China’s industrial profits remain elevated, but current CNY rally unlikely to be sustainable - Commerzbank

China’s industrial profits continued to be elevated, but structural unevenness continues. In the initial seven months of the year, the industrial profits rose 21.2 percent. The mining sector, especially, was able to register extreme profit rises that is due to a low basis of comparison though. A huge swing of the profits rather shows the fundamental fragility of China’s mining industry.

The unevenness of the state-owned enterprises (SOEs) and the privately-owned enterprises (POEs). Trend growth evidently shows that the SOEs continue to outperform while the POEs continue to struggle. The rapid profit growth in SOEs cannot hide the low efficiency of China’s SOE’s. IMF had stated that SOE productivity is also a quarter lower on average than non-SOEs when controlling for the sector, partially driven by still-significant social responsibilities and weak corporate governance.

The relatively lower profitability is particularly striking given that SOEs receive considerably implicit support that is estimated to be around 3 percent of GDP, even excluding other benefits such as operating in protected markets. That signifies the economic situation in China continues to be fragile and therefore, the current CNY rally is unlikely to be sustainable, note Commerzbank in a research report.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Chinese Yuan was highly bullish at 151.843, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -71.7859. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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