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China’s industrial profits returned to growth

China’s industrial profits returned to growth

In the first two months of 2015, China’s industrial profits returned to growth. This happened despite the weakening business conditions and the slowing economic growth in China, which is the second-largest economy in the world. 

The year 2016 is so far highlighted by economic growth

The profits earned by the Chinese industrial companies in January and February were higher with 4,8% than the previous year, totaling around 780.7bn CNY ($120bn), according to the National Bureau of Statistics (NBS). This is a good thing, especially when compared with the annual fall from December 2015, which was 4.7%. This positive trend is the result of quicker products sales of the industrial firms and the decline of industrial producer prices, according to He Ping (NBS official). 

The industries that contributed the most to this growth are electrical machinery, food sectors, and oil processing industries. The increase in profits was also the result of industry sectors benefiting from lower oil prices. The food industry has grown significantly as a consequence of the high demand and the price decline for some raw materials. 

The National Bureau of Statistics always gives a combined profit figure of the first two months of each year to eliminate seasonal distortions that may result from the Lunar New Year holiday, when most companies are closed. 

The producer prices in China diminished in February for the 48th month in a row, putting a lot of pressure on Chinese manufacturers. The Premier of China, Li Keqiang, declared that the country has the tools to maintain the country stable despite all structural problems. China's leaders have set for this year a growth target of 6,5-7%. This is not a hard target to achieve, especially because of the flexibility in juggling growth, restructuration of industrial “zombie companies” and the new countless job opportunities.

A little insight on the future

More than 90% of all semiconductors used and purchased by China are imported from South Korea, Taiwan, Japan and the United States. But this will soon change. China plans to invest up to $ 161bn (1 trillion Yuan) over the next decade into creating and developing the domestic semiconductor industry. The plans are that China will become a global power in this sector and will even be a trend maker.

Beijing has repeatedly started the developing of their IC industry (Integrated Circuit industry), making it a national strategic concern. The Beijing’s efforts are in perfect alignment with the Chinese government’s goals of becoming stronger in high-tech, research and development areas, but also in intellectual property (IP), presented in the China’s 13th Five-Year Plan.

Today, China is the largest purchaser of semiconductors, representing 56,6% of the global consumption and 90% of them are imported from South Korea, Taiwan, Japan and the United States. As a result, more money is spent importing semiconductors than on oil. With the help of the new domestic semiconductor industry, Beijing estimates that China will be 40% self-sufficient by 2020 and can reach 70% by 2025. In the end, the goal imposed by the Chinese government is for Chinese companies to be the no˚1 industry leaders by the year 2030. 

Strong Government motivation

The Chinese semiconductor industry was fundamentally transformed as part of the 10th Five-Year Plan the government developed for the year 2000. Until then, all the semiconductor companies were entirely state-owned. But in the year 2000, all of them were privatized, and this technological sector was categorized as an encouragement industry and could receive foreign investment. Several tax incentives were introduced with State Council Rule 18 to begin the growth in this industry in June 2000. The State Council Rule 18 was revised and developed in State Council Rule 4, which is valid from 2011 until 2017 and has a lot of notable points, such as the continuation of preferential VAT for software products, reduced 15% and 25% tax rates for IC manufacturers and many others.

The Chinese government is committed to developing this domestic semiconductor industry, and it is capable of offering significant capital and tax incentives to some IC producers. China offers great potential for investment into industry, and it is a fantastic chance for any investor, Chinese or foreign, to start their business here.

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