uarterly reports of major listed trading companies show that they have weathered growing pains due to the opening-up of the trade sector and decreased export tax rebate rates.

But they are still worried that declining profit margins and fiercer competition might squeeze their operations.

However, State-owned heavyweights remained sanguine during the past few months because of their monopolies and growing raw material needs in China.

Sinochem, China National Cereals, Oils and Foodstuffs Import and Export Corp, and China Minerals and Metal Corp (China Minmetals) all reported robust performance during the first quarter.

Among them, China Minmetals Development, listed arm of the country's biggest metal and mineral trader China Minmetals, registered a 350 per cent profit rise to stand at 295 billion yuan (US$35.67 million).

"It is no surprise that the big three are still bullish," said Fan Ying, a trade expert at Beijing-based Foreign Affairs College. "For one thing, the goods they are trading chemical products, grains, metal and mineral are mostly subject to State trade."

"And the pressing shortages of raw materials such as steel, iron ores, copper and cotton also pushes their businesses," she said.

Small and medium-sized trading firms which are conducting imports and exports of general commodities, also witnessed rises in revenue and profits, as painstaking efforts start to pay off.

Most of them opted to diversify instead of simply conducting imports and exports.

They are now enjoying steady jumps from the profit engines, which in many cases have offset sluggish trading businesses.

Zhejiang Orient Group Co, a Shanghai-listed professional trading group, has plugged into the profitable real estate market, which has helped it earn US$4.2 million in the first quarter.

And the company is strengthening market research in a bid to find new profit engines, it said in its quarterly report.

Professional trading firms have been keen to establish their own production bases instead of acting as go-betweens, as they have fully realized that their former clients are now also allowed to trade.

Jiangsu Sainty Corp, an apparel and machinery trader based in China's second largest trading province Jiangsu, has made progress in this regard, establishing five manufacturing bases domestically.

More than 20 per cent of the exports of the company are self-produced.

"To tap the surging trade industry is surely a wise way to slash costs and reduce risks," Fan said.

Some trading players are still sticking to the "open sesame" policies that have kept them profitable: expanding exports at low prices.

Although the strategy is bucking national demands to improve export quality, there is still money to be made.

Nanjing Textile Import and Export Co Ltd, a Shanghai-listed textile trader, wields a banner of "trying every means to expand business, thus to propel profits."

Its consistent efforts in buoying trade volume helped the Jiangsu-based company notch up a first quarter revenue of 1.85 billion yuan (US$22.4 million) and a net profit of 13.8 million yuan (US$1.67 million), up 61 per cent and 127.7 per cent on yearly basis respectively.

"Temporarily, the strategy is still effective in China, especially in the sectors like textile, machinery and toy production," Fan said.

In contrast, a number of trading firms gave a higher priority to high added value and began to optimize export composition instead of increasing exports quantitatively.

Jiangsu Holly Corp is making such a shift.

The company has initiated a profit-oriented policy and is optimizing its business complex.

Although the trader exported 7.75 per cent less in the first quarter to US$4.19 million, its pre-tax profit rate increased by 16.72 per cent.

"The optimization of our business structure will lay a solid ground for further development," the company said in its quarterly report.

"Although such companies are currently suffering a slowdown in business growth or even seeing profit decline," said Fan, "their future is rosy."

"Chinese enterprises should overhaul their quantity-oriented export strategy to a quality-dominated one," she said.

The better-than-expected performance of the trading firms in the first quarter soothed previous worries that a competitive and open trade sector could put them in the red or dramatically drag down their profits.

Declining profit rate

However, trading companies say they are haunted by a downsized profit margin because of a combination of factors.

"It is a tough job to conduct imports and exports in today's market," said Qi Jianxi, board secretary of China Technological Import and Export Co Ltd, traditionally a strong trader of electronics and machinery products. His words resonate among traders in China.

A number of trading players named decreases in export tax rebates as a key element that makes trading businesses less profitable.

"Some trading firms depend on the rebates, which are the backbone of their profit," Fan said.

Wu Jiming from a textile trading firm said that the 4 percentage points rebate drop was like "adding frost to snow," using a Chinese phrase to describe a worsening situation.

"We have already had to bear the pressure of a sustained high cotton price," he said.

Tan Fang, a businesswoman from a Jiangsu-based bicycle maker and exporter, told China Daily that the tax rebate cut made her company less competitive in the international market.

"Our clients tend to think twice as we raised the prices of our baby carriers by 4 per cent to offset the profit losses because the tax rebate changes," she said.

"They complained, and began to seek alternative suppliers in other countries."

China's export tax rebate rate decreased from an average of 15.11 per cent to 12.11 per cent.

The move inhibited the export incentive of companies and partly contributed to the four-month trade deficit in China.

Another factor that narrows the profit margin is the price jumps of the raw materials, traders say.

"We had to once more raise the price of our products because of the soaring price of steel and iron," Tang said, "This, as a matter of fact, makes our clients all the more grumpy."

"The price jump has also greatly affected the production capacity of our companies," Tan said. "We find it's all the more difficult to buy steel and iron, the primary raw material of our products."

Textile and apparel traders have encountered a similar situation.

Jiangsu Sainty Corp saw its pretax profit rate decline to 9.14 per cent in the first quarter. The figure stood at 11 per cent in 2003.

Meanwhile, newcomers have relentlessly split market share, leading to a profit rate decline.

Many more manufacturers have been allowed to conduct trade since the Ministry of Commerce, China's trade watchdog, lowered capital requirements in September 2003 from 8.5 million yuan (US$1.03 million) to 500,000 yuan (US$60,460).

At the Chinese Export Commodities Fair (CECF) in April, manufacturing companies for the first time outnumbered trading firms, also a worrisome signal for purely trading firms.

The fair, held in South China's Guangdong Province annually, is one of the largest trade fairs in China, attracting exporters from across the nation, and is seen as a barometer of China's trade sector.

Private trading firms are also turning out to be a major force in this already-competitive and less lucrative market.

Private firms have been allowed to run international import and export businesses on a trial basis since 1999. Since then, private trading firms have mushroomed across the country.

East China's Fujian Province is a good example of this, with the establishment of 312 private trading enterprises from January to April this year.

Among these, 307 companies have a registered capital of less than 1 million yuan (US$122,000).

Shareholders of a majority of the firms are former employees of State-owned trading companies.

"It is natural that the profit margin drops for each player," Fan said: "The more players joining the market, the less profit one can grab."

"Resources of the trade sector are undergoing a redistribution," said Fan.

"The process could be accelerated after the foreign traders make big forays into China," Fan said, hinting that local trading firms are to meet a new wave of growing pains.