China's Industrial Profits and Revenue Turned Lower Month-on-Month in July, While Year-on-Year Growth Also Slowed

Overview

The report analyzes data on the profits and operating revenue of China's industrial enterprises in July. Although both indicators continued to grow year-on-year, their growth rates slowed from June, while seasonally adjusted month-on-month growth turned negative; meanwhile, the overall profit margin on a 12-month average basis remained broadly stable.

Core views

First, industrial profits rose 11.0% year-on-year in July, but this was markedly below the 18.3% increase in June. After seasonal adjustment by Goldman Sachs, industrial profits were estimated to have declined 3.2% month-on-month in July, compared with month-on-month growth of 1.3% in June. This indicates that although the year-on-year data remained supported by annual comparison factors such as a lower base, the actual sequential growth momentum during the month had weakened. Second, the slowdown in profit growth occurred across both upstream and downstream segments of the industrial chain. Downstream industry profits rose 9.6% year-on-year in July, slowing from 16.2% in June; upstream industry profits increased 12.7% year-on-year, also significantly below the 24.5% growth recorded in June. The report notes that the main drags on the upstream segment came from chemical raw materials, non-metallic mineral products such as cement, and the petroleum, coking, and nuclear fuel processing industries, indicating that the slowdown was not confined to a single sub-industry. In terms of structural contributions since the beginning of the year, the National Bureau of Statistics stated that industrial profits increased by a cumulative 17.6% in the first seven months. High-tech manufacturing contributed 9.6 percentage points, the electronics industry contributed 9.3 percentage points, and raw materials manufacturing contributed 7.1 percentage points. These data indicate that despite the weakening of marginal momentum in July, high-tech manufacturing, electronics, and raw materials manufacturing remained important contributors to profit growth during the first seven months. The revenue side showed a similar pattern to the profit side. Industrial operating revenue rose 6.5% year-on-year in July, below the 11.4% increase in June; after seasonal adjustment, revenue declined 2.8% month-on-month in July, compared with growth of 3.1% in June. Both profits and revenue turned negative month-on-month in July, indicating an overall cooling in the operating activities of industrial enterprises. However, after calculating the overall profit margin as total profits divided by operating revenue and taking a 12-month average, the margin was broadly unchanged in July, suggesting that enterprises' profitability relative to revenue did not experience a marked further compression on a rolling basis.

Analysis framework

The report first compares the year-on-year growth rates of industrial profits and operating revenue in July with those in June, and then uses Goldman Sachs' seasonally adjusted, non-annualized month-on-month data to assess short-term momentum. It subsequently breaks down profit performance into upstream and downstream segments and combines this with industry contribution data disclosed by the National Bureau of Statistics to identify structural sources. Finally, it examines whether profitability changed in tandem by using the 12-month average profit margin calculated as total profits divided by operating revenue.

Methodology notes

• (Method outside the vocabulary)

  Seasonally adjusted, non-annualized month-on-month comparison

  Goldman Sachs seasonally adjusts the monthly data to reduce the impact of regular seasonal fluctuations and uses non-annualized month-on-month growth to assess the actual short-term change in July relative to June; this measure shows that both profits and revenue shifted from growth to contraction.

• (Method outside the vocabulary)

  12-month average profit margin

  The report calculates the overall profit margin by dividing total profits by operating revenue and uses a 12-month average to smooth monthly fluctuations; this indicator shows that the rolling profitability of industrial enterprises was broadly unchanged in July.

Key data

• Year-on-year growth in industrial profits in July+11.0%+18.3% in June; year-on-year growth slowed
• Month-on-month growth in industrial profits in July-3.2%Goldman Sachs' seasonally adjusted, non-annualized measure; +1.3% in June
• Year-on-year growth in industrial operating revenue in July+6.5%+11.4% in June; year-on-year growth slowed
• Month-on-month growth in industrial operating revenue in July-2.8%Goldman Sachs' seasonally adjusted, non-annualized measure; +3.1% in June
• Year-on-year growth in downstream profits in July+9.6%+16.2% in June
• Year-on-year growth in upstream profits in July+12.7%+24.5% in June
• Growth in industrial profits during the first seven months+17.6%National Bureau of Statistics measure
• Contribution from high-tech manufacturing9.6 percentage pointsContribution to industrial profit growth during the first seven months
• Contribution from the electronics industry9.3 percentage pointsContribution to industrial profit growth during the first seven months
• Contribution from raw materials manufacturing7.1 percentage pointsContribution to industrial profit growth during the first seven months
• Overall profit marginBroadly unchangedCalculated on a 12-month average basis in July

Impact & implications

The data presented in the report indicate that although industrial profits and operating revenue continued to grow year-on-year in July, short-term month-on-month momentum had weakened, while profit growth in both upstream and downstream industries slowed. The stable 12-month average profit margin suggests that profitability on a rolling basis did not deteriorate further in a marked manner despite the month-on-month declines in revenue and profits during the month.