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BEIJING, June 27 (Reuters) – China’s trade profits fell at a slower pace in May after a sharp drop in April as activity at primary production hubs recovered, but COVID-19 restrictions still weigh on factory output and cut factory margins.
Profits fell 6. 5 from a year earlier, down from April’s 8. 5 drop, according to data released Monday by the Office for National Statistics (NBS).
The improvement in May was driven by higher gains in the coal and oil and fuel extraction sectors, as the Russo-Ukrainian war triggered a rise in global commodity prices.
However, gains in the production sector fell 18. 5% in May as appliance production advanced significantly, Zhu Hong, the SNB’s chief statistician, said in a statement. April’s earnings fell 22. 4%.
“Overall, the functionality of trading enterprises showed some positive changes, but it should be noted that the annual expansion of trading profits continued to decline, with increasing pressure on prices and difficulties in production and operation,” Zhu said, adding that the foundations for the recovery were not solid.
While production is gradual compared to last month, the decline in profits of trading enterprises in Shanghai, the eastern province of Jiangsu and the northeastern provinces of Jilin and Liaoning has declined by more than 20 percentage points, Zhu said.
Profit margins between the upstream and downstream sectors narrowed in May, Goldman Sachs analysts said in a note, adding that the profit divergence between other sectors and corporations remained significant.
Some factories restarted operations in cities like Shanghai after the closures, but weak housing markets and fears of recurring waves of infections cast a shadow over factory output and raised doubts about the faltering recovery of the world’s second-largest economy.
Profits of commercial enterprises rose 1. 0 percent year-on-year to 3. 44 trillion yuan ($514 billion) between January and May, a slowdown from the 3. 5 percent accumulated in the first 4 months, according to NBS data.
Profits of car production corporations fell 37. 5% in the first five months, while profits in the ferrous steel casting sector fell 64. 2%.
In the same five-month period, the revenues of trading enterprises increased by 9. 1% to 53. 16 trillion yuan, with an expansion of 9. 7% in the first 4 months.
China’s economy showed signs of recovery in May after collapsing last month with the resumption of trade production, but consumption remained weak and underscored the challenge for policymakers amid the lingering burden of strict COVID-19 restrictions.
Despite emerging overall trade output, inflation from factory outlets in China reached its slowest speed in 14 months in May, depressed by weak demand for steel, aluminum and key commercial products.
As the internal COVID scenario improves and oil costs are not expected to rise significantly, Zheng Houcheng, director of the Yingda Securities Research Institute, expects the expansion of business profits to be further in June despite pressures on corporate costs.
China’s cabinet announced in May a series of measures spanning fiscal, financial, investment and trade policies to combat the damage of COVID to its economy.
The policies underscore the government’s resolve for its economy, but analysts say a 5. 5% expansion target will be hard to hit if China sticks to its costly COVID-0 containment strategy.
The country pledged this month to step up the economy and deploy more policy measures, but said it would refrain from issuing money above the limit.
The liabilities of commercial companies rose by 10. 5% compared to last year at the end of May, compared to an expansion of 10. 4% at the end of April.
Knowledge of industrial profits covers enterprises whose annual revenue of more than 20 million yuan comes from their core business. ($1 = 6. 6922 Chinese yuan) (Information through Ella Cao, Ellen Zhang and Ryan Woo; Editing via Jacqueline Wong)