Industrial firms' profits indicate robust recovery

China's major industrial enterprises' steady profit increases in the first five months of the year show the country's economy is on the right road to recovery, officials and experts said.

However, targeted policy support will be needed to help downstream industries and smaller businesses cope with rising costs and ensure sound economic fundamentals.

Figures released by the National Bureau of Statistics on Sunday showed that profits for China's major industrial enterprises rose 83.4 percent year-on-year in the first five months to over 3.42 trillion yuan ($530 billion). Major industrial companies refer to those with an annual business turnover of at least 20 million yuan from their main operations.

Compared with 2019, profits of the major industrial firms rose by 48 percent over the period, putting the two-year average growth at 21.7 percent. In May alone, profits of major industrial firms climbed 36.4 percent from a year earlier to 829.92 billion yuan.

More than 70 percent of industries maintained profit growth year-on-year, while profits in the raw material manufacturing sector have shown particularly fast growth, the NBS statement said. Profits of raw material manufacturing grew by 111 percent year-on-year in May, acting as a catalyst for overall industrial profits.

China's industrial profits have had a steady recovery, but profit growth across industries and businesses is uneven. The fundamentals for enterprises' recovery are not yet solid, Zhu Hong, a senior NBS statistician, said in a statement accompanying the data release.

Affected by numerous factors, including commodity price rises, the increased profits of industrial firms are mainly clustered in the mining industry and raw material manufacturing, while cost pressures on downstream industries are growing, Zhu said. Profit increases of small businesses lag behind medium-sized and large ones, while the increases of private firms are below those for major industrial firms.

Zhu said going forward, it is important to implement macro policies in a systemic and targeted way, promote innovation and reform and energize market players. Efforts should be made to alleviate business burdens and consolidate steady industrial recovery.

Li Qilin, chief economist at Shanghai-listed Hongta Securities, said the pressure on middle and downstream industries caused by surges in raw material prices has become more prominent and has affected their profitability.

Shi Yinghua, director of the Chinese Academy of Fiscal Sciences' Research Center for Macroeconomics, said more targeted support and incentives are crucial for the short-term recovery of small businesses.

"Smaller businesses are vulnerable facing external pressure, like the commodity price challenge. The government has already announced a raft of fiscal, tax and financial support for them, and I think more grounded implementation is still needed to bring them real gains and tide them over challenging times," Shi said, adding that structural reforms and a level playing field in the market, should be done in parallel.

Despite support from the central government, Shi said local governments should work more proactively to give targeted support to smaller firms.

Robin Xing, chief China economist at Morgan Stanley, said recovery in consumption and in manufacturing investment in the first half of this year has been steady, despite cost rises. With steady external demand and good policy support, these two sectors will continue to generate more growth, he said.

The issuing of a special local government bond was relatively slow in the first half of this year and is expected to move faster in the third quarter, he said. Going forward, policy maneuvers can be expected, and liquidity will remain adequate for the rest of the year, he added.