Weak industrial profits require continuity of pro-growth measures

June's drop in industrial profits has injected new vigor into worries about China's economic slowdown, despite growth resting at 7 percent, unchanged from the first quarter.

Profits at major industrial firms dropped 0.3 percent year on year in June, according to data released Monday by the National Bureau of Statistics (NBS), which proposed a significant drop in factory gate prices as the direct cause of the fall.

Weak industrial profits mean further deflationary pressure. China's producer price index fell 4.8 percent year on year in June, the 40th straight month of decline.

The weakness in industrial profit growth will lower entrepreneur confidence, curb manufacturing investment and hit corporate cash flows and government tax revenue.

China Daily reported on Tuesday the recent equity market crash has driven down industrial profits, and the suspension of IPOs may also impede near-term capital raising.

Chinese stocks nosedived on Monday and the National Development and Reform Commission (NDRC) on Tuesday expressed concern about volatility, but played down the impact on the real economy.

"The Chinese government has rolled out a series of measures to boost the healthy development of the stock market," NDRC secretary-general Li Pumin said at a Tuesday press conference in Beijing. He added that the fundamentals of the Chinese economy are steady and improving.

However, the NDRC warn that growth momentum is insufficient, market demand is weak and industrial production poor.

"The government is still facing slowing fiscal income and heavy pressure to stabilize employment," Li said.

China will have to maintain proactive fiscal policy and prudent monetary policy later this year, while working to expand demand, encourage investment and increase consumption, Li said.

"Policies to stabilize growth will not be withdrawn in the third quarter," said the China Daily report, citing Zhang Yu, an analyst at Minsheng Securities Co Ltd.

Since the start of the year, policies including three rounds of cuts to both interest rates and banks' reserve requirement ratios, structural tax reductions, accelerated fiscal spending on infrastructure, and reduced downpayment requirements for home buyers have been rolled out to boost growth.