Standard & Poor's Asia-Pacific Equity Research predicts a decline in earnings growth for China's listed companies in 2005.

The research agency said in a recent report that it expects the earnings per share growth of Chinese mainland's listed companies will slow to 12 per cent next year from an estimated 20 per cent in 2004.

Even materials companies are unlikely to get the same boost from high raw material prices as they enjoyed this year, said Lorraine Tan, director of Asian equities at Standard & Poor's Asia-Pacific Equity Research.

Expected slowing global economic growth and continued weakness in the US dollar will bring rising risks for China's external sector, she said at a briefing of the agency last week in Beijing.

Some industries will have excessive capacity next year, she said.

The potential for further interest rate hikes is also haunting the market.

China increased interest rates for the first time in nine years in late October which, many economists say, means the country has entered a new "interest rate raising cycle."

In addition to the rate hike, the Chinese Government adopted a series of other macroeconomic control measures this year to cool down the economy. These measures, which include restriction on investments in certain areas and restriction on converting farmland into industrial use, will take further effect next year, said Tan.

Moreover, some large companies will launch initial public offerings in the domestic A-share market next year. The pressure of market expansion may dampen sentiment for a while and affect market liquidity, she said.

However, there are still many positive factors for the market, she added.

Strong economic growth in China will continue to drive international interest in Chinese stocks.

Standard & Poor's predicted China's gross domestic product growth to slow down moderately to 8 per cent in 2005, from an estimated growth of more than 9 per cent this year.

But the growth is still robust and with the government's tightening measures, the Chinese economy will reach a soft-landing.

Positive growth should continue to stimulate domestic consumption, so retail sales will maintain double-digit growth, said Tan.

Moreover, as more Chinese companies are engaged in mergers and acquisitions with overseas companies, more domestic organizations will become better known by global investors, with examples such as recent high profile bids for global entities like Noranda and IBM's PC manufacturing business by Chinese companies Minmetals and Lenovo respectively.

Source: China Daily