News Analysis: China's industrial firms restoring strength, pressure remains

China's latest profit data reveals it is making progress in restoring and upgrading its industrial firms, but they have not fully recovered yet.

Profits at major industrial companies rose 4.8 percent year on year in the first two months of 2016, ending a seven-month dropping streak, official data showed Sunday.

"The rebound is heartening news, reflecting an overall improvement in business operations and proving that supportive policies and reforms were kicking in," said Mo Kaiwei, a research at China Academy of Regional Finance.

China's industrial sector is grappling with a lingering glut, flagging trade and a large group of "zombie companies" that can only survive on government aid as the economy lost steam.

To help the industry weather the downturn, authorities have cut interest rates, reduced taxes, slashed overcapacity and initiated reforms to improve efficiency.

The latest profit growth was caused by rising sales and a milder decrease in industrial product prices, analysts said.

In the first two months, revenues from the industrial firms' primary business climbed 1 percent year on year, improving from a 0.6 percent drop in December and a 0.8 percent increase for last year.

In the two-month period, China's producer price index, which measures the prices of goods at the factory gate, slipped 5.1 percent year on year, narrowing from a drop of 5.9 percent in December and 5.2 percent for 2015.

Ren Zeping, analyst at Guotai Junan Securities, said credit and fiscal stimulus were behind the improvement.

Destocking and cost reduction have particularly benefited downstream industries, said Xu Hongcai, an economist with China Center for International Economic Exchanges.

Helped by lower oil prices, oil refining and chemical industries contributed an increase of profit growth by 4.9 percentage points in January and February combined from 2015, official data showed.

Electric machinery and food industries also accounted for a significant part of the profit increase, which Mo viewed as a result of product upgrading and strong demand.

Combined with other indicators, the industrial data reinforced the impression of a good start for China's economy this year, said Yao Jingyuan, a research fellow at the Counsellors' Office of the State Council.

Property investment grew 3 percent year on year in the first two months, compared with a 2.1-percent decrease in December.

Power consumption rose 4 percent year on year in February, in contrast to the decline of 6.3 percent for the same month last year.

Though industrial output posted weaker-than-expected growth in the first two months, output growth of the emerging and high-end industries is speeding up.

"Structural reforms are slowly taking effect," Xu said. "Costs are down, efficiency is up, and there are good signs from upgrading."

However, the improvement does not necessarily indicate a sustained upturn, as the industrial sector is still plagued by overcapacity.

Upstream industries like mining remain mired in losses and the bloated sectors have not turned better fundamentally, Yao noted.

Mining incurred 8.1 billion yuan of losses in the first two months of this year, worsening from 38.6 billion yuan of profits made a year earlier, the National Bureau of Statistics counted.

As of the end of February, it could take industrial producers an average of 16.5 days to sell out their inventories of finished goods, 2.3 days more than the end of 2015.

Mo said downside risks loom in future, noting that a depreciating yuan may lift raw material prices and labor cost for the firms, while a possible uptick in the long-subdued oil price could sap the profits of oil refiners and chemical producers.

"We must be clear-headed about it," he said in reference to the industrial profit growth. Endi