Weekly Economic Briefings > Emerging Markets Weekly Economic Briefing

Profit growth in industry in China has rebounded this year, driven by heavy industry. The recovery in real estate activity and firming exports are supporting sales volumes. But profit margins are also up and output prices have bottomed out. Overall profits in industry are thus likely to continue to expand in the near term. It remains to be seen how sustained the recovery in real estate construction will be. But for now, stronger-than-expected property construction benefits heavy industry, suggesting that the sub-sector may continue to lead the recovery in manufacturing.The gradual increase in profit margins in manufacturing in recent years, notwithstanding several dampening factors such as fast wage growth, is impressive and shows how China's manufacturing sector continues to achieve rapid productivity growth. Margins are likely to continue to rise as several dampening factors fade out. The extraction sector is becoming less of a drag on overall profit growth albeit mainly because profits in the sector by now are close to zero. Profit margins are at a record low as excess capacity remains very large. And sales volumes have flattened owing to large inventories and weak demand. The main upside for profits in extraction stems from output prices having bottomed out but sustained fast gains are unlikely. With the strongest declines in commodity and output prices behind us, overall profits in industry should continue to rise over the coming months. This would be a welcome development for the economic outlook since sustained profit growth is necessary to allow corporates to expand via organic, self-financed investment rather than credit.