20:45 GMT21 September 2020
Listen Live
    Get short URL
    0 20

    Chinese industrial firms have posted upbeat earnings in April, capitalizing on the rising production margins; however, downward pressures on the broader economy still linger and the government in Beijing could either step up its supply-side reforms or use the tools of monetary accommodation.

    Kristian Rouz — Earnings in Mainland China's industrial sector accelerated last month due to the higher producer margins and an increased factory output, coupled with a low-base effect. This comes as global prices for iron ore and bauxites remain subdued, whilst changes in global trade have pushed industrial metals and automobile prices higher.

    READ MORE: 'Trade Wars Between US and China Can No Longer Continue' — Trade Specialist

    According to a report from China's National Bureau of Statistics (NBS), the mainland's industrial enterprises posted a 21.9-percent annual increase in April. This is a significant acceleration from the previous month when profits rose a meager 3.1 percent.

    "Overall, operating conditions across China's manufacturing sector continued to improve in April. But uncertainty in exports has increased significantly, and the dependence of the Chinese economy on domestic demand is rising," Zhengsheng Zhong, of CEBM Group said.

    China's industrial sector revenues totaled at some $90.14 bln last month. However, this comes with a grain of salt, as industrial company liabilities also rose by 6.1 percent year-on-year. This is an indication that China's model of economic growth based on elevated borrowing is still intact, despite Beijing's gradual progress on the path of supply-side reforms.

    Additionally, the NBS said, China's industrial profits rose 15 percent year-on-year between January and April, compared to a 24.4-percent growth for the same period last year. This means the Chinese economy is still facing risks of a broader slowdown despite a mild pickup in GDP expansion earlier this year.

    "Manufacturers are facing a sharply deteriorating foreign demand environment as new export orders declined for the first time in 17 months in April," Zhong said.

    China's chemical, steel and automotive industries have benefitted the most from Beijing's reforms aimed at supporting domestic demand for manufactured goods.

    Domestic demand for fuel has bolstered oil refineries; the booming construction sector has driven domestic demand for steel, whilst cheaper Chinese-made cars have met a higher consumer demand than highly-taxed imported vehicles.

    Overall, the mainland's industrial output rose 7 percent in April, surpassing earlier forecasts. The NBS also said Beijing's economic reforms helped offset the risks associated with high corporate debt and elevated production costs.

    However, the reforms — aimed at supporting the domestic consumer — have also contributed to the ongoing rise in labor costs in China, affecting the international competitiveness of Chinese goods.

    Additionally, Chinese exports have been under pressure amidst the ongoing trade standoff with the US, stirring concerns that the People's Bank of China (PBOC) could devalue the renminbi in order to bolster its exports to other parts of the world.

    "Slower growth is likely in the months ahead as the drags on economic activity from weaker credit growth and the cooling property market intensify," Chang Liu of Capital Economics said.

    According to a separate report from Caixin China, the nation's Purchasing Managers' Index (PMI) in the manufacturing sector ticked up to 51.1 last month from 51.0 in March. Readings above 50 indicate expansion and weak PMI gains might suggest the Chinese industrial production is still balancing on the verge of contraction.

    READ MORE: To be Continued? China Wins First Round of Tariff War, Trump Not Satisfied

    Meanwhile, China's foreign trade figures also softened in April, with the PMI's export orders sub-index dropping to 50.7 from 51.3 in March.
    In this light, Beijing is expected to ramp up its effort modernizing the "old economy" — the vast export-reliant manufacturing-based sector — into a more flexible, domestic-focused "new economy."

    At the same time, Chinese authorities are also expected to maintain the slow pace of the ongoing reforms in order to not "rock the boat" — as China's staggering levels of corporate debt, and an overheated real estate sector could provoke painful shockwaves in the economy in case of elevated instability.
    Such considerations render a renminbi devaluation quite a feasible option for Beijing — despite the modestly optimistic situation in the industrial sector at this point.


    US-China Trade Frictions Indicate 'New Normalcy' in Bilateral Ties – Economist
    China, Eurasian Economic Union Sign Trade, Economic Cooperation Agreement
    'Many in the US Feel Deep Angst About China's Economy' - Professor
    coast, profit, China
    Community standardsDiscussion