With China’s major industries now reporting falling profits for a fourth month running, the country’s premier, Wen Jiabao, has indicated more government action is needed to stabilize economic growth.
New state data released Monday showed profits for major industries on average fell 5.4% last month, down from 1.7% in June.
Ferrous metal profits tanked, down 60.8% in the first seven months of this year over last year, amid reports of accumulating inventory as both manufacturing and construction of new infrastructure slows, both key to China’s continuing GDP growth. Chemical material and product industries saw their profits fall 21.3%, though power and heat generators and suppliers saw their profits rise 29.3%
The numbers, combined with warnings from flash purchasing managers’ indices last week and last month’s dismal trade data, will increase pressure on China’s policy makers to move beyond fine-tuning to restore economic growth. Though the government’s stated target is 7.5% this year, most economists believe this is a deliberately low figure and the goal is closer to 8 per cent, to maintain a stable level of employment.
Economists have been warning all summer that China’s growth is slowing too fast and that, with inflation now seemingly under control, it is time for a stronger economic stimulus plan from the state. But so far Chinese policy makers have stuck to fine-tuning measures including interest rate cuts and reductions in banks’ reserve requirements.
The lack of response is beginning to weigh on investors’ moods as well; the Shanghai Composite Index fell another 1.2% Monday to close at its lowest level since January 2009. HSBC has also revised its prediction for this year’s GDP growth to a flat 8%, down from 8.4%.
Critics have warned that heavy state investment, as in 2008 when China poured four trillion yuan into the economy – fuelling growth but also bad loans and overcapacity in some industries – is only a temporary solution. But Prof. Yu argues it is the only way forward in the short-term to restore this year’s momentum, and believes more investment is coming – if not from the central government, then from individual local government programs.
