China Industries Report Sustained Earnings Growth

Profits for China's industrial powerhouses surged the most in nearly six years in September as a government crackdown on air pollution sparked fears of winter supply shortages and sent prices of finished goods like steel and copper sharply higher.

Sustained earnings growth will give China's policymakers more room to restructure bloated and often inefficient state-owned enterprises, which dominate the industrial landscape and account for a hefty portion of the country's corporate debt, Reuters reported.

Industrial profits in September rose 27.7% from a year earlier to 662.18 billion yuan ($99.46 billion), accelerating from a 24% jump in August, the National Bureau of Statistics said on its website on Friday. That was the sharpest monthly gain since December 2011, when profits leapt 31.5%.

The NBS attributed the September surge to stronger growth in production and sales and higher prices for manufactured goods, as well as a pick-up in earnings in sectors such as electricity and electronics. "We predict the industrial sector will remain on a steady, improving trajectory in the fourth quarter," Zheng Lixin, a spokesman for the industry ministry, told a media briefing.

For the first nine months of the year, the firms notched up profits of 5.58 trillion yuan, a 22.8% jump from the same period last year and up a touch from January-August. Industrial firms' liabilities increased 6.7% in September on-year, compared with a rise of 6.4% in the first eight months of the year.

Strengthening Role of State Firms

While a year-long construction boom is starting to show signs of fatigue, still robust industrial earnings will be good news for the country's leaders who gathered for a key Communist Party Congress over the past week to set political and economic priorities for the next five years. President Xi Jinping opened the gathering stressing the need to move from high-speed to high-quality growth.

While reiterating a commitment to give market forces freer rein in the world's second-largest economy, Xi also said the government would strengthen the role of state firms, raising questions about whether Beijing will pursue painful reforms in the sector which some analysts say are long overdue.

Market watchers had expected solid September earnings after producer prices rose by a higher-than-forecast 6.9% on-year, boosted by strong demand for building materials. Most analysts have maintained those price gains and industrial profits would start to moderate in coming months as measures to cool China's heated housing market and a government crackdown on riskier lending starts to bite.

But commodity prices got a fresh leg up in recent weeks as the government pressed ahead with efforts to reduce notorious winter smog, urging major northern industrial cities to slash steel output ahead of the official winter heating season. That has spurred fears of shortages and pushed up steel prices, but is having the opposite effect on steelmaking raw materials such as iron ore and coking coal, which are sliding on worries about a supply glut.

China's steel output dropped in September from a record high in August as mills cut production in line with Beijing's campaign for clearer skies.

Higher Profits

Aluminum Corp of China Ltd announced a plan on Thursday to bring up to 16 billion yuan of investment into some subsidiaries after posting a more than 10-fold rise in nine-month profits. Chalco is the listed arm of China's biggest state-run aluminum firm, Chinalco. A breakdown of the profit data showed heavy industry continued to reap most of the benefits from the building boom, which is also being driven by heavy government infrastructure spending.

Mining industry profits surged 473.8% in January-September on-year, and manufacturing profits rose 19.6%. Earnings in the mining industry soared 5.9 times last month from a year earlier, but sectors such as electricity, gas and water production saw their profits fall 18.3%.

China's economy has surprised analysts with robust growth so far this year, with the rebound in its industrial sector contributing to a reflationary pulse that has boosted manufacturing worldwide.

Though GDP growth slowed slightly to 6.8% in the third quarter, senior officials said last week that the economy is still on track to meet the official growth target of around 6.5% for the full year, despite the punishing war on pollution. Economists polled by Reuters expect the economy will grow 6.8% this year, before slowing to 6.4% in 2018.