Profits at foreign firms in China plunge despite easing of Covid-19 restrictions

BEIJING (BLOOMBERG) – Profits at foreign industrial businesses in China showed no sign of rebound in the first five months of the year even as an easing in Covid-19 restrictions allowed companies to resume production and improve logistics and sales.

Foreign firms saw a drop of 16.1 per cent in their profits during the January-to-May period from a year earlier, a similar contraction to the first four months of the year.

In contrast, profits across all industrial companies in China gained 1 per cent in the five-month period.

For May alone, industrial profits fell 6.5 per cent from a year earlier, narrowing from April’s 8.5 per cent drop, data from the National Bureau of Statistics showed on Monday (June 27).

The economy is making a gradual recovery from the worst of the Covid-19 restrictions imposed in recent months to curb outbreaks.

High-frequency data tracked by Bloomberg shows an improvement in activity in June, although growth likely remained muted.

“April and May are probably the lowest point,” said Mr Larry Hu, head of China economics as Macquarie Securities.

“If China’s economy recovers in the second half of the year, there could be some rebound in industrial profits.”

NBS analyst Zhu Hong cited rising costs and operational difficulties as reasons for the continued decline in profits in May.

Measures to stabilise the industrial economy must be implemented “carefully to help relieve company difficulties,” Mr Zhu said in a statement.

Industrial profits at private firms remained weak, dropping 2.2 per cent in the first five months of the year, while profits at state-owned enterprises were up 9.8 per cent during that time frame.

The profit recovery for the private sector will likely be slower “given the weaker sentiment broadly and more disruptions to smaller firms from Covid flareups,” said Peiqian Liu, chief China economist at NatWest Group Plc. May saw a rebound in industrial output to 0.7 per cent, reversing from a drop of 2.9 per cent in the previous month. Producer prices weakened as global commodity prices cooled, curbing earnings of upstream firms. Twenty of the 41 major industrial sectors recorded net income growth that either accelerated from the prior month, or which declined by a narrower margin. Five sectors saw profits reverse from a drop in April to a rise in May. Declines in net profit for firms in Shanghai, along with Jiangsu, Jilin and Liaoning provinces, all narrowed significantly from a month earlier. What

Bloomberg Economics Says … “The smaller drop in China’s industrial profits in May relative to April reflects reduced pressure on manufacturers after Shanghai started to ease the strict lockdown. Further reopening going forward should provide more support. But the boost to earnings could be limited by the moderation in producer price inflation.” – Eric Zhu, economist Read the full report here Beijing has made frequent pledges to boost growth. Last week, President Xi Jinping reaffirmed the country’s 2022 growth target of about 5.5 per cent, saying that the government would “strengthen macro-policy adjustment and adopt more effective measures” to strive to meet its goals. Economists expect hitting that target to be a significant challenge, though, with those polled by

Bloomberg in a recent survey expecting full-year growth to reach just over 4 per cent this year.

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