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Industrial enterprises registered a strong profit growth last month, offering an uptick for the world's second-largest economy, which has been experiencing a slowdown.

Industrial profit growth rebounded to a three-month high in May, due to lower raw material prices and faster expansion of domestic market demand, the National Bureau of Statistics said on Thursday.

Net income of industrial enterprises in May increased by 15.5 percent from a year earlier to 470.5 billion yuan ($76 billion). It had increased 9.3 percent in April and 5.3 percent in March, according to the NBS.

In the first five months of the year, industrial profit reached 2.08 trillion yuan, increasing 12.3 percent compared with the same period last year, and greater than the January-to-April growth rate of 11.4 percent.

"The main business profit indicator is closer to real industrial production, which can better reflect true operating performance," said a statement on the bureau's website.

Yu Jianxun, an economist from the NBS, said that about 98.5 percent of the added profit in May was from four industries: electricity and heating power production and supply, automobile manufacturing, computer communications and electronic equipment manufacturing, and the oil processing and nuclear fuel processing industries.

Jin Lingfeng, deputy president of electrical equipment manufacturer Shanghai People Enterprise Group, said that due to decreasing prices of raw materials such as steel, the basic costs of materials were reduced, which in turn raised profits.

Lower raw material costs were in line with the decreasing producer price index, which showed a negative 2.87 percent in May, compared with a negative 2.62 percent in April, according to the NBS.

"Economic policies should stay stable and consistent, and we should stabilize market expectations," Premier Li Keqiang said at a State Council meeting on Wednesday.

The acceleration of profit growth may not be sustainable in the coming months, as overcapacity is still a big challenge for industrial production and the momentum of domestic economic growth is weakened, said a report from the Bank of Communications.

Zhu Baoliang, an economist at the State Information Center, a think tank under the National Development and Reform Commission, said China needs more engines for growth.

"It's an arduous task to reduce the backward capacity, which accounts for up to 20 percent of China's capacity," Zhu said.

"High costs of funding, logistics and human resources have put great pressure on enterprises in almost all industries," he said.

Industrial companies that have high debt ratios may face default risks if the liquidity squeeze lasts for a longer period, economists said.

With more support from the central bank, the seven-day repo rate moderated from a record high of 11.6 percent on June 20 to above 7 percent this week, indicating that the interbank liquidity condition eased slightly.

"An improvement in market sentiment and a drop in interbank rates do not mean a reversal of macro and monetary policies. Over the coming months, we expect credit growth to slow and financing costs in the economy to rise," said Wang Tao, chief economist in China with UBS AG.

Louis Kuijs, chief China economist with the Royal Bank of Scotland, said China needs to focus on reforms instead of stimulating growth.

"Improving distribution of resources, directing resources to new industries and products, and encouraging innovation will help reforming economic structures," Kuijs said.

In addition, enabling migrant workers to live as urban residents will boost growth in consumption and the service industry, he said.
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