China's June industrial profit growth eases as trade risks rise

By Yawen Chen and Elias Glenn

BEIJING (Reuters) - Profit growth for China's industrial firms eased in June from the previous month, as factory production slowed amid rising trade frictions with the United States and Beijing's ongoing efforts to cut pollution and debt.

Analysts say profits could be further crimped in the second half of the year as trade woes deepen, adding more pressure on growth in the world's second-largest economy.

Industrial profits rose 20 percent to 658.29 billion yuan ($96.7 billion) in June, National Bureau of Statistics (NBS) data showed on Friday, compared with a 21.1 percent rise in May.

NBS said in a statement on the data that rising prices had cushioned firms' profits even as industrial production slowed in June, but it did not provide separate reasons for the slower profit growth.

Lisheng Wang, an economist at Nomura in Hong Kong, said it was hard to tell what impact the trade tensions had on industrial firms in June, but economic headwinds were growing.

"In the second half of this year there could be a more visible slowdown in export growth in China, which could put some downside pressure on profits," Wang said.

Steel, building materials and oil extraction sectors were key drivers behind profit growth in the first half of the year, it added. But profit growth in textile, non-ferrous metal smelting and processing, and telecommunications and electronic equipment manufacturing profits fell during the same period from a year earlier.

For the first half of the year, industrial firms' profits grew 17.2 percent from a year earlier to 3.39 trillion yuan, accelerating from a 16.5 percent rise for January-May.

The data covers firms with annual sales of at least 20 million yuan.

China's economic growth slowed in the April-June period from the previous quarter while June's industrial output growth slumped to a four-year low, raising concerns about the outlook amid growing signs of stress.

The government's campaign to cut debt and emissions have driven up borrowing costs and curbed production for some key industries, while threats of further tariffs on Chinese goods from Washington add to the headwinds for the second quarter even as Beijing insists economic fundamentals are sound.

The central bank in June cut bank reserve requirements for the third time this year and has pumped more money into financial markets. Policymakers have so far ruled out the odds of a major stimulus package but have vowed to take necessary fiscal and monetary steps to support growth while urging banks to ensure adequate liquidity for smaller firms.

Nomura's Wang said despite some expected fiscal stimulus from the government to cushion the economy, he saw risks in the second half of the year due to weakening domestic demand, a slowing property market and China-U.S. trade tensions.

"We still maintain our call that economic growth will slow visibly to 6.4 percent in the third quarter," Wang said.

The country's industrial firms have benefited over the past two years from hot property and infrastructure construction markets, which boosted demand for building materials such as steel bars and cement. Price growth of new homes accelerated to a near two-year high in June, on monthly terms, suggesting continued momentum despite recent government curbs.

However, there are challenges for producers with growth in fixed-asset investment hitting a record low in the first half of this year amid a war against pollution. Raw materials cost also rose at a faster clip than the producer price index in June, suggesting possible margin pressures.

PROFITS DECLINE

Despite the strong headline growth figure, the 658.29 billion yuan in total profits earned by China's large industrial firms was 9.5 percent lower than the nominal 727.8 billion yuan reported last June.

The large and widening divergence in reported and implied profit growth has raised questions about the data.

The statistics bureau in June has addressed the issue three times within the last month, attributing the difference to changes in the sample size and statistical methodology. It said that fewer firms met the requirements to be included.

($1 = 6.8080 Chinese yuan)

(Editing by Sam Holmes and Jacqueline Wong)