China Industrial Profits Soar Most In 18 Months But Overcapacity Looms

Profit growth of Chinese industrial companies rebounded dramatically in March. Of course this should not be totally surprising given the trillion-dollar credit injection in Q1 and artificially-elevated commodity prices juicing the zombified industrial base but it does leave The Fed today with a problem - they're running out of excuses. So in being patriotic, we will help - first, as Goldman warns, this profit spike is unsustainabe given the surge in overcapacity; and second, nobody is paying - payment delays have surged to the highest in 17 years as the ponzi accelerates.

So a trillion dollars goes in and profits spike 11.1% YoY..


But on Sunday we also learned that median days sales outstanding for mainland domiciled companies now sits at 83 days - the highest in nearly 17 years and double the average for EM as a whole.

As you can see from the above, it now takes 50% longer for Chinese firms to get paid than it did just five years ago. As you might imagine, the problem is particularly acute for industrial firms who are waiting 131 days to convert sales into cash. "A reading of more than 100 days is typically a red flag," Amy Sunderland, a money manager at Grandeur Peak Global Advisors in Salt Lake City told Bloomberg. 

Yes, Amy it certainly is. Especially considering the median for companies in the MSCI Emerging Markets Index is just 44 days.

But, as Goldman notes, while it is all sunshine and rainbows now, this profits jump is not sustainable...

March industrial profits improved both in month-over-month and year-over-year terms. This is consistent with the rebound in industrial production in March. Better underlying activity growth, pickup in producer prices and lower financial costs all contributed to the rebound in profits in March.


Moreover, according to data quoted by NBS in the explanatory note, higher investment returns and non-business income also helped with the rebound in headline industrial profit growth: investment return went up 20.4% yoy in March (-3% in Jan-Feb), and non-business income (this includes gains from most asset sales , but not investment property) jumped 68.3% yoy in March (39.5% yoy in Jan-Feb). Compared with March last year, 30.5% of increase in profits (3.4 pp of the 11.1%yoy headline profit growth ) came from investment return/non-business income. Profit growth improved in most sub-sectors: in year-over-year terms, profit growth improved or turned less negative in ferrous/non-ferrous metal smelting and pressing, general equipment manufacturing, automobile manufacturing, computer manufacturing among other sectors.

We continue to expect sequential growth to rebound in Q2, which should support profit growth in the near term; however, structural issues such as overcapacity will still weigh on industrial profits in the long run.

Especially if the commodity bubble bursts...