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China industrial profit growth accelerates in Sept despite cost pressures

Profits at China‘s industrial firms rose at a faster pace in September even as surging raw material prices and supply bottlenecks squeezed margins and weighed on factory activity.

Profits jumped 16.3% on-year to 738.74 billion yuan ($115.72 billion) the statistics bureau said on Wednesday, quickening from the 10.1% gain reported in August.

The industrial sector has been hit by the surging price of coal, supply shortages and power rationing triggered by coal shortages due to emission reduction targets.

But Beijing has taken a raft of measures to curb elevated metals prices and ease the country’s power crunch, including urging coal miners to boost output and manage electricity demand at industrial plants.

In October, the government said that it will allow coal-fired power prices to fluctuate by up to 20% from base levels, enabling power plants to pass on more of the high costs of generation to commercial and industrial end-users.

For the January-September period, industrial firms’ profits grew 44.7%% year-on-year to 6.34 trillion yuan, slowing from a 49.5% increase in the first eight months of 2021, the statistics bureau said.

China’s economic growth in the third quarter was the slowest this year, due partly to power shortages and wobbles in the property sector.

Record high factory inflation in September is putting a strain on middle and downstream businesses to pass through costs to consumers.

Analysts polled by Reuters expect the People’s Bank of China to refrain from attempts to stimulate the economy by reducing the amount of cash banks must hold in reserve until the first quarter of 2022.

Liabilities at industrial firms rose 8.2% from a year earlier at end-September, easing from 8.4% growth as of end-August.

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

China factory output flat, retail sales slip in July

BEIJING: China’s factory output rose just under 5% last month from a year earlier while retail sales fell slightly, suggesting the country’s recovery from the coronavirus pandemic remains muted.

The data reported on Friday show that despite a rebound in Chinese exports, overall domestic demand in the world’s second-largest economy remains lackluster.

Massive flooding across much of the south of the country also has hurt both production and consumer demand, though it pushed food prices sharply higher. Pork prices jumped nearly 86%, the report said.

Such “idiosyncrasies” don’t fully account for the prolonged weakness in consumer spending, said Stephen Innes of AxiCorp.

“Still, the glaring concerns around retail demand continue to speak volumes that it’s going to take more than stimulus and deep discounts on luxury products to get people shopping again,” he said in a report.

The 4.8% increase in industrial output from a year earlier was on a par with the month before and slightly below forecasts of just over 5%.

China, where the pandemic began in December, was the first economy to start the struggle to revive normal business activity in March after declaring the virus under control. Manufacturing is recovering, but consumer spending is weak.

Many Chinese either lost their jobs or some income, or are are worried they might.

The National Bureau of Statistics said that overall, China created 6.7 million jobs, nearly 2 million fewer than would normally be expected.

The trends show a “steady recovery,” said bureau spokesperson Fu Linghui.

Still, there were signs of improvement in investment in factories and construction, which fell 1.6% in January to July, compared with a 3.1% contraction in the first half of the year.

Friday’s data release came just before Chinese and U.S. officials are due to hold online talks about progress on a “phase one” trade agreement set in January that brought a truce in a tariff war between the two biggest economies.

Relations have worsened despite that deal, as the two sides spar over abuses in the northwestern region of Xinjiang, developments in Hong Kong and technology disputes, among other issues.

​How far will Xi Jinping go to restrain China’s real estate sector?

The question has suddenly become an urgent one on trading desks around the world. After months of treating the crisis at indebted developer China Evergrande Group as largely contained, investors on Monday rushed to price in the risk that Xi will miscalculate as he tries to curb China’s property-market excesses without derailing the economy.

The resulting market turbulence may add pressure on Chinese leaders to tap the brakes on policy tightening, or at least take steps to limit the fallout. Goldman Sachs Group Inc. analysts called for authorities to send a “clearer message” on how they plan to stop Evergrande from causing “significant spillovers” to the broader economy. Citigroup Inc. said officials may commit a “policy error of overtightening.” Economists at Societe Generale SA assign a 30% probability to a “hard landing.”

“Even though most people don’t expect Evergrande to collapse all of a sudden, the silence and a lack of major actions from policy makers is making everyone panic,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc in Hong Kong. “I expect China to at least offer some verbal support soon to stabilize sentiment.”

The selloff on Monday left few risky assets untouched. Hong Kong’s Hang Seng Index tumbled more than 3%, led by real estate companies. Equity benchmarks in Germany and Italy lost more than 2%, while the S&P 500 Index fell 1.7% for its biggest drop in four months. The average price of junk-rated dollar notes from Chinese borrowers slid the most in about a year. A nearly 12% intraday slump in iron ore futures made matters worse, as did holiday closures in many Asian markets.

Bloomberg

Chinese authorities, who recently hired advisers to look into Evergrande, have provided no public assurances that there’s a state-led plan to resolve the crisis. Official media commentary has largely avoided the subject, apart from a tabloid that said Evergrande was an “isolated case” and called out Western outlets for bashing the Chinese economy. There’s been no clear evidence of state funds stepping into the domestic stock market, like they did in March.

The response so far has been largely limited to the People’s Bank of China, which injected a net 90 billion yuan into the banking system on Friday. It added another 100 billion yuan on Saturday.

Evergrande has around $300 billion worth of liabilities, more than any other property developer in the world. It’s a whale in China’s high-yield dollar bond market, accounting for about 16% of outstanding notes. Some $83.5 million of interest on a five-year dollar bond comes due Thursday, and failure to pay within 30 days may constitute a default. Evergrande also needs to pay a 232 million yuan ($36 million) coupon on an onshore bond the same day.

Evergrande’s shares lost as much as 19% on Monday, briefly taking its market value to the lowest on record. The stock closed 10% lower.

“With policy makers showing no signs of wavering on property market deleveraging, the latest headlines regarding Evergrande likely suggest that housing activity may deteriorate further in the absence of the government providing a clear path toward an eventual resolution,” Goldman economists led by Hui Shan wrote in a Sunday note.

With more than 200 offshore and almost 2,000 onshore subsidiaries, Evergrande has about 2 trillion yuan in assets — equivalent to 2% of China’s gross domestic product — according to Goldman Sachs calculations. A messy spillover into an already-slowing housing market could be costly, with real estate accounting for 40% of household assets in China. Data last week showed home sales by value slumped 20% in August from a year earlier, the biggest drop since the onset of the coronavirus early last year.

Authorities appear determined to push ahead with their campaign to deleverage as well as cool the property market. Guo Shuqing, the chief banking regulator, last year identified banks’ excessive exposure to the property market as the biggest risk facing the financial system. The challenge for officials is how far to go before their tough measures threaten to create the kind of financial instability that they are trying to avoid.

Regulators are increasing efforts to tame land and home prices that have fueled China’s property industry — and much of its economic growth. China has in recent months tightened mortgage approvals and raised rates for first time buyers, introduced rental controls in cities and suspended some centralized land sales. Chinese banks are being told to lower their lending to home buyers and officials in May revived the idea of a national property tax. The government last year drafted what are known as “three red lines” — debt metrics that developers will have to meet if they want to borrow more.

“China will do what it takes to ease the impact,” said Peter Garnry, head of equity strategy at Saxo Bank. “For China it is about structuring the right communication and make the right plan for how real estate should look like under the new policy direction. When that is done they will move quickly and in great size.”

The central government has shown it can stomach heavy market losses — whether at tech companies, online tutors or Macau casinos — as officials seek to achieve Xi’s goals of “Common Prosperity.” The plunge in Hong Kong property developers on Monday was fueled in part by speculation China will extend its real estate clampdown to the city, one of the priciest places in the world to buy a home.

“Insisting unchanged policies while the Evergrande overhang persists could trigger more weakness than the government is comfortable with,” Citi analysts led by Dirk Willer wrote. “We will watch market signals, like banks’ CDS for example, and equity behavior of property and financial sector stocks, to monitor whether this crisis could become more systemic.”