Profitability across China’s industrial sector continued to improve in May, according to data released by China’s National Bureau of Statistics (NBS) earlier today.

The NBS said that profits increased by 16.7% from a year earlier, higher than the 14.0% increase seen in the 12 months to April.

In local currency terms, profits stood at 625.99 billion yuan in May, something Normura’s Asia economics team said was “mainly driven by increased investment gains and net non-operating incomes”.

The data captures the profitability of large industrial companies with revenues of more than 20 million yuan per annum.

Over the first five months of the year, profits increased by 22.7% compared to the same period in 2016, marginally below the 24.4% annual increase reported in April.

As shown in the chart below, much of the improvement in profitability this year was driven by China’s state-owned enterprises (SOEs).

Profits of SOEs grew by 53.3% between January and May compared to the same period in 2016, an outcome that largely reflects weaker economic conditions at the start of last year.

In comparison, profits at private firms and foreign-owned enterprises grew by just 14% and 18.9% respectively over the same period.

Looking ahead, economists at Nomura say that a combination of weaker producer price inflation and cooling property market conditions will likely see growth in profits slow in the second half of the year.

“The impact of a cooling property sector on economic growth is starting to appear in May, as fixed asset investment growth slowed more than expected,” it said.

“The return of producer price deflation should also lead to lower industrial profit growth, in our view.”

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