Industrial profits rebound to buoy economic recovery

China's economic recovery is likely to accelerate over the rest of the year after industrial profits rebounded strongly in August, signaling that the growth of the world's second-largest economy is back on a firmer footing and the supportive government policies have begun to take effect, economists said on Wednesday.

While the green shoots of recovery have strengthened their confidence that China is on track to achieve its annual growth target of around 5 percent in 2023, economists said the country still needs to grapple with stress in the property market as well as the still-weak demand.

Looking to the rest of the year, they expect to see more property easing policies, forceful fiscal measures and a third round of cuts across key policy rates, to support the growth of the Chinese economy.

Data from the National Bureau of Statistics showed on Wednesday that China's industrial profits rebounded in August for the first time in more than a year, adding to signs that the economy had bottomed out.

Industrial enterprises with annual revenue of at least 20 million yuan ($2.7 million) each saw their total profits jump 17.2 percent year-on-year in August after a 6.7 percent decline in July.

Yu Weining, a statistician at the NBS, attributed the improvement in industrial profits to the steady rebound in industrial production and improved corporate profitability with a series of stimulus measures gradually taking effect. 

In the January-August period, industrial firms' profits fell 11.7 percent year-on-year to 4.66 trillion yuan, narrowing from the 15.5 percent drop in the first seven months, the bureau said.

"Looking ahead, the decline in industrial profits will continue to narrow in the first nine months given the improvement in producer prices and the base effect," said Zheng Houcheng, chief macro economist at Yingda Securities.

"While industrial companies still face pressures amid lackluster demand, a series of recently released supportive measures, such as tax and fee reductions and boosting technological innovation, will significantly strengthen the market confidence and benefit companies' future development," said Ding Yue, deputy general manager at Zolix, a Beijing-based supplier of optical instruments.

He said that as the producer price index is poised to rebound from the bottom gradually, declines in industrial profits will further narrow in the near future.

NBS data showed China's industrial output jumped 4.5 percent in August, up from a 3.7 percent increase in July. And China's August producer price index, which gauges factory-gate prices, was down 3 percent from a year earlier after the 4.4 percent annual contraction seen in July.

"Recent data suggests that the economy likely bottomed out in July, and that activity is indeed now moving in the right direction," said Louise Loo, lead economist at British think tank Oxford Economics.

She added that her team, therefore, maintained its China growth forecast for 2023 at 5.1 percent, expecting GDP growth to pick up pace in the third and fourth quarters.

While most hard macro data is now on a firmer footing than in July, Loo said there remain two lingering areas of weakness — property and sentiment. "Data on sentiment remains subdued, reflecting the extent of the confidence crisis among homebuyers, consumers, and investors, notwithstanding the cyclical support to activity from stimulus."

Looking forward, she said her team assumes local governments will be tasked to step up their infrastructure on-balance sheet spending, a more prudent policy response compared to past easing cycles. On the monetary policy front, she expects a third round of cuts of 10 basis points across key policy rates this year.

The People's Bank of China, the country's central bank, has vowed to continuously support the real economy and strengthen policy adjustments as the country's economic recovery is picking up pace, despite still facing a harsh external environment.

The PBOC said in a statement on Wednesday that it will intensify the implementation of the monetary policy tools that have been introduced to ensure a reasonably ample level of liquidity while encouraging a rebound in price levels to maintain them within a reasonable range.

Zhou Maohua, an analyst at China Everbright Bank, said the country will likely step up the use of structural monetary tools to support the weak links in the real economy.