CHINA’S industrial profits surged in the first two months of the year, government data showed yesterday, suggesting companies still have an incentive to invest despite steps by the government to cool the economy.

Industrial firms earned a combined 293.2 billion yuan (US$37.9 billion) in January and February, up 43.8 percent from a year earlier, the National Bureau of Statistics said.

Profits rose 31.0 percent in 2006. In the first two months of last year the growth rate was 21.8 percent.

Steel makers led the charge, with profits leaping 360 percent.

Chemical companies showed profit growth of 80.1 percent, power providers, 66.7 percent, and coal firms, 57.3 percent, a partial breakdown from the statistics office showed.

Oil and natural gas producers bucked the trend, with profits falling 18.6 percent from the first two months of 2006.

Zhao Xiao, a professor at the University of Science and Technology in Beijing, said the strong profit growth could be partly explained by a stabilization of raw materials and energy prices.

If upstream prices for oil, coal and power stay steady and there is no big increase in interest rates or appreciation of the yuan, profits should continue to grow by at least 30 percent, Zhao said.

But he pointed out a downside to the healthy profit growth.

“It’s true that when returns are high in the industrial sector, investment activity by industrial firms is hard to control,” Zhao said. “Strong corporate profitability will definitely be an incentive for investment.”

The authorities have been striving to prevent a reacceleration of capital spending, fearing misguided investment will lead to supply gluts and a new crop of bad bank loans.

The central bank has been tightening monetary policy since last April and government ministries have tightened land-use and environmental protection standards for new investment projects.

A lively debate among economists raged last year about the quality of China’s industrial profits data.

Some said the figures were not worth the paper they were printed on. But others, including the World Bank, concluded that profits have indeed been rising fast and that investment is being rationally channeled to the most profitable sectors.

(SD-Agencies)