China: Industrial profits growth slows in April – ING

Prakash Sakpal, Economist at ING, suggests that China’s accelerated supply-side structural reforms are expected to depress profitability.

Key Quotes

“Industrial enterprise profits growth slowed to 6.5% YoY YTD in April from 7.4% in March. The 4.2% YoY growth in April alone was down from March’s 11.1%, which was the fastest since July 2014. April sales growth of 2.3% YoY YTD eased from 2.4% in March but growth in account receivables accelerated to 1-year high of 9.3% from 8.3%. Like most things economic, profits move with production; industrial production growth slowed to 6.0% in April from 6.8% in March.

The path to a hard landing starts with financial distress in highly-leveraged corporates and runs through a banking crisis. Relaxing enterprise cash constraints is the key to avoiding one. Strong profits growth would be evidence of relaxing cash constraints.

We expect accelerated supply-side structural reforms to depress profitability. The Xinhua News reported the government of the largest steel-making Hebei province committing to reduce a month of production capacity. Reforms will take out some of China’s excess manufacturing capacity and the rest of the world will have to grow into the rest. We expect this to prolong the slump in global manufacturing.”