Chinese Industrial Profits Surge 20.4% In The Fourth Quarter

Electricity consumption data, which observers tend to trust more than China's official GDP growth numbers, seemed to confirm the turnaround.

Over the weekend, China's National Bureau of Statistics released industrial earnings growth figures for the fourth quarter. The data showed that profits surged 20.4 percent in Q4 after negative growth over the first three quarters.

BofA Merrill Lynch economist Ting Lu broke down the details this weekend:

Upward momentum was sustained in Dec 2012. China’s NBS today released 2012 annual sales and earnings data of industrial companies above certain sizes. December data could be derived from year-to- date (YTD) data. Earnings growth moderated slightly to 19.0% yoy in Dec from 22.4% Nov, but small volatility in monthly data derived from YTD data should be downplayed. Quarterly data, which is less subject to data irregularities, displayed impressive turnaround: Industrial earnings growth surged to 20.4% in 4Q12 from - 1.0% in 3Q12 and -1.8% in Jan-Sep 2012. These NBS earnings data bode well for China’s listed companies’ earnings to be released in coming weeks. We expect the NBS industrial earnings growth to peak in 1H13 at around 25%.

Why do the NBS industrial earning growth data matter? As shown in Chart 1, the NBS industrial earnings growth moves fairly closely with that of non-financial listed companies. Since the NBS data are monthly (although they need to be derived from YTD data), they provide an early guidance for quarterly earnings of listed companies. Based on the correlation, we expect listed non-financial companies’ earnings growth could turn the corner in 4Q12, likely jumping to around 10% yoy from -16% in 3Q12.

The Shanghai Composite surged 2.4 percent in overnight trading, but the gains were led by financials as opposed to industrials.

Ting Lu expects industrial earnings growth to peak in mid-2013 near 25 percent.