China's industrial sector is projected to maintain a high rate of earnings growth in the second half of the year, but the momentum is likely to slow in 2004 as commodity prices stabilize and foreign investment cools down.

Ratings-agency Standard & Poor's (S&P) said this in a report released yesterday on China's top 50 companies.

Substantial inflows of overseas investment following China's entry to the World Trade Organization (WTO), coupled with expansive government policies and rising oil and steel prices, have generated significant growth in corporate earnings in recent years.

Industrial profits reached 562 billion yuan (US$67.7 billion) last year, representing an increase of 20.6 per cent compared to the previous year. In the first nine months, the figure grew a stunning 49 per cent year-on-year, but slower from the 56.7 per cent growth rate in the first half.

"The exceptionally strong growth in earnings that we have witnessed in China in recent years is unlikely to prove sustainable," said S&P director John Bailey.

Foreign direct investment in China has seen a reduction in recent months, while the government has begun controlling investment growth in over-heated sectors including real estate and auto manufacturing, he said.

Stabilizing product prices will further curb profits.

According to the S&P's report, which has reviewed the financial trends of Chinese companies, the best performers in 2002 and 2003 were oil and natural gas producers, together with steel manufacturers, which accounted for 40 per cent of the companies in the survey.

Traditional State-owned enterprises in the refining and petrochemical sectors comprised some of the worst performers.

The report warned of mounting competitive pressures accelerated by the lowering of protective tariffs.

Companies reviewed generally had strong interest coverage ratios, attributed in part to increased profitability and declining global interest rates.

High levels of liquid, short-term investments were a feature of a large number of firms surveyed, with 24 per cent achieving a net-cash position at the end of 2002.

Report findings showed that leverage was relatively low among the companies reviewed with the average ratio of net debt to total capital amounting to about 14 per cent, while low leverage reflects growth in equity issuance.

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