Profits earned by China's major industrial companies fell in 2015, their first annual contraction since the current data gathering standards took effect in 2011, official data showed on Wednesday.
While the latest data again highlighted the pressure on the industrial sector and the whole economy, a painful period is an inescapable part of China's economic transformation and supply-side reforms are expected to help with the process, experts said.
Industrial enterprises with annual revenue of more than 20 million yuan ($3.1 million) from their core operations saw their profits decline by 2.3 percent in 2015 from the previous year, the first annual fall since the data gathering system was revised in 2011, the National Bureau of Statistics (NBS) said on its website on Wednesday.
In comparison, the country's industrial profits in 2014 and 2013 expanded by 3.3 percent and 12.2 percent, respectively, year-on-year.
In December 2015 alone, industrial profits amounted to 816.72 billion yuan, down by 4.7 percent year-on-year, quickening the downward pace from the 1.4 percent slip in November, the NBS data showed. The numbers marked a seventh consecutive month of decline, also the longest period of continuous monthly declines since 2011.
Four factors contributed to the slowdown in industrial profits, He Ping, an official from the Industry Department at the NBS, said in a statement posted on the bureau's website on Wednesday.
According to He, subdued global and domestic demand led to a significant deceleration in production and sales activities; sinking producer prices cut into companies' profit margins; and high costs and tight liquidity further exacerbated the pressure on companies' production and operations.
Companies in the mining and raw materials sectors saw a big slump in profits in 2015, which also dragged on overall industrial profits, He noted.
Broken down by sectors, 29 out of 41 industrial sectors reported profit growth in 2015, with 12 recording profit contractions, the NBS data showed. Total industrial profits decreased by 147.32 billion yuan compared with 2014, and the profits of companies in five industries - oil and natural gas, ferrous metal, nonferrous metal, non-metallic mineral products, and coal - fell 499.12 billion yuan from a year earlier.
"With today's industrial profit data, [the situation] in industries burdened by overcapacity is worrisome. For example, the decline in profits for ferrous metal smelting and processing companies increased to about 67.9 percent in 2015 from 2.7 percent in 2014," Nomura economist Wendy Chen told the Global Times via e-mail on Wednesday. "The dwindling profits in these industries may soon turn into net losses. Therefore, we believe the government will endeavor to reduce excess capacity in these industries this year."
Although the 2015 industrial profit drop reflects the generally gloomy outlook for China's economy, sectors related to industrial restructuring, transformation and upgrading still registered relatively fast growth in 2015. Profits for high-tech manufacturers, equipment manufacturers and consumer goods manufacturers increased by 8.9 percent, 4 percent and 7 percent year-on-year, respectively, He said in the NBS post.
The contrast between the situation in raw material sectors plagued by overcapacity and high-tech sectors shows that the country is sticking to the effort to shift its growth model from an investment-driven one to a consumption-led one, Liu Yuhui, a professor at the Chinese Academy of Social Sciences, told the Global Times on Wednesday.
"This process cannot be completely seamless, and must be accompanied by a degree of economic pain," Liu noted.
China's GDP grew by 6.9 percent in 2015, the slowest pace in a quarter of a century, sparking concerns about the prospects for the world's second-largest economy.
"There is no shortcut in the transformation process, and the government cannot roll out rescue measures as it did before to alleviate the pressure," Liu said. "The new supply-side reforms may help to speed up the process and get through the painful period."
After the annual Central Economic Work Conference in December 2015, the central government announced its plan to formulate and deliver supply-side structural reforms, which will focus on better provision of high-quality goods and services and lower costs for businesses.
China used to rely on stimulating the demand side by boosting investment, consumption and exports, but the strategy has been producing diminishing returns in recent years.