TO THE POINT: Ignoring the economic recovery, the stock market bleeds as investors speculate more monetary tightening policies. In the first quarter of this year, the manufacturing sector shines, though cost inflation looms large, and listed companies also report handsome profits. Automakers turned out more wheels as sales picked up in April. Shrugging off the impact of the tainted formula scandal, dairy makers turn loss into profits in 2009. Foreign credit rating agencies take root in China, casting an ominous shadow over financial interests of the country.

By HU YUE

Stock Market Woes

The benchmark Shanghai Composite Index has retreated more than 12 percent so far this year as lingering concerns over tightening monetary policies keep the mood subdued. 

On May 4, the first trading day after the central bank announced a reserve requirement ratio hike for the third time this year, the Shanghai Composite Index dropped by 1.29 percent to a seven-month low. 

Unlike mature markets where institutional investors focus on fundamentals, the fledgling Chinese markets are dominated by retail investors driven by speculation. As a result, government policies have easily tipped the balance of the market to the bearish side, said Pan Xiangdong, an analyst with the Everbright Securities Co. Ltd. 

Investors' jitters are rooted in the fear that more aggressive tightening moves are drawing near though the latest hike in reserve requirement ratio possibly delays an interest rate adjustment, said Pan Xiangdong.

Worries also abound that corporate profit growth could slow down this year, making stock valuations less attractive, added Pan.

With a bear market awakened from its slumber, the question on investors' minds is when it will start to bottom out, the prospect of which is not so promising. 

Among the pessimists are the stock funds, which held back on stock exposure, leaving an average of 78 percent of their funds in stocks in April, down from 90 percent by the end of 2009, said a report by the Beijing-based Desheng Fund Research Center.

Though in part intended to meet redemption requests, the funds' sell-off has only added to liquidity concerns clouding the market, said Pan. 

Manufacturing Strength

If China is one of the few countries in the world that shows an economic pulse, the manufacturing sector deserves much of the credit. 

The Purchasing Managers' Index (PMI), a gauge of manufacturing activities across the nation, came in at 55.7 percent in April, up from 55.1 percent in March and 52 percent in February, said the China Federation of Logistics and Purchasing (CFLP).

A reading above 50 percent indicates expansion, and this was the 14th straight month the index had registered above the threshold.

Among the 20 sectors surveyed by CFLP, only four reported an index under 50 percent, including non-ferrous metal, tobacco, pharmaceuticals and petroleum processing and coking.

The continued growth in manufacturing provides fresh evidence of vibrant domestic demands, which have effectively made up for a fall-out in exports, said Zhang Liqun, a CFLP analyst.

But pressures facing enterprises are building up as the prices of raw materials creep higher, said Zhang.

Corporate Growth

The net profit of China's 1,837 companies listed on the Shanghai and Shenzhen bourses hit 345.03 billion yuan ($50.52 billion) in the first quarter, witnessing both year-on-year and quarter-on-quarter rises, according to a report of the Shanghai Securities News.

Industrial and Commercial Bank of China Ltd., the nation's biggest lender, raked in the most with a net profit of 41.55 billion yuan ($6.1 billion) in the first quarter. China Construction Bank Corp., the second largest lender, and PetroChina Co., the country's largest oil producer, followed, both earning a net profit of more than 30 billion yuan ($4.4 billion).

Papermaking and printing companies, in particular, fared well, with their net profits up around 500 percent year on year. 

Auto Blossoms

China's auto market continues to burst with vitality, drawing strength from a booming economy and strong consumer confidence.

Exports aside, sales of domestic-made vehicles hit 1.39 million in April, up 9.8 percent from March and 40 percent from the same period last year, said the China Automotive Technology and Research Center (CATRC).

Domestic automakers produced 1.53 million vehicles in April, down 9.82 percent from March but still up 35.18 percent compared with the same period in 2009.

Despite a demanding comparison base last year, in 2010 the market will bask in the glow of growing enthusiasm of buyers, promotional offers of automakers as well as the debut of many new models at the 2010 Beijing International Automobile Exhibition held from April 23 to May 2, said Zhao Hang, Director of CATRC.

Zhao estimated that sales of domestic-made vehicles can reach 15 million this year.

No Sour Milk Market

For China's dairy industry buckling under strains of the tainted formula scandal, greener pastures lie ahead.

China's dairy makers have staged a swift return to profits. The best performer was Mengniu, which raked in a handsome profit of 1.12 billion yuan ($164 million) in 2009, followed by Yili's 648 million yuan ($94.9 million) and Bright's 122 million yuan ($17.9 million). Only Sanyuan spilled red ink—a loss of 128 million yuan ($18.74 million)—in part because of costly efforts to rework the distressed assets acquired from Sanlu, the culprit of the scandal.

The magnitude of the bounce-back was a reason to celebrate given how heavily the health scare in 2008 pinched market confidence. On top of the reputation crisis came the economic downturn that promoted consumers to tighten their wallets.

It seems the industry has all but recovered, though the profit growth in part came from market shares left by bankrupt Sanlu, said Chen Yu, a senior analyst with Beijing Orient Agribusiness Consultant Ltd. 

The long-term prospect is also turning around as recovery-boosted income delivers a strong perk for dairy demands, he said.

But one cause for concern was a lack of raw milk as dairy farmers cut back on supplies in wake of the Sanlu incident, said Chen.

Meanwhile, competition is heating up as foreign brands rush to cash in on the China milk market and economic, he added.

Foreign Rating Control

While China's financial industry booms, its credit rating industry, an integral component of the market, remains in its infancy.

Foreign agencies command more than 67 percent of credit rating market shares in China and scooped up interests in three of the four biggest Chinese agencies, posing a threat to the financial security of the country, Zhu Guangyao, Associate Minister of Finance, told Economic Information Daily.

In 2006 the Moody's Investor Service acquired a 49-percnet stake in Beijing-based China Cheng Xin International Credit Rating Co. Ltd. while the U.S.-controlled Hong Kong Xinhua Financial Network Ltd. obtained a 62-percent interest in Shanghai Far East Credit Rating Co. Ltd. One year later, the Fitch Rating bought a 49-percent stake in Lianhe Credit Rating CO. Ltd. and took over its management rights. Only the Dagong Global Credit Rating Co. Ltd. has rejected all foreign bids, holding on to a path of development on its own.

China learned a painful lesson from heavy reliance on foreign rating agencies. In 2003, the Standard & Poor's rated 13 Chinese banks as junk grade. This put the banks in a weak bargaining position in negotiations as they looked to introduce foreign strategic investors.

Zheng Xinli, Vice Executive Director of the China Center for International Economic Exchanges, also said that there is growing need to foster domestic rating agencies and have a greater say in global financial businesses.