China's industrial profit shrank by a large margin in the first half of 2005 while its national economy grew 9.5 percent over the same period last year.

According to data from the State Development and Reform Commission, profit in China's major industrial enterprises climbed only 19.1 percent in January-June period, 22.5 percentage points lower over the same period last year.

The loss-making firms reported a loss of 107.5 billion yuan (13.25 billion US dollars) in the first six months, 59.3 percent higher year on year and the highest since 1999.

However, the profit of raw material suppliers was amazingly high. The coal mine, non-ferrous metal, metallurgy and petroleum industries enjoyed a total profit of 300.5 billion yuan (37 billion US dollars), accounting for 89.2 percent of the newly-added profit of the whole industry.

"The drop in profit is within our expectation," said Zhang Wenkui, an expert with the Development Research Center of the State Council. "The index of China's macro-economy and the major industries reached its summit in 2004, following the financial crisis in 1998."

Zhang also pointed out that an increased cost of human resources and management resulted from the optimistic situation last year has not dropped along with profits, which cut profits to some extent.

In the latest edition of the China Quarterly Update, the World Bank expressed worries about China's industrial profit reduction, saying that profit shrinkage may dampen investment.

Zhuang Jian, an economist with the Asian Development Bank, also worried that "profit cuts will have a negative impact on investment, which in turn may drag down the economic development pace".

While Yi Xianrong, a financial researcher from the Chinese Academy of Social Sciences, voiced a different opinion.

He said that the profits cut is related to the recent economic restructuring. China's industrial economic profits are changing from a high-speed growth phase to a phase characterized by stable growth, he said.

"This will phase out some high energy consuming enterprises and less competitive enterprises, creating a sound environment for economic development," said Yi.

Last year, a series of macro-control policies taken by the central government slowed the growth of real estate and other overheated sectors, leading to the sagging of demand for industrial products. However, prices of raw materials remain high as those sectors were less affected by the policies.

Source: Xinhua