China's largest companies on track despite sign of slowdown

26 Sep '06

3 min read

China's largest companies are on track for another good year in 2006, but earnings growth is likely to slow in 2007, according to Standard & Poor's Ratings Services' biggest study in this field to date.

The recently released report, titled "China's Leading Corporates: The Top 200 Performers", says that while earnings were strong in 2005, the Chinese government's market-cooling measures, overcapacity, and high raw material costs have started to bite.

Standard & Poor's annual coverage of China's leading listed companies has doubled since last year, providing a better view of key trends. Overall earnings rose 20.8 percent in 2005, compared with significantly higher growth of 46.5 percent in 2004. About 59 percent of companies reported higher earnings and only 9 percent recorded losses.

"Although most companies are benefiting from relatively strong economic growth, downstream sectors are becoming increasingly susceptible to operating cost inflation stemming from higher raw material costs. Some are also experiencing intensified competitive pressure resulting from overcapacity," said John Bailey, Standard & Poor's Managing Director for corporate ratings in Asia.

Overheating is not widespread at the moment, but overcapacity has started to appear in some sectors, such as low-end steel, aluminum, coke, cement, textiles, copper, and autos. Despite overcapacity, many new projects are still under construction or in planning.

If the U.S. economy slows significantly, as some expect, Chinese export growth could be hit, eliminating a still-important source of GDP expansion.

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