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Weak Chinese industrial profits drop Shanghai stocks to 3-year low

August 27, 2012|By David Pierson
  • A worker at a textile factory in Jinjiang, a city in southeast China's Fujian province.
A worker at a textile factory in Jinjiang, a city in southeast China's… (Associated Press )

BEIJING -- China reported a deepening slide in industrial profits last month, heightening concerns about the world's second-largest economy and sending the benchmark Shanghai Composite Index to its lowest level in three years.

In a report released Monday, China's National Bureau of Statistics said profits of major industrial firms fell 5.4% in July compared with a year ago, its steepest slide since a 5.3% drop-off in May. The survey, which measures companies with annual revenues of $3.2 million or more, showed profits fell only 1.7% in June.

Some of the worst-hit sectors were ferrous metals and chemical raw materials, which saw profits decline year-on-year 60.8% and 21.3%, respectively.

The weak data reinforce fears that China has yet to recover from its weakest quarterly growth since the financial crisis in 2008. Investors showed their pessimism by dropping the Shanghai composite 1.74% to 2,055 points -- its lowest point since the start of 2009.

Chinese Premier Wen Jiabao said during an inspection tour of southern China over the weekend that the third quarter was crucial for Chinese export growth after a dismal performance in July. Exports expanded only 1% last month compared with a year ago because of plunging demand from Europe.

“We should take targeted steps to stabilize growth,” Wen told state media.

Still, Beijing has shown anything but decisiveness in how to counter the steep falloff in economic activity. Some analysts were expecting looser monetary easing or a cut in interest rates. None of that has come.

Yiping Huang, an economist for Barclays, wrote in a report Monday that policymakers were hesitant to take a more aggressive stance because inflation had a chance of rebounding on rising global food prices.

Huang also cited mixed signals from the Politburo, the central bank, the Ministry of Finance and the powerful policymaking organ, the National Development and Reform Commission, as to why the stimulus response has been muted.

"It is increasingly likely that a growth recovery could be delayed further, alongside a downward shift in growth expectations, as downside risks continue to linger," Huang said.

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