PROFIT declines for hundreds of Chinese companies in the first half may increase pressure on the government to reduce corporate taxes as part of efforts to stem the economy's slowdown.

Net income declined from a year earlier for more than half of 760 listed companies to report results, worse than in the first six months of 2009, Societe Generale SA said last week. Credit Agricole CIB sees tax cuts as a likely policy tool.

The breadth of the declines raises the urgency for Premier Wen Jiabao to move beyond boosting investment and monetary stimulus in dealing with the worst deceleration in the world's second-largest economy since the global financial crisis. Wen this month repeated his call for structural tax changes and the State Council may be poised to announce measures to support growth, the China Securities Journal reported on July 16.

"The stakes are very high - it's about the corporate world's confidence in the whole economy," said Yao Wei, China economist at Societe Generale in Hong Kong. "The positive sign is that the central government has realized the problem and is talking more frequently about the issue."

Tax cuts are among "fundamental changes" that can't wait much longer, Yao said.

The government may loosen policies through tax cuts as well as fiscal measures and reductions in banks' reserve requirements, Dariusz Kowalczyk, senior economist and strategist at Credit Agricole in Hong Kong, said on July 9.

Private investment

Vice Premier Li Keqiang said this month that the government should implement structural tax reductions and encourage and guide private investment, Xinhua news agency reported.

Corporate income tax is 25 percent and the nation also has a 17 percent value-added tax.

Among the Chinese companies reporting profit declines, telecommunications equipment maker ZTE Corp said first-half net income may have fallen as much as 80 percent from a year earlier on reduced investment income, foreign-exchange losses and delayed contracts.

Air China Ltd, the world's second-biggest carrier by market value, said profit may have declined more than 50 percent on weaker demand and higher fuel costs. China Southern Airlines Co and China Eastern Airlines Corp forecast similar slumps.

Sany Heavy Industry Co, China's biggest maker of excavators, has lowered its annual unit-sales forecast, Vice Chairman Xiang Wenbo said on July 11. A "meaningful recovery" in demand for earth-moving equipment may not be visible until the first quarter of next year, Xiang said.

Share sale put on hold

Sany, China's biggest machinery maker, is postponing a US$2 billion share sale in Hong Kong after struggling to attract investors, two people with knowledge of the matter said.

"Many people think our industry will see a substantial decline, which I think is reasonable," Xiang said, adding that the government's past stimulus measures had provided a growth opportunity that was "abnormal" and "irrational."

A government report last month showed industrial companies' profits fell for a second month in May, dropping 5.3 percent from a year earlier to 390.9 billion yuan (US$61 billion). Revenue in the first five months rose 11.9 percent to 34.5 trillion yuan. The statistics bureau releases June data on Friday.

Depressed prices

"Despite the rapid disinflation of input costs like raw materials, profit margins continued to shrink as weakened demand has depressed finished goods prices while some cost components such as wages have remained sticky," UBS AG analysts led by Wang Tao said in a report last week. They were commenting on industrial companies' profits, and said that net income is likely to rebound in the fourth quarter as growth accelerates on additional policy support.

Some US companies doing business in China indicated this month that they're struggling with the deceleration of economic expansion.

Dell Inc Chief Executive Officer Michael Dell said on July 17 that the computer maker is seeing a slowdown. Yum! Brands Inc, owner of the KFC and Pizza Hut restaurant brands, reported second-quarter profit gains short of analysts' projections as labor and commodity costs increased in China.

Gao Shanwen, chief economist for Essence Securities in Beijing, said tax cuts are "more symbolic than serious." More government spending is necessary to help the economy, even as corporations bear the brunt of the slowdown, said Gao, who previously worked for the People's Bank of China and the State Council's Development Research Center.

Room to enlarge deficit

China has "relatively large" room to boost fiscal spending to support economic growth and can allow the fiscal deficit to widen if necessary to a size similar to 2009's gap, said Zhang Peng, a Beijing-based researcher with the Fiscal Research Institute at the Ministry of Finance

Premier Wen said in March that the government plans a deficit of 800 billion yuan this year; the shortfall was 950 billion yuan in 2009, ministry data show.

Even with the deceleration, China is likely to "continue to grow very well" and leaders will make the right decisions in managing the economy, David Cote, chief executive officer of Honeywell International Inc, said on a July 18 conference call, according to a transcript. "You should bet on them, not against them," he said.

Elsewhere in the Asia Pacific region, import prices in Australia probably rose 1.5 percent in the second quarter from the prior period, while export prices were unchanged, according to a Bloomberg News survey ahead of a government report.

In Europe, Germany's producer prices may have declined 0.2 percent in June from the previous month, based on the median estimate in a Bloomberg survey of economists. It would be the second consecutive drop following four increases.

Mexico's central bank is forecast to leave its benchmark interest rate unchanged at 4.5 percent, where it's been since 2009. Canada will report a 1.7 percent increase in the consumer price index from a year earlier, according to analysts.

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