by Giles Hewitt

BEIJING, Jan 27 (AFP) - China's haemorrhaging state sector mounted up more than seven billion dollars in losses in 1996, as regional protectionism helped keep 43.7 percent of state firms in the red, a senior economist said Monday.

Total losses were put at 61.6 billion yuan (7.4 billion dollars), up nearly 30 percent from 1995, said Qiu Xiaohua, director of the China Economic and Analysis Centre under the State Staistics Bureau (SSB).

While the national economy managed a soft landing last year, with economic growth of 9.7 percent and inflation at six percent, Qiu said a significant number of enterprises still forecast a gloomy 1997.

The Analysis Centre's survey of 10,000 firms involving in-depth questionnaires sent to targetted companies at the end of each quarter showed that 25 percent of enterprises felt the economic climate would worsen in 1997.

At the same time, 46.3 percent of those surveyed in the last three months of 1996 said competition in the domestic market had become too intense as the country continued its transition to a market economy.

"Regional competition within China is far more intense than on the international market," Qiu said, stressing, however, that it was not the healthy competition of a free market.

"There are major problems of resource allocation, irrational investment, regional protectionism and product duplication," Qiu said.

China has tens of thousands of randomly located small-scale firms that possess limited production capacity and often collapse after a year or two of struggling in the market.

While their period of survival is short, their number is so large that they consume vast quantities of scarce capital and thus restrain the growth of potentially more vigorous large-scale enterprises.

Qiu pointed out that every Chinese province apart from Tibet had its own television manufacturing base, while 23 provinces manufactured automobiles, washing machines and refrigerators.

"In many cases, the production capacity is relatively small scale, which means the manufacturing cost and therefore the purchase price of the goods will be higher," Qiu said.

The resulting inability of many small- and medium-scale state firms to compete on the domestic market means they have to rely on unhealthy, and often illegal, protectionist policies adopted by their provincial authorities.

Qiu urged the government to strengthen its micro-economic controls in 1997 to ensure that resources were allocated where they were most needed and most efficiently used, and to curb protectionist sentiments between different regions.

He also unveiled figures that pointed to a possible upturn in the fortunes of state-run firms in the last quarter of 1996.

Profits among state enterprises in the black plunged 88 percent in the first half of last year compared to the same 1995 period, but the decrease eased to 20 percent in the second half with the final quarter actually showing a 14 percent profit rise.

"The figures suggest that efficiency is improving and we believe that trend will continue in 1997," Qiu said.