Chinese industrial companies’ profits climbed 55 percent in the first eight months of 2010 from a year earlier, bolstering investment as the government pares back stimulus.

Net income increased to 2.6 trillion yuan ($390 billion), the statistics bureau said today in an e-mail. That compared with an 11 percent decline in the same period in 2009.

Strength in corporate spending may help the economy maintain momentum as the government reins in lending from last year’s record levels and the effects fade of a November 2008 stimulus package. Barclays Capital said last week that growth may bottom at 9 percent in the fourth quarter and in the first three months of 2011 as the nation has a “soft landing.”

“The strength of profits gives me confidence that private firms will keep investing,” said Huw McKay, an economist at Westpac Banking Group in Sydney. “The additional tax revenue coming from the profits rebound adds to the government’s fiscal firepower if it deemed that more stimulus was needed.”

The Shanghai Composite Index of stocks rose 0.95 percent before the mid-day lunch break today.

Today’s report gave little indication that labor costs are a drag on earnings, after local governments increased minimum wages and companies such as Foxconn Technology Group boosted pay. The numbers indicated a 6.03 percent profit margin, similar to the level for the first five months of the year, McKay said.

Stronger Spending

Stronger domestic spending would help insulate the economy from any reduction in overseas demand for Chinese exports. China’s September trade surplus is likely to be smaller than in August, Chen Jian, a vice minister at China’s Ministry of Commerce, said in Taipei today. China posted a third straight monthly surplus of more than $20 billion in August.

Industrial companies’ sales gained 33.4 percent in the first eight months to 43.1 trillion yuan, the statement showed. The figures, released every three months, cover state and private businesses with annual sales of more than 5 million yuan in 39 industries, including steel, chemicals, electricity, telecommunications and mining.

Industrial profits plunged in early 2009 as the global financial crisis pummeled the Chinese economy, then surged back because of the government’s stimulus program. In the first two months of this year, earnings rose 120 percent, partly because of the favorable year-earlier base for comparison. For January- through-May, the gain was 82 percent.

Not Sustainable

Such large increases weren’t sustainable, McKay said, adding that the economy is in “the midst of a deceleration that will persist through year’s end.”

In June, China ended an almost two-year-old crisis policy of pegging the yuan to the dollar, signaling some confidence in the outlook for growth. Policy makers are targeting a 22 percent decline in new lending this year to 7.5 trillion yuan.

At the same time, officials are yet to raise interest rates from 2008 levels as austerity measures, sovereign-debt woes and unemployment limit the global recovery.

China’s expansion has cooled since the first quarter as the government tries to prevent asset bubbles in property by curbing home purchases and also closes factories to chase energy- efficiency and pollution targets.

UBS AG. economist Wang Tao said in report last month that earnings growth for heavy industry may keep slowing on input costs, decelerating infrastructure investment and an expected slowdown in property construction. In contrast, profit gains by light industry “may remain strong for some time” on a recovery in export demand, Wang said.

Wuhan Steel

Wuhan Iron & Steel Co., the listed unit of China’s third- biggest steelmaker, may face a “very difficult” second half of the year after drastic changes in demand from the auto, appliances and real-estate industries since July, the company said last month.

China’s economic growth cooled last quarter to an annual 10.3 percent annual pace from 11.9 percent in the first three months of this year. Third-quarter data will be released next month, with faster-than-forecast gains in industrial output in August suggesting that the nation’s slowdown has stabilized.

China is poised to overtake Japan as the world’s second- biggest economy this year, after reporting a larger gross domestic product in the second quarter.