China's light industry sector, plagued by over-capacity and poor management, will continue to post heavy losses this year, with the potential of a giant rural market still years away, officials and economists say. Official figures published yesterday showed the output value of the nation's light industrial goods last year was 2.62 trillion yuan (about HK$2.44 trillion), an increase of 15 per cent over 1995, higher than the 13.1 per cent growth in overall industrial output. Of the 34,800 firms in the sector, 42.2 per cent were in the red at the end of November, an increase of 3.47 percentage points over a year earlier, due to poor management, excess national capacity and inability to respond to the market. The China National Council of Light Industry aimed to cut this year the proportion of firms in the red to 39.2 per cent and the level of losses by 20 per cent, the Economic Daily said yesterday. It gave no overall figure for the losses. Benny Chiu, research manager at Hongkong Bank China Services, said the situation would be the same as last year, with an attempt to reduce losses but no major breakthrough expected. 'The fundamental problem is that, despite years of reform, the industrial enterprises have still not developed market-related systems and many do not tailor their products to the market,' he said. 'They also suffer from cost increases outside their control, such as in fuel, power and transport.' Mr Chiu said there were concerns about the threat this posed to domestic brands but this would not lead to increased protectionism, with Beijing continuing tariff cuts. A light industry council official said the government's answer to the surplus was not closures and bankruptcies but promoting mergers between big and small companies and a restructuring of products to meet market needs. The excess capacity was largely the result of new factories approved by regional and provincial governments and new capacity must be strictly controlled, he said. While the urban market was saturated, the rural market of 900 million had enormous potential that would develop gradually as more rural families got the water, power and other facilities they needed to use modern consumer goods. Mr Chiu said the development of this rural market would be a long-term process, with no major change in the next one to two years because of low incomes and a poor distribution system. Thomas Chan, head of the China Business Centre at the Hong Kong Polytechnic University, said there was a surplus of consumer goods in mainland cities, with a household penetration of electrical goods equal to that in some developed countries. 'There has been a fundamental change in China, from a deficit to a surplus economy,' he said. Competition in consumer products was very fierce and profit margins slim, he said. 'The potential is in the rural market. The government should invest more in the rural market,' he said. Consumer products have been one of the major success stories of China's 17 years of reform, with most families in large cities having colour televisions, refrigerators and washing machines. The rapid growth in sales of these goods since the mid-1980s has attracted many new manufacturers into this sector, resulting in the surplus of production and widespread idle capacity.