(China Daily)
Updated: 2008-03-29 10:06

A sharp increase in domestic enterprises' profits used to be hailed as evidence of China's improved economic efficiency. However, as the country presses ahead to prevent overheating, a reduction in profitability should be accepted as the necessary price of cooling investment growth, but not necessarily a justification for lower efficiency.

China's major industries saw their profits increase 16.5 percent from a year earlier, during the first two months of this year. The figure marks a considerable deceleration from the 36.7 percent growth in profits in the first 11 months of last year.

Such a slowdown in profit growth is due to the impact of weakening external demand and the effects of the severe winter weather on enterprises. On one hand, the ongoing recession in the United States has reduced demand for Chinese exports, which are more expensive because of the appreciating Chinese currency.

As a result, China's net exports plunged from $19.5 billion in January to just $8.6 billion in February. The initial figure was the first monthly trade surplus under $20 billion since last May.

On the other hand, the severest winter weather in 50 years in central and southern China has disrupted production and deliveries, at the cost of domestic enterprises.

Of course, rising domestic prices are also biting deep into enterprises' profits. China's consumer inflation accelerated to a 12-year high of 8.7 percent on the back of soaring food prices, while the producer price index rose 6.6 percent in February due to surging crude oil prices.

Under such circumstances, some industrial sectors with thin profit margins will be hit harder than others. Their calls for government help are understandable, but policymakers should not drift away from the tightening measures they currently adopt.

A narrowing profit margin can work as a natural check on excessive investment. Though the government has adopted a lot of fiscal, monetary and administrative measures to rein in investment growth, the country's fixed asset investments remain strong and will rebound as long as the country's macroeconomic controls ease. Yet, slower profit growth will make investors think twice before they throw their money into new projects.

The suffering of some unprofitable enterprises does demand close attention from policymakers, especially in labor-intensive sectors.

But if that means the elimination of businesses that cannot meet the country's higher labor and environmental standards, policymakers should prepare to help the workers, not the enterprises, to find new jobs.