Chinese industry returns to profit as stimulus plan delivers

The Chinese central bank has cut interest rates and the authorities in Beijing have been increasing state spending to help boost growth 

Industrial firms in the world’s second-largest economy returned to profit in the first two months of the year, lending some support to the idea that China’s stimulus measures are helping to stabilise its troubled manufacturing sector.

Official statistics showed profits up 4.8 per cent on a year earlier, at 780.7bn renminbi (£85bn) in  January and February. They fell by 4.7 per cent in December.

The turnaround was driven by a pick-up in sales and an easing of industrial deflation. The strongest sectors were oil processing, electrical machinery and food. 

“Sales and profit margins in sectors exposed to the consumer are holding up much better than in those where the downturn in real estate construction has exposed major excess capacity and unleashed relentless downward pressure on margins,” Louis Kuijs, the head of Asia for Oxford Economics, wrote last week.

The Chinese central bank has cut interest rates and the authorities in Beijing have been increasing state spending to help boost growth and avoid a feared “hard landing” for the economy. China’s industrial slowdown has already had a severe impact on the rest of the world, particularly raw  material exporting economies in the emerging markets.

At a forum on Hainan island last week, China’s premier, Li Keqiang, insisted that Beijing had sufficient tools to keep the economy stable. “There will be short-term difficulties in the job market as some companies go bankrupt but the government needs to help people find new employment and ensure a basic standard of living,” he said. “Both the central government and local governments have already started doing this.”

He added that “supply-side reforms” to address industrial overcapacity would be the government’s top priority for 2016.

The Chinese government has set a growth target for this year of  6.5 to 7 per cent. Last year the economy grew at its weakest pace in 25 years – a 6.9 per cent GDP expansion.

Annual growth in January and February was the fastest in 28 months and breaks a run of seven months of declining profits recorded by firms.

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