China industrial profits quicken in May, seen fading as finance costs rise

For the first five months of the year, profits reached 2.9 trillion yuan ($424 billion), up 22.7 percent from the same period of last year although the growth pace was lower than the 24.4 percent annual rate for January-April 2017.

"The quickened growth of China's industrial profits was partly due to a low-base effect at the same time a year earlier, which marked the second slowest growth over the course of last year," statistics bureau official He Ping said in a statement on Tuesday.

Operating costs as a proportion of operating revenue rose on an annual basis for a third consecutive month in May, which He said needed to be closely watched.

Profit growth at private enterprises and foreign enterprises fell to 14.0 percent and 18.9 percent respectively in the year to May, from 14.3 percent and 19.8 percent in January-April.

Nomura analysts this growth noted was driven by "increased investment gains" and "net non-operating incomes", terms often used to refer to property profits.

"Our concerns over growth quality remain," they said.

Profits at China's state-owned firms enterprises (SOE) were up 53.3 percent at 652.04 billion yuan in January-May, compared with a 58.7 percent rise in the first four months.

"The low base is likely to support high profit growth of SOEs for a few more months," Nomura said.

PRODUCER PRICE INFLATION China's factory gate inflation eased for the third straight month in May on sagging prices for raw materials, signaling a broader cooling in economic activity as profits are squeezed by slackening domestic demand and rising financing costs.[L3N1J42YF]

"The return of PPI deflation should also lead to lower industrial profit growth," Nomura said.

Concerns about China grew after Moody's Investors Service downgraded its credit rating last month. The agency said it expects Chinese financial strength will erode in coming years as growth slows and debt continues to rise.

China's statistics bureau said this month that economic performance in the January-May period laid a solid foundation for achieving the full-year growth target of about 6.5 percent.

China's strong growth prompted the International Monetary Fund this month to raise its 2017 growth forecast to 6.7 percent from 6.6 percent.

Capital Economics, which forecast last year that China's economic rebound would run out of steam early in 2017 as policy support was withdrawn, said last week that the predicted slowdown would be "mild" with growth dropping back towards "a sustainable pace".

Still, with half a year left to go, the economy is expected to handily meet its annual growth target without hitting too many bumps, good news for President Xi Jinping ahead of a major political leadership reshuffle later this year.

The data encompasses companies with annual operating revenue of more than 20 million yuan from their main operations.

($1 = 6.8399 Chinese yuan)

(Reporting by Beijing Monitoring Desk; Editing by Eric Meijer)