China's industrial sector will continue to grow rapidly this year, as a
result of a strong growth in exports, higher commodity prices, solid consumer
demand and continued high government spending, according to Standard &
Poor's Ratings Services.
Although earnings growth is likely to cool down in 2004 as commodity prices
stabilize, momentum from strong private investment and consumption should ensure
that the country's industrial sector continues to grow, said the credit rating
company, which plans to increase its presence in China.
Paul Coughlin, managing director of the company, said the threat of future
overcapacity in China's manufacturing sector continues to be a key concern for
the country's corporate credit standing.
"The previous investment cycle produced some irrational investment and
expansion of low-end production capacity," Coughlin said. "A repeat of this
experience could have a detrimental effect on corporate profits and could lead
to a further round of non-performing bank loans."
China's economy is expected to grow more than 10 per cent during the second
half of this year, far more than the official forecast of 8 per cent, he said.
This has largely been achieved without incurring inflationary pressures,
which is a reflection of the country's abundant labour resources and excess
production capacity that was built up during the previous investment cycle.
However, in certain segments, existing high demand and limited supply is
beginning to attract investors, consequently causing concern about
over-investment, he said.
These segments include the steel, aluminium, property, automobile,
telecommunications equipment, and consumer goods industries, he said.
John Bailey, director of the company, said overcapacity increases the risk of
price competition, reduced operating margins and weak cash
flow.
