The impressive performance of domestically-listed companies in the first nine months is surely a shot in the arm for the reform of China's stock market.

Yet, for the central authorities who are resolute about cooling down the country's economic growth by reining in investment growth, it is also a cause for concern. Usually, a rise in profitability indicates a strong incentive for players in the market to further expand their businesses by investing more.

Latest quarterly reports released by 1,401 mainland-listed companies show that altogether they made a net profit of 216 billion yuan (US$27.7 billion) in the first three quarters of this year, up 21.9 per cent over the same period of last year.

When compared with a decline of 13 per cent in the first quarter and a meagre increase of only 7.5 per cent in the first half-year, the third-quarter growth of net profit is really explosive.

And given such a rise in profitability so far this year, many listed companies are justified in being upbeat about their yearly results now.

For investors, this could be a piece of good news if market regulators can press listed companies to offer dividends. It has long been a bad habit for Chinese companies to only raise money from the stock market but drag their feet over paying dividends.

After bidding a long-awaited farewell to the old split share structure featuring a huge amount of non-tradable shares owned by the State or legal entities, China's stock market has entered a new development phase.

The share-merger reform that began last year was meant to help revamp corporate governance of listed companies and enhance protection of public investors' interests. And the recent introduction of large and highly profitable Chinese companies into the domestic stock market is also believed to help improve the overall quality of domestically-listed companies.

It is still too early to tell if the jump in listed companies' net profits is a result of those reforms. But such profit growth will definitely add to investors' confidence in the development of the domestic stock market.

For policy-makers who are waiting to see the effect of their tightening measures, however, rocketing corporate profits could mean a strong incentive for enterprises to increase their production capacity.

Though the growth of gross domestic product decreased from 11.3 per cent in the second quarter to 10.4 per cent in the third quarter, domestic enterprises' enthusiasm for investment remains high, if not higher, as profit growth indicates.

Increased profitability will make it more difficult to curb enterprises' investment activities. But meanwhile, it is also a chance for the government to pressure domestic enterprises to undertake the necessary industrial upgrade.

Adoption of energy-saving and environment-friendly technologies and improvement of labour standards will inflate enterprises' cost, at least, for the moment. But rising profits can make them affordable.

(China Daily 11/02/2006 page4)

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