DRINKS giant Diageo has highlighted the continuing challenge facing Scotch in China as it saw its current year sales decline widen in its most recent trading quarter.

The Johnnie Walker and Guinness producer cited tough conditions in emerging markets as organic net sales dropped by 0.7 per cent in the third quarter. Organic net sales were down 0.3 per cent in the nine months ended March 31.

The share price dropped by more than 3.5 per cent as one analyst declared sales had failed to meet expectations in each of its trading regions.

But there is no sign of the distiller scaling back its ambitions in China, where it launched the luxury Haig Club single grain whisky with David Beckham, and added a third Johnnie Walker House in China in Chengdu.

In Asia Pacific, which covers the important Chinese market, Diageo said sales were down six per cent in the third quarter - a showing "broadly in line" with first half results. At that stage it said ongoing anti-extravagance measures in China - in addition to economic strife in Russia - were continuing to limit demand for its brands.

The decision to reduce inventory levels means sales are still being affected across South East Asia, the company added.

The challenge in China was recently underlined by the Scotch Whisky Association, which reported that exports to Singapore tumbled by 39 per cent to £201m in 2014. Singapore, the third most important market for Scotch by value, is a major gateway hub for exports to China.

Diageo said it did not comment on individual brands at quarterly updates, but away from Scotch it pointed to the recovery of its baijiu business in China.

Baijiu is the most widely consumed local spirit in China, and having previously dragged Diageo's growth in the market, its Shui Jing Fang brand recovered to drive net sales by 13 per cent over the nine months.

In the US, Diageo's biggest market, organic net sales edged up 0.2 per cent over the nine months, with growth picking up to 0.9 per cent in the three months ended March 31. However the growth slower than expected.

Reported net sales in the US grew by 4.6 per cent, with Canadian whisky Crown Royal Regal Apple credited with driving the improved performance in North America.

But the improving fortunes of Smirnoff Red vodka in the market was offset by the "weakness" of Captain Morgan rum.

Diageo reported "high single digit sales net sales decline" in Britain, caused by a tough comparison with last year when an anticipated rise in excise duty had brought sales forward into the third quarter. Net sales in Europe fell by 0.5 per cent in the nine months to March 31, widening to a 1.3 per cent fall in the most recent quarter.

Elsewhere, the company reported a stronger performance in Africa, as anticipated, with net sales climbing 6.2 per cent in the first nine months of the year. This includes a steady improvement in Guinness in Nigeria - a major market for the famous stout.

Net sales in Latin America and the Caribbean were down 3.3 per cent over the nine months and by 10.3 per cent in quarter three, as currency volatility curbed consumer demand.

Lewis Sturdy, dealer at London Capital Group said: "Diageo has its work cut out to live up to its slogan for Guinness for strength after sales for all its regions missed market estimates.

"There was no froth on this whisky to beer maker performance from Diageo, especially compared with SABMiller which turned in strong Asia Pacific growth while Diageo spluttered with a six per cent decline."

Diageo chief Ivan Menezes said: "Our performance in the quarter reflects continued tough conditions in the emerging markets and subdued consumer demand in some developed markets. However it also reflects the actions we have taken to ensure we are building a stronger business.

"Of key importance is that depletions continue to outpace shipments as we embed our sell out culture.

"In addition, our decision to destock some wholesale channels in South East Asia and West LAC (Latin America and Caribbean) will improve our ability to track consumers and customer trends and reduce future volatility."

Shares in Diageo closed down 70.5p, or 3.58 per cent, at 1896.5p.