China's industrial profits narrow declines to 1.5% in July as Beijing clamps down on price wars

China's industrial profits slipped 1.5% from a year earlier in July, marking a notable recovery following months of steeper declines, signaling Beijing's campaign against price wars has helped ease the strain on company profitability.

The profit decline narrowed in July following a 4.3% slump in June and a 9.1% drop in May, as the government pledged tougher regulations to the punishing price wars that have hurt firms' financial health.

Profits at major industrial firms fell 1.7% in the first seven months this year, according to data from the National Bureau of Statistics on Wednesday, in part dragged down by the mining sector.

Profits in the mining industry plunged 31.6% in the January to July period from a year earlier, while the manufacturing sector and utilities industry — for electricity, heat, gas and water supply — saw their profits improve by 4.8% and 3.9% from a year ago, respectively.

State-backed industrial firms saw their bottom line drop 7.5% in the first seven months, while businesses with foreign investments as well as Chinese private enterprises saw profits increase by 1.8%.

Yu Weining, a statistician at the statistics bureau, attributed the narrower profit declines to Beijing's policies aimed at recovering consumer price levels, which improved profitability for companies.

Profits in the raw-material manufacturing sector rebounded to grow 36.9% higher than a year earlier, versus a loss of 5% in June. Within that broad category, steel and oil refineries became profitable, while consumer goods manufacturers continued to experience profit declines.

"The early effects of anti-involution have started to emerge, as evidenced in a slight increase in profit margins," said Tianchen Xu, senior economist at Economist Intelligence Unit.

"Involution," known colloquially as "neijuan," refers to excessive competition plaguing China's economy, often leading to price wars.

China is expected to release its official manufacturing PMI for August later this week, with economists polled by Reuters predicting the key gauge on factory activity to remain in contractionary territory for a fifth straight month.

Goldman Sachs predicts a private survey, RatingDog China manufacturing PMI, formerly known as the Caixin manufacturing PMI, to edge back to 50 in July, the threshold separating expansion from contraction, from 49.5 in July, on the back of stronger export growth.

Industrial profits serve as a key gauge of the financial health of factories, mines and utilities, influencing their investment plans in the months ahead.

Factory-gate deflation deepened in June and July, falling to its worst level in two years as sluggish domestic demand compounded the country's overcapacity pressure.

Beijing has stepped up efforts to stimulate domestic demand and curb aggressive price-cutting. But analysts believe they are unlikely to lead to a repeat of the sharp rebound in producer prices following the supply-side reform a decade ago.

"The anti-involution campaign is as much political as economic [as] top leaders want to demonstrate that they are sensitive to the problems afflicting businesses and investors, even if the actual policy responses are highly incremental," said Gabriel Wildau, managing director at consultancy firm Teneo.

"Deflation or disinflation will [likely] likely continue until market pressures force industry consolidation and the exit of uncompetitive firms," Wildau added.