August 27, 2021

BEIJING (Reuters) – Profit growth at China’s industrial firms in July grew at its slowest clip this year, as elevated raw material prices and supply chain constraints from extreme weather as well as sporadic coronavirus cases weighed on the manufacturing sector.

The data adds to a recent batch of indicators highlighting loss of momentum in the world’s second-biggest economy, suggesting policymakers are likely to maintain support measures to underpin growth.

Industrial firms’ profits increased 16.4% on an annual basis in July to 703.67 billion yuan ($108.51 billion), data from the National Bureau of Statistics (NBS) showed on Friday. That compared to a 20% gain in June.

China’s economy has staged an impressive recovery from a coronavirus-battered slump, but the expansion is losing steam as businesses grapple with higher costs and supply bottlenecks, and as consumers remain cautious with spending.

“Overall, profits at industrial firms above the designated size maintained a steady growth in July, but we have to recognize that the unevenness and uncertainty in the recovery of corporate earnings still exist,” said Zhu Hong, senior statistician at the NBS.

Zhu attributed the slower growth in July to sporadic COVID-cases and flooding, as well as high commodity prices that have pressured profitability for small mid-stream and downstream firms.

In the first seven months of the year, industrial firms’ profits grew a hefty 57.3% on year, due to base effects, although growth slowed from the 66.9% surge in first half of 2021.

China’s factory output growth showed a sharp slowdown in July, and analysts expect it to come under increasing pressure due to COVID-19 social distancing rules and tightening measures in the property sector and high-polluting industries.

Commodity prices have been on a tear in recent months, hurting the bottom lines of many mid- and downstream factories. Chinese coke and coking coal futures hit record highs this week while iron ore futures rose for the fourth day on Thursday.

COVID-19 cases of the more transmittable Delta strain in July and record rainfalls in transportation hub Henan province have also hurt industrial production. The terminal at China’s major Ningbo port paused services as part of the government’s effort to curb the spread of the virus.

Liabilities at industrial firms rose 8.2% on an annual basis at end-July, down from 8.5% growth as of end-June.

The industrial profit data covers large firms with annual revenues of over 20 million yuan from their main operations.

($1 = 6.4850 Chinese yuan renminbi)

(Reporting by Colin Qian, Stella Qiu and Ryan Woo; Editing by Shri Navaratnam)