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China's growth still real but profit under pressure
By Yao Wei |
July 20, 2012, Friday
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Print Edition
Print Edition
CHINA'S second-quarter GDP and June activity growth was weak but less than scary, based on the official release. However, the current slowdown has undoubtedly inflicted a lot of pain on the corporate sector, probably more than that shown by the data. Tax and wages are squeezing corporates from both ends.
There have been waves after waves of news flow on how much the corporates are suffering - collapsing orders, piling of inventories, and rampant bankruptcies.
The limited easing offered by the central government so far probably leaves many to wonder if there is ever going to be an end to the slowdown.
Yet a more important reason is probably that the burden of the economic slowdown is disproportionally greater on corporates. Data from the National Bureau of Statistics showed profits of large industrial enterprises contracted 2.4 percent year-on-year in the first five months, compared to 23 percent decrease year-on-year in the fourth quarter of 2008.
However, more than half of the 760 listed companies in the domestic stock market that have reported semi-annual results experienced year-on-year declines in net profits, which was worse than in the first half of 2009.
And the situation is almost certainly worse with unlisted smaller companies.
Analyzing the overall growth by income, we notice a troubling trend - corporates seem to be bearing most of the burden of the cyclical and structural slowdown. The squeeze is coming from labor costs and government taxes.
Toward consumption
Growth in the household sector comfortably outperformed overall growth. In other words, household income starts to gain shares in the national income pie, which is much needed for China to rebalance toward consumption.
While the resilience of wage growth is a positive trend, the lack of reduction in the fiscal burden and the limited space for private corporates to grow is pushing China into a status of profitless growth.
For companies, the sum of value-added tax and corporate income tax is growing even faster, up 10.7 percent annually in the first quarter and 13.6 percent in the second. The gap between profit growth and tax growth is now wider than ever.
Tax is not living up to its role as a stabilizer, as it was designed to, but instead is adding to the economic pains for corporates.
Fundamental changes, such as structural tax cuts and further marketization, cannot wait much longer now.
We see China under great pressure to make the decision whether to use more investment and credit to save the short-term cycle or to concentrate more on reforms to win back corporates' confidence as well as the economy's long-term prospect.
There have been waves after waves of news flow on how much the corporates are suffering - collapsing orders, piling of inventories, and rampant bankruptcies.
The limited easing offered by the central government so far probably leaves many to wonder if there is ever going to be an end to the slowdown.
Yet a more important reason is probably that the burden of the economic slowdown is disproportionally greater on corporates. Data from the National Bureau of Statistics showed profits of large industrial enterprises contracted 2.4 percent year-on-year in the first five months, compared to 23 percent decrease year-on-year in the fourth quarter of 2008.
However, more than half of the 760 listed companies in the domestic stock market that have reported semi-annual results experienced year-on-year declines in net profits, which was worse than in the first half of 2009.
And the situation is almost certainly worse with unlisted smaller companies.
Analyzing the overall growth by income, we notice a troubling trend - corporates seem to be bearing most of the burden of the cyclical and structural slowdown. The squeeze is coming from labor costs and government taxes.
Toward consumption
Growth in the household sector comfortably outperformed overall growth. In other words, household income starts to gain shares in the national income pie, which is much needed for China to rebalance toward consumption.
While the resilience of wage growth is a positive trend, the lack of reduction in the fiscal burden and the limited space for private corporates to grow is pushing China into a status of profitless growth.
For companies, the sum of value-added tax and corporate income tax is growing even faster, up 10.7 percent annually in the first quarter and 13.6 percent in the second. The gap between profit growth and tax growth is now wider than ever.
Tax is not living up to its role as a stabilizer, as it was designed to, but instead is adding to the economic pains for corporates.
Fundamental changes, such as structural tax cuts and further marketization, cannot wait much longer now.
We see China under great pressure to make the decision whether to use more investment and credit to save the short-term cycle or to concentrate more on reforms to win back corporates' confidence as well as the economy's long-term prospect.
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