China Firms Suffer Declining Profits in Early 2012

Profits at China’s industrial firms fell an average of 5.2% on year during the first two months of 2012, according to the National Bureau of Statistics. The decline was attributed to rising costs and weakening demand.

China’s industrial firms posted profits of 606 billion yuan ($96 billion) during January and February, a 5.2% year-on-year drop. The profits of state-owned firms plunged 19.7%.

Fourteen of 41 industrial categories saw profits drop. The steel industry fared worst, posting an aggregate operating loss for the two-month period. Shipping was another big loser due to a plunge in total shipping activity combined with soaring fuel costs.

The profit decline is attributed to deterioration of business conditions that began in the second half of last year, including the central government’s tightening of capital, slow global demand and rising production costs.

Another major area of profit weakness was a faltering housing market. The government’s policy of dampening real estate speculation to prevent a bubble drove down housing profits which had been a reliable source of profits for state-owned firms.

Slowing industrial profits suggest China must cut interest rates in the coming months to stimulate investment and boost domestic demand, said Nomura Securities.

A recent series of cuts in the bank reserve ratios haven’t made loans easier to get, requiring many enterprises to seek capital from private sources.

But the central government is unlikely to loosen its monetary policy yet because the consumer price index may well rebound in March, driving up the inflation rate, said Lu Zhengwei, chief economist at China’s Industrial Bank. The central government sees rising inflation as the most important factor contributing to social unrest.

But some analysts expect bank reserve ratios to be cut again in April in another effort at improving liquidity.