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Pressure grows for stimulus as Chinese profits plunge

Employees work along a Geely Automobile assembly line in Cixi, in this file photo taken June 21, 2012. New state data released Monday showed profits for major industries on average fell 5.4 per cent last month, down from 1.7 per cent in June.


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 per cent last month, down from 1.7 per cent in June.

Ferrous metal profits tanked, down 60.8 per cent 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 per cent, though power and heat generators and suppliers saw their profits rise 29.3 per cent.

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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 per cent 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.

"The third quarter of the year is a critical period for China to realize the year's export growth target, and we should take targeted steps to stabilize growth," Mr. Wen was quoted as saying by the state news agency Xinhua this weekend.

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 per cent 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 per cent, down from 8.4 per cent.

"China hasn't found a powerful energy to boost the economy," said Yu Miaojie, an economics professor at Peking University, who said with external trade demand from the United States and Europe falling, and domestic consumption failing to fill the gap, the only driver left to address falling growth is investment.

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.

"My view is, clearly, if you want to boost China's economy and get to 8 per cent [GDP growth] then clearly you need this investment," Prof. Yu said. "We need to have another package to boost the economy. I am not saying we need four trillion [yuan]. But maybe 1 trillion is enough."

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