Many have also been caught flat-footed by a flat yuan exchange against the US dollar so far this year and suffered foreign exchange losses after the yuan's 4 per cent gain last year generated substantial exchange windfalls for investors. The yuan was trading at 6.3729 per US dollar yesterday, compared with 6.3606 at the beginning of this year.

Analysts and accountants broadly said the most worrying question posed by the flood of profit warnings was stark: if industry leaders are struggling, how can the smaller players survive?

'The profit warnings show tough economic and operating challenges,' said Philip Tsai, a Deloitte Touche Tohmatsu partner. 'They signalled uncertainty in the EU and a slow economic recovery in the US, increased labour costs, lower government subsidies and tighter and conservative bank lending policies.'

A Credit Suisse survey found that about 230 of the 1,500 listed companies had issued profit warnings since April. That number was 290 at the onset of the global financial crisis in 2008. In the first two weeks of this month, the number jumped 145 per cent to 49, it revealed.

Castor Pang Wai-sun, head of research at Core Pacific-Yamaichi, said he expected 'a lot of profit warnings' in the next six months as external economies were still weak and it took time for stimulus measures to take effect. 'For state-owned enterprises, manufacturers and the steel sector, which are also plagued with structural problems, the fiscal stimulus may not offer much of a strong or quick solution,' Pang said.

Mainland economic growth slowed more sharply than expected to 7.6 per cent in the second quarter, giving an overall first-half growth figure of 7.8 per cent, prompting Beijing to cut interest rates on July 5, the second time in a month, and encourage investments in infrastructure. The central government is targeting full-year growth of 7.5 per cent.

Pang said the banking sector would be hurt by lower profit as interest rate cuts narrowed their net interest rate margins.

The sector's prospects looked bleak, as economists with HSBC Holdings, Mizuho, Morgan Stanley and Bank of America-Merrill Lynch all expected the People's Bank of China to cut rates again this year, and predicted several rounds of reduction in banks' reserve requirement ratio (RRR), or the amount banks must put aside when lending.

Premier Wen Jiabao, who said last week that slowing growth would persist for some time, is expected to fine-tune monetary measures to stimulate the economy.

Loosening monetary control is desperately needed by the vehicle sector, which has seen two leading carmakers warn of a weaker first half this year. BYD, which counts Warren Buffett as a shareholder, warned of a drop of up to 95 per cent in interim net profit. Separately, Dongfeng Motor, which has A shares listed on the mainland and H shares in Hong Kong, is also challenged with Guangzhou's decision to limit car purchases.

'The recent monetary easing has pumped liquidity into the market while the government is studying a new round of incentives to fund replacement of old vehicles in rural areas,' Guosen Securities analyst John Lu said. 'Wholesale and retail car sales should see growth in the second half of this year.'

Goldman Sachs expected a double-digit decline in average earnings per share for the vehicle sector in the next three years, and said in a report that Beijing had shifted its approach to the sector to emphasising sustainable development from stimulus in the past. It forecast a profit decline for Guangzhou Automobile Group, heavy-duty truck maker Sinotruk (Hong Kong) and heavy-truck component supplier Weichai Power.

But dealers for luxury brands such as Brilliance Auto, which sells BMW, and Zhongsheng Group, which sells Japanese brands and staged a strong comeback following last year's nuclear crisis in Japan that disrupted carmakers' supply chains and manufacturing, should still fare well this year, analysts said.

Champlus Asset Management director Ricky Tam Siu-hing said the steel sector would continue to struggle with overcapacity and dwindling prices.

Angang Steel, the mainland's second-largest steelmaker and based in Anshan in Liaoning province, said it was likely to report a 1.97 billion yuan (HK$2.39 billion) first-half net loss, compared with a 220 million yuan net profit in the same period last year, dragged down by a 12 per cent drop in the prices of steel products.

'We should see an obvious improvement by the fourth quarter as it usually takes about three months for any stimulus or monetary easing policies to take effect,' Tam said. 'However, the prospect of steel companies remains dim as these measures won't help resolve the overcapacity issue.'

Excess inventory also troubles many sportswear retailers on the mainland, with Li Ning warning this year's revenue would contract, China Dongxiang cautioning that first-half revenue would shrink 29 per cent and Peak saying full-year net profit would slump.

'The sportswear sector will remain in a trough for the rest of the year because the whole industry is plagued by the inventory problem,' Piper Jaffray analyst Alfred Ying said. 'The players have accumulated a large amount of inventory in distribution channels since the Olympics in 2008. In the past few years, they have had to buy back the apparel and shoes from their distributors and sell them at a sharp discount.'

He added that these discounts had hurt both profit margins and their brands. More middle-class consumers would choose to buy international brands, he said.

The global economic woes, a 12.4 per cent jump in domestic jet fuel prices in the first half and a stagnant yuan also prompted Air China yesterday to caution that interim profit would tumble at least 50 per cent. This came after rivals China Eastern Airlines and China Southern Airlines earlier warned of a profit decline of a similar extent. Analysts said fuel costs commonly accounted for as much as 40 per cent of airlines' total costs.

In the energy sector, Huaneng Renewables, the mainland's third-largest wind power firm, also said its first-half profit might slump by more than 50 per cent from a year earlier.

Additional reporting by Enoch Yiu

49

The number of listed companies that issued profit warnings in the first two weeks of this month