TO THE POINT: China's consumption sector makes year-on-year gains, but more efforts are needed to polish its long-term prospects. China is on track to replace Germany as the world's biggest exporter though clouds gather over recovery efforts in the trade sector. International venture capital sets its eyes on Chinese video sites, which aim to turn losses into profits. Telecom equipment provider Huawei leaps past foreign competitors on the back of technological advances. Industrial enterprises bask in the glow of economic recovery as they begin to rake in juicy profits once again.

By HU YUE

Consumer Efforts

If it is true China has fully shaken off the economic downturn, consumption deserves much of the credit.

Retail sales for consumer goods in November 2009 increased 15.8 percent from a year earlier, a sign that consumers are stepping up to fill in the gap left by plummeting exports.

Nevertheless, long-term prospects for the sector may be less promising. Governments and enterprises purchase contributes 66 percent of the increases in retail sales, while households account for the remaining 34 percent, said the Chinese Academy of Social Sciences in a December report. The finds are evidence that households are still unwilling to relax their austerity.

For decades, thrift has entrenched itself as a common value as Chinese residents save for the future. The recent economic recovery and stock market gains might make savings somewhat less urgent, but will not simply eliminate the desire to save altogether.

Since repairing the social safety net will be a protracted effort, the job of spurring consumption has been placed mostly in the hands of powerful policy stimulus measures, which have sparked a housing and automobile buying rush.

But after purchasing a car or home, consumers are likely to become even more hesitant toward daily consumption as they may have mortgages and other bills to pay, said Huang Yasheng, an economics professor at the Massachusetts Institute of Technology, in an interview with the Beijing-based Global Entrepreneur magazine.

"It is imperative for policymakers to replace the temporary stimulus with more permanent incentives, such as wage growth and reforms to the health care and pension systems," Huang said.

Export Champion

In the final months of 2009, China was set to overtake Germany as the world's top exporter, a reflection of the competitive edge of Chinese goods, said Zhong Shan, Vice Minister of Commerce, in a statement on December 27.

After taking a hit from the financial meltdown, China's exports were caught in a tight spot, though government stimulus provided some respite. Exports in the first 11 months of 2009 fell 18.8 percent year on year, according to data from the Ministry of Commerce.

But export woes of other countries were even more severe, paving the way for China to win a larger piece of the shrinking global trade pie. Zhong expected China to account for 9 percent of all global exports in 2009, an increase from 8 percent in 2008.

A recent State Information Center report forecasts a rise in exports of about 6 percent in 2010, marking a turnaround from the slump in 2009.

Waving aside the optimism, however, Zhong said it is still too early to predict prospects for 2010 as trade protectionism still looms as a potential threat to the export market.

By November 3, 2009, China suffered 101 trade remedy investigations from 19 countries and regions involving nearly $11.7 billion in exports.

Domestic exporters now must upgrade their technologies and products in order to move up the value chain, Zhong said.

Online Ad Frenzy

With foreign investors providing financial support, Chinese video websites are gearing up to jump out of the red.

Online video viewing is experiencing a rise in popularity as young Chinese look for a wider variety of programs than are offered on television. As of the end of June 2009, China had 338 million Internet users, two thirds of whom watched videos online, according to a survey by the China Internet Network Information Center. The success of video websites attracted advertisers willing to dole out large sums of cash to have their products posted on sites frequented by a high volume of netizens. International venture investors have since started pouring money into the Internet sector of China in search of the next Youtube.

The most-visited Chinese video-streaming site, Youku.com, for instance, raised $40 million from investors Brookside Capital Partners, Sutter Hill Ventures, and Maverick Capital in December 2009, bringing its total amount of private equity funding to $110 million. Meanwhile, the video-sharing site Tudou.com reportedly completed its fifth round of venture financing, raising $400 million.

However, the seemingly buoyant sector continues to spill red ink largely due to heavy broadband access costs, according to a report by the Shanghai-based consulting firm iResearch. The video sites have also started paying higher prices for professional content as they try to dismiss criticisms about hosting pirated videos uploaded by users.

In an attempt to diversify its revenue sources, Youku launched a beta mobile portal to tap the 3G mobile market in 2009 while Tudou focused its investments in original program manufacturing.

Gary Wang, CEO of Tudou.com said the sector will maintain torrid growth in the next three to four years, adding his firm will break even in 2010.

Telecom Giant's Success

While global telecom equipment vendors continue to suffer as carriers cut back on costs, Huawei Technologies Co. Ltd. is staging a swift, defiant uptick.

The privately owned Shenzhen-based company was selected by Norway's largest telecom operator, Telenor, to supply its new Norwegian wireless network. The contracts exemplify how Huawei is moving beyond China and other emerging markets to tap into Europe and the United States.

According to data from the U.S. market research company Dell'Oro, Huawei's global market share almost doubled to 20 percent by the end of September 2009 from one year earlier, making the company the second largest supplier after Ericsson.

While standing out thanks to low-cost supplies in its early days, Huawei now relies more on its technological edge to compete with foreign rivals, said Zhang Yu, a senior analyst with the Beijing-based consulting firm BDA China Ltd.

Clear evidence of its innovative competence is the SingleRAN (single radio access network), a wireless network that allows mobile operators to save costs by operating separate networks.

Despite a significant leap in sales revenues, Huawei's profit margin was 6.28 percent in 2008, a sharp decline from 19 percent in 2003. The drop was due in part to a rise of the renminbi against the U.S. dollar and other currencies that led to a $776 million foreign-exchange loss for the company.

Meanwhile, rapid increases in accounts receivable are mounting pressures on Huawei's balance sheet, forcing the company to take on short-term debts to support business expansions.

Industrial Prospects

As the Chinese economy gains momentum, the industrial sector, which fell into a downward spiral in 2009, is regaining its lost strength.

According to the National Bureau of Statistics, profits of major industrial enterprises in the first 11 months 2009 rose 7.8 percent year on year, 2.9 percentage points higher than one year earlier. During the same period, the industrial output increased by 10.3 percent, maintaining the steady expansion momentum.

The profit advance was led by private manufacturers, whose earnings jumped 17.4 percent year on year to 684.9 billion yuan ($100.3 billion) in the first 11 months of 2009. Profits of foreign-invested companies (including companies set up by Hong Kong, Macao and Taiwan in the mainland) gained 16.9 percent to reach 751.1 billion yuan ($110 billion), while profits of state-owned firms declined 4.5 percent to 751.4 billion yuan ($110 billion) due to losses incurred by steel makers and oil explorers.

The industrial recovery comes sooner and stronger than expected, said Xu Jian, an analyst with the China International Capital Corp. Ltd.

The growth outlook for manufacturers will intensify in 2010 since a time lag can be expected before the economic recovery filters through the enterprise sector, he added.