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 percent during the second half of this year, far more than the official forecast of 8 percent, he said.

This has largely been achieved without incurring inflationary pressures, which is a reflection of the country's abundant labor 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.

(China Daily December 12, 2003)