Looking into the half-year reports of China's major listed trading companies, you will find the texts punctuated by the words, heavy going.

They are true, with proof easily singled out from the reports: Slow increases in revenues and profits, lacklustre performance in non-trading businesses, and worse, cautious optimism about full-year results.

Even if some of the companies posted respectable yearly increases, analysts say, the figures are not as encouraging as they appear, according to China Daily Tuesday.

That is mainly because these increases were compared with a relatively small increases in the previous period. Because of the SARS (severe acute respiratory syndrome) epidemic, lasting from April to June in 2003, interim revenue and profit are comparatively small.

A combination of factors including fiercer competition, decreasing export tax rebates, energy shortages and cost increases are blamed for the hard times.

Companies have vowed to overcome difficulties with a stream of reforms and strategy adjustments.

Whether they can survive the present climate is still uncertain.

More players

China's foreign trade has galloped at a brisk growth rate of more than 30 per cent in past months, seemingly boding well for these listed trading firms.

However, an increasing number of newcomers flocked into the trade sector and took over market share that was formerly controlled by the listed companies.

"Overnight, you are surrounded by a number of competitors," said an official surnamed Yu from Jiangsu Holly Co.

The Shanghai-listed company is a major trader in East China's Jiangsu Province, the mainland's second largest trading province.

"Most of them are private companies with more flexibility and efficiency, squeezing us a great deal," Yu said.

Holly suffered a 37.86 per cent drop in its net profit.

The sudden increase of the number of trading companies was due to the central government's efforts to open up the trade sector under World Trade Organization (WTO) commitments.

Foreign trading rights now can be gained through registration rather than licensing, and State-owned and private firms are treated equally.

Many of these private firms were clients of the listed traders, but now they have become rivals.

The fiercer competition was the first thing that led traditional players to slowdowns or bleak prospects.

Life could be more difficult for traditional players during the rest of the year.

Beginning in the third quarter started on July 1, individuals were allowed to conduct foreign trade under the new Foreign Trade Law.

Fan Ying, a trade professor at China Foreign Affairs University, said "thresholds for entry into the foreign trade sector were almost dismantled completely."

Something like adding frost to snow, Yu said, using a Chinese phase to describe a worsening situation, was that foreign investors would be allowed to establish wholly-owned trading subsidiaries in China.

"That means, apparently, we have to withstand more pressure," he said.

Increasing cost

In their efforts to elbow a way through an increasing number of competitors, the listed trading firms find that the hurdle of soaring costs is facing them.

Cost increases are inevitable as the State Council has lowered the export tax rebate rate by an average of 4 percentage points from the beginning of this year.

"The policy has increased staple business costs and affects our export scale and profitability," said Jiangsu Sainty Co, Jiangsu Province's largest trading house, in its half-year report.

Sainty, a textile and machinery trader suffered a 4-percentage-point drop in tax rebates.

Traders are also discovering there are more things beyond their control.

Price hikes for raw materials, such as steel, iron, chemical products and cotton, have also eroded their profits and made them less competitive on the international market.

"Prices of cotton and steel skyrocketed crazily in February and March," said Wu Jiming, a Sainty official.

The situation eased a great deal after the central government tightened bank loans and land use approval to tame the economy, he said.

"However, prices are still hovering at a relatively high level," Wu said.

And nationwide energy shortages that uplifted power prices forced these companies to run out of budget.

In addition, ongoing crackdowns on overloaded delivery, initiated by the Ministry of Communications, have led to rises in road transportation charges.

Because of the above factors, a majority of listed trading companies saw its cost increases outpace revenue growth.

Holly, as one of the most affected, witnessed a 40.1 per cent increase in its operation costs.

With a few exceptions, those companies reported declines in gross profit rate in the January-June period.

Thorny road ahead

The traditional traders are not succumbing to the tougher climate. Instead, many of them have chosen to make inroads into other sectors to cushion risks in the trade market. In some cases, however, the choice subjected them to greater exposure to new risks.

China National Technical Trading Co Ltd (CNTIC), a Shanghai-listed trader of machinery, light industrial products and oil products, began to take stock of the changing stock market in 1997.

"Despite some gains in 2003, CNTIC Trading has lost 13.57 million yuan (US$1.64 million) due to the bearish stock market this year," said Wu Gang, an analyst at Kulun Securities.

The failure taught the company a lesson, and it claimed in its interim report that it will reduce the scale of short-term investments in the stock market.

And for some other companies, diversification plans, if not having failed, have not brought them big returns for the time being.

Real estate, manufacturing, internal trade and catering sectors are some of the markets that traders want to cash in on.

"To switch to a new sector is not an easy task," said Fan. "Traders should think before they leap."

Even those who succeeded in these endeavours also have painful memories.

China National Cereals, Oil and Foodstuffs Import and Export Corp (COFCO), the nation's largest grain trader, invested heavily in other sectors in the late 1980s and early 1990s, but soon found its investment made little profit due to its unfamiliarity with the markets.

The company withdrew and did not renew the campaign until the late 1990s. This time it chose to invest indirectly and properly in new sectors.

Currently, COFCO has become a diversified conglomerate with food processing, real estate and financial services as its new profit engines.

Some listed trading companies are experiencing hard times similar to what COFCO experienced in the early 1990s.

Ray of hope

Fortunately, there are success stories, erasing bleak market prospects and offering models for stagnating players to copy.

China's traditional trading giants China Mineral and Metal Group and Sinochem Group posted a set of upbeat figures, signalling that the trading sector is not a "sunrise" sector as observers have termed it.

Sinochem International Co Ltd, the Shanghai-listed arm of China's largest chemicals trader Sinochem Group, reported a 365 per cent increase in its combined net profit to 484 million yuan (US$58.5 million) during the first half of the year.

The increase came against a slight drop in the company's revenue from 5.79 billion yuan (US$700 million) to 5.49 billion yuan (US$664 million) and was largely a result of a rising profit rate in its staple business.

China Minmetals Development Co, the Shanghai-listed arm of China Minmetals, reported an 185 per cent increase in its net profit to stand at 352 million yuan (US$42.6 million).

These two companies are major raw material suppliers in China. Unlike many others, they have taken advantage of ongoing raw material shortages, as supplying what is in demand means slight risk and great profit.

Their success was also a result of long-term dominance that they had forged during past decades. Their parent companies were designated by the State to control the trading of metals and minerals, and chemical products, until recently.

If these two are too outstanding for common players to follow, there are medium-sized, "grassroots" successes.

Xiamen C&D Inc, a trader of light industrial products, textiles, machinery, chemicals and packaging materials, posted a net profit growth of 90.85 per cent to 163 million yuan (US$19.7 million).

The company, based in East China's Fujian Province, never gave up the advantages it had accumulated in the trade sector, and revved up efforts to expand imports and exports.

Meanwhile, it cautiously invested in the exhibition sector in 2003, and has started to gain profits.

Source: China Daily