weining.

Zhou Maohua, a researcher at China Everbright Bank, said the latest statistics came amid robust macroeconomic policy support and a gradual recovery in market demand, pointing to an improved relationship between supply and demand in the industrial sector.

"Notably, the rapid growth in profits among high-tech equipment manufacturers showcased China's continued industrial upgrading and transformation process," he said.

According to the NBS, profits at high-tech manufacturing and equipment manufacturing enterprises surged 12.8 percent and 6.1 percent, respectively, in the first seven months.

"Meanwhile, we also see that insufficient effective domestic demand has constrained the continued improvement of corporate performance, while price fluctuations in the international energy commodity market and mounting uncertainty in the external environment have increased the operating pressure on enterprises," Zhou said.

Despite these headwinds, Zhou said he remains confident that China's industrial profits will likely continue to improve in the following months, given the continuous recovery in consumption and investment, as well as robust stimulus policies for enterprises.

The industrial profits reading echoed July's solid industrial production growth, although other indicators have pointed to still-weak domestic demand and challenges in the property sector.

NBS data showed that China's value-added industrial output grew 5.1 percent in July from a year earlier, while China's retail sales, a key indicator of consumer spending, grew 2.7 percent year-on-year in July. Property investment fell 10.2 percent in the first seven months, compared with a 10.1 percent decline in the first six months.

Xiong Yuan, chief economist at Guosheng Securities, said the indicators point to a mixed picture with regard to China's economic recovery, suggesting that the broader economy still faces downward pressures.

"To meet the preset annual growth target this year, China needs to achieve around 5 percent year-on-year growth in the second half, with about 1.4 percent quarter-on-quarter growth," he said.

Xiong called on policymakers to take more steps to stabilize growth in the remainder of the year, including moves to resolve debt risks related to local authorities, further property easing policies in key cities, the accelerated issuance of local government special bonds, and further reductions in the RRR and interest rates.