DIAGEO has seen sales of Scotch plunge 42 per cent in China amid an official crack down on extravagance in a development that will raise fears about the prospects for a key market for Scotland’s whisky industry.

The drinks giant still managed to post a one per cent increase in total sales of Scotch in the six months to 31 December helped by growing demand for the flagship Johnnie Walker brand in other overseas markets.

However, Diageo’s experience in China will cause unease in Scotland where distillers are grappling with the impact of the slowdown in emerging market economies and the effects of the strong pound.

Diageo said adverse currency movements wiped £125 million off first half operating profits.

Chief executive Ivan Menezes said he favoured Britain staying in the European Union, although he did not think there would be a dramatic short term impact if it left.

"We think it's very important for this country and for Scotch whisky," said Mr Menezes. He described Scotch as Britain’s largest and most successful food and drink export.

On China, London-based Diageo said: “Net sales of international spirits were down 40 per cent, largely due to scotch, which was down 42 per cent as the effects of the government’s anti-extravagance measures on the traditional on trade persist and competition increases in the modern on trade channel.”

The comments highlight the impact of the crack-down on the giving of expensive gifts launched by China’s government in 2013.

They also underline the fact Scotch producers are jockeying for position in a huge country where economic growth has fuelled demands for what are seen as high status western products but the market is in its infancy.

While China is only a small part of Diageo’s business the firm has invested significant effort in trying to build a following for its brands there.

Last week Scotch Whisky Association chief executive David Frost said the Chinese government’s measures could have a lasting impact on the industry and were prompting companies to look at other ways of distributing products.

Mr Frost noted there was uncertainty about the prospects for emerging markets given the global economic backdrop but the mood in the industry was getting better following a challenging period.

The value of whisky exports fell by three per cent in the first six months of last year, to £1.7bn. Exports fell by seven per cent annually in 2014 following a decade of record-breaking growth.

Diageo noted geopolitical developments led to softness in the Middle East business.

However, the firm was pleased by its overall performance in the whisky market, which it regards as a long term growth area.

Scotch accounts for around 25 per cent of Diageo’s sales making the company one of Scotland's biggest manufacturing exporters. It has 50 sites and 4,000 staff north of the Border.

Diageo noted its Scotch sales rose 17 per cent in Brazil, helped by strong growth for Johnnie Walker amid tough economic conditions.

The Scotch business fared well in traditional export markets such as the USA, France and Germany.

Sales of malts increased by 10 per cent globally and by 40 per cent in Britain.

The group, which makes Guinness, grew sales of beer by seven per cent on an underlying basis. The Rugby World Cup fuelled demand in Britain.

Sales of vodka fell eight per cent. Diageo said the decline was largely driven by Cîroc in the US. Smirnoff performed well.

Operating profits fell to £1.72 billion in the six months to 31 December from 1.84bn in the same period in the preceding year.

The company noted the weakness of many currencies against sterling, in particular the euro, the Venezuelan bolivar and the Brazilian real partially offset by the strengthening of the US dollar.

Mr Menezes said trading conditions remain challenging in some markets but Diageo has become a stronger, more competitive business. It continues to generate strong cash flow.

Diageo increased first half pre tax profits by nine per cent, to £1.78bn from £1.64bn, helped by making a £457m gain on the disposal of stakes in brewers in Jamaica and Malaysia to Heineken.

Total sales grew by two per cent on an underlying basis in the first half to £5.6bn.

Charles Huggins, Investment Analyst at Hargreaves Lansdown, said: “Given the downturn in emerging markets, historically a strong driver of growth, Diageo have posted decent results.”