Total industrial profits declined 5.4 per cent compared with a year earlier, accelerating from June's 1.3 per cent fall, government data showed Monday. That might hurt investment, a key part of Beijing's recovery plan for China's deepest slump since the 2008 global crisis.
The decline follows July's collapse in export growth and weak consumer spending despite repeated stimulus measures. The slowdown has forced thousands of small companies to close, raising the threat of job losses and unrest as the Communist Party prepares to hand over power to younger leaders.
Lower profits might force the government to ease credit policy or step up spending to offset private sector weakness.
"This would suggest that policy easing is crucial to support the economy in the coming months," JP Morgan economists Haibin Zhu and Grace Ng said in a report.
Economic growth fell to a three-year low of 7.6 per cent in the second quarter. Analysts expect a rebound later this year but say it will be slow and too weak to drive global growth without improvement in the United States and debt-crippled Europe.
The profit figures showed a striking gap between the performance of state-owned companies, which receive government support and priority access to lending by government banks, and private sector companies that have struggled but are more flexible and efficient.
Profits for government-owned industrial enterprises fell 12.2 per cent in the first seven months of the year compared with the same period last year, while private sector profits rose 15.5 per cent, according to the National Bureau of Statistics.
The figures cover companies in fields such as steel and chemical production, manufacturing of autos, electronics and machinery, oil and natural gas and power generation.
Beijing cut interest rates twice in June and is pumping money into the economy through higher spending on public works construction. But Communist leaders have resisted calls for more aggressive stimulus after huge spending in response to the 2008 crisis fueled inflation and a wasteful building boom.
Premier Wen Jiabao warned last month that the country's job situation will become "more complex and severe."
This weekend, Wen called for efforts to stabilize trade after July's export growth collapsed to 1 per cent, well below forecasts, from the previous month's 11.3 per cent expansion. He was visiting Guangdong province in the southeast, an export region that has been battered by weak foreign demand.
"The third quarter of the year is a critical period for China to realize the year's export growth target and we should take targeted steps to stabilize growth," Wen said, according to the official Xinhua News Agency.
The report gave no indication of possible measures but Beijing previously has promised tax cuts and loans by state banks to help struggling exporters.
August manufacturing activity fell to a nine-month low, according to the preliminary version of HSBC Corp.'s monthly purchasing managers' index. It said new export orders fell at the fastest rate in three years.
The International Monetary Fund and private sector forecasters expect China's economy to grow by about 8 per cent this year. That is robust compared with low single-digit growth expected in the United States and a contraction in Europe but painful for Chinese companies accustomed to a rapid expansion.
The government set a target of 10 per cent trade growth this year. Trade grew by 9.2 per cent over the first half but that fell to 7.8 per cent for the first seven months of the year, making the annual target look increasingly hard to meet.
In the southeastern port of Wenzhou, an export centre, a business association says 10 per cent of its 3,000 member companies have closed and 20 per cent are in trouble, the government newspaper China Daily reported Monday.