ECONOMICS: ASIAN PERSPECTIVES—OCT 2, 2009
Rising Industrial Profits Bode Well for China’s
Investment Recovery
Anthony Chan
Asian Sovereign Strategist—Global Economic Research, + 852 2918 7846
After plummeting during the financial crisis, industrial profits in
China are staging a recovery. Importantly, profit margins are
too. The trends suggest a positive outlook for growth in private
capital expenditure.
Industrial profits in China, having suffered
in February, May, August and November.
a major collapse at the height of the
The most recent (August 2009) show that
global crisis in late 2008 / early 2009,
growth in industrial profits has started to
have bounced back on the expansion in
catch up with the expansion in output
the overall economy. Improved profit
(10%–12% year on year over the past
growth bodes well for fixed-asset
three months).
investment in the coming year, suggesting
Display 1
Profits on the Rise
China’s Industrial Profits
(YoY % Change)
50
40
30
20
10
0
(10)
(20)
(30)
(40)
(50)
Total Profits (excluding Energy Sector)
Total Profits
Jan- Mar- Jun- Sept- Jan- Mar- JunFeb May Aug Nov Feb May Aug
08 08 08 08 09 09 09
that private capital expenditure could pick
Total profits growth recovered to 6.5%
up just as the impact of public investment
year on year in June–August, having
starts to fade. While the switch from
contracted by 15% and 37% year on year
losses to profits in oil refining has helped
in March–May and January–February
boost overall profit growth, it is encour-
respectively. It is still, however, well below
reduced the differential between onshore
aging to see that the rebound has been
the 18%–22% year-on-year expansion
and offshore prices. Consequently, oil
broadly based and includes the exports-
seen in early 2008 before Lehman
refinery margins have turned positive this
oriented electronics sector.
Brothers collapsed (Display 1).
year, with the sector earning a profit of
We have not written about China’s
Profit trends in the oil refinery sector have
January–August compared with a loss of
industrial profit trends since 2007, when
contributed significantly to overall growth
about RMB130 billion in full-year 2008.
the reporting of the statistics changed
in industrial profits. The fuel price
The surge in heavy industrial production
from a monthly basis to four times a year.
mechanism introduced late last year has
has also boosted independent power
Year-to-date data are now released only
created a more market-based system and
producers’ profits remarkably: the
Source: CEIC Data and AllianceBernstein estimates
RMB71 billion (US$10.4 billion) in
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electricity generating sector enjoyed a
export-driven electronic and telecommuni-
ninefold increase in profits on the year
cation equipment sector (up 2% in
Display 2
during June–August following a 108%
June–August versus a decline of 20% in
Margin Recovery
year-on-year jump in March–May 2009.
March–May). Also during this period, profit
China’s Industrial Profit Margin (%)*
contraction in the steel and nonferrous
Outside the energy sector, profit growth
metal sectors slowed noticeably.
5.6
6.2
5.9
5.8
5.1
remained respectable at 4.5% year on year
4.4
in June–August. While less dramatic than
It is important to note, too, that the overall
growth in the energy sector, it was still a
profit margin in the industrial sector has
sharp rebound from the 31% year-on-year
also picked up nicely—to 5.9% in
contraction in January–February (Display
June–August from the trough of 3.9% in
1). Profit recovery was strongest in
January–February, almost matching the level
chemical fibers (up 150% year on year in
that prevailed before the global crisis
June–August), motor vehicles (up 48%),
started in late 2008 (Display 2). We expect
construction materials (up 25%), special-
margin expansion to provide extra impetus
ized machinery (up 25%) and the
to the recovery in private-sector capex. n
3.6
JanFeb
08
MarMay
08
Jun- Sept- JanAug Nov Feb
08
08
09
MarMay
09
JunAug
09
*Profits as a share of industrial sales
Source: CEIC Data and AllianceBernstein estimates
OCT 2, 2009 ECONOMIC PERSPECTIVES