Industrial profits jumped 5.1 percent year-on-year in June, capping off a first-half year-on-year increase of 6.2 percent for large (presumably primarily state-owned) firms. While even the National Bureau of Statistics (NBS) acknowledges that this doesn't mean China's out of the woods yet, it offers compelling evidence that the massive 1Q stimulus is working to stabilize the real economy.
Plus, given the sheer size of the package, as well as ongoing liquidity injections by PBOC which are more narrowly and prudently tailored (if even still uncomfortably large in absolute terms), when combined with global monetary easing led by a slow-to-hike Fed, there's little reason not to expect further stabilization or "L-shaped" recovery in the remainder of 2016.
That being said, early indications point to a weak July and yet more evidence that China remains at significant risk of runaway credit growth.
Optimistically, these concerns will take two or three quarters to clear up, but clear up they will - there's no reason to pessimistically assume that new credit is predominantly going to the same old zombie firms. A lot probably still is, but then there wouldn't be default cases like Dongbei Special Steel group which are clearly a result of the loss of the traditional liquidity backstops for large SOEs. To point out that SOE reform on the ground has been slow isn't the same as saying no progress is being made at all: it's more a reflection of the stabilizing overall economic situation and yet more verification that SOEs contribute to that stability via employment and policy utilization, not profits.
Indeed, with private investment at lows that weren't touched even in the depths of the financial crisis, who knows how bad the Chinese economy would be if state firms haven't stepped up to the plate. And just because they're doing so doesn't mean they're doomed to be just as wasteful and inefficient as they've been before.
More importantly for both the real economy and by extension the country's debt burden, quiet, unspectacular productivity and efficiency improvements are underway in the industrial and manufacturing sector: to survive and prosper, firms must do more with less, and such a process steadily weeds out losers from winners. This especially appears to be the case with lighter industries downstream from the still-depressed industrial commodity manufacturers: electronics and electrical equipment, for instance, have seen a profit tear of late, contributing disproportionately to overall industrial profit growth.
China also intends to make the most of the robot revolution, which makes perfect sense for it now that its labor force is entering a long, steady decline.
The stimulus is working. Any surprises in the remainder of 2016 are likely to be on the upside, not the downside: Chinese growth has a fairly good shot of bottoming out by year-end, as even though the same problems and headwinds will persist well into 2017, they're increasingly likely to be outweighed by productivity gains in the real economy. Even more guardedly, if one argues that far too many local governments and SOEs still aren't changing their ways (or fast enough), that means growth will still fall in 2017, but doesn't change the overarching theme of macro stabilization in a rough "L" shape (which its purveyor himself acknowledged could take up to two years).
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