China Economic Review: Industrial profit growth downslides

China's major industrial enterprises registered an overall profit of 276.4 billion yuan (33. 3 billion US dollars) in the first quarter of this year, only increasing 17.2 percent year on year, a three-year low.

"China's industrial profits can no longer maintain the high growth rate of before," Jiang Yuan, a senior economist with the National Bureau of Statistics (NBS) told the Economic Information Daily newspaper in a recent exclusive interview.

From the latter part of 2002 to the end of 2004, China's industrial profits kept a rare growth rate as high as 30 to 40 percent. The last quarter of 2004 witnessed a year on year growth rate of 34.1 percent, much higher than the 17.2 percent increase in the first quarter this year.

During the first three months this year, the total losses of loss-making industrial enterprises jumped 36.4 percent year on year, the highest rate since 1997.

Only mining industries, such as coal, oil and non-ferrous metal industries, have enjoyed growth by large margins, said Jiang. Most processing sectors purchasing raw materials have seen their profits shrink quickly due to the price hike of resource products, he said.

The growth rate of the steel industry's profits as well as sale has slowed down due to the price hike of iron ore in the international market and China's decision to reduce the export tax rebate rate for steel products, Jiang said.

China, the world's largest steel producer, accepted a 71.5 percent price hike for iron ore in an agreement with international suppliers in February 2005. Steel prices in the country, which firstly saw a soaring rise, suddenly began to sag after the government adjusted its tax rebate policy in April.

In the first quarter, the sales of the steel industry only increased 36.1 percent, dropping 20 percentage points from the same period last year. The steel industry's profits just increased 18.4 percent during the period, slumping 118 percentage points from the same period last year.

The gap between the steel selling price and the iron ore purchasing price has shrunk greatly, and the profit rate for the industry will probably continue to downslide, Jiang said.

In the first quarter, China's cement industry lost 350 million yuan, but during the same period last year, the industry fulfilled profits of 3.08 billion yuan. The profit of plate glass industry decreased 40.5 percent year on year, that of aluminum industry dropped 10.4 percent, that of auto manufacture fell 58.5 percent.

The downslide of industrial profits led to the slowing of tax- revenue growth and stockpile increases, according to the newspaper. In the first quarter, taxes paid by major industrial enterprises grew 16.5 percent year on year, dropping 7.4 percentage points from the same period last year. Meanwhile the stockpile increased 20.3 percent, up 2.5 percentage points year on year.

Jiang attributed the profit shrinkage to the long-time price hike of raw materials as well as weakening market demand. Thanks to a series of macro-control policies taken by the Chinese government since last year, the growth pace of real estate and other overheated sectors slowed down, leading to the sagging of demand for industrial products. Prices of raw materials including coal, iron ore and crude oil, however, are still high.

600450 China Economic Review: Industrial profit growth downslides
Date: 1 July 2005

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