TO THE POINT: Chinese banks reap juicy returns as interest income widens. The manufacturing sector warms up, as evidenced by the PMI's continued growth. Foreign trade regains its lost ground and is estimated to grow 25 percent this year, but the road ahead is filled with challenges. Consumers click away as China's e-commerce sector booms with a transaction volume totaling $180 billion in the third quarter this year. International hot money remains a concern since an increased amount may be pouring into China.

By HU YUE

Bank Profits

The banking industry of China is getting into full swing, but not without worries from investors and experts.

In the first three quarters this year, the country's 16 listed commercial banks raked in combined net profits of 529.3 billion yuan ($79 billion), surging 34 percent from a year ago. Of this, around 74 percent went to the "big four" lenders—the Industrial and Commercial Bank of China (ICBC), China Construction Bank, Bank of China and Agricultural Bank of China (ABC).

ICBC retained its position as the world's most profitable bank by generating 127.8 billion yuan ($19.1 billion) in net profits in the January-September period, soaring 27.2 percent year on year. ABC, the last of the "big four" to go public, earned 70.2 billion yuan ($10.5 billion) in the first three quarters, a growth of 36.3 percent from one year earlier.

Total domestic assets of Chinese banks increased 20.4 percent year on year to 90.6 trillion yuan ($13.1 trillion) by the end of September, said the China Banking Regulatory Commission.

The growth was largely driven by expanding interest income as their net interest margins widened, said Huang Can, a senior analyst at the China Cheng Xin International Credit Rating Co. Ltd (CCXI).

A cause for concern is the slight slowdown in intermediary businesses as regulations are tightened, he said.

Short-term risks facing the banking industry remain subdued because the government stepped up its handle over housing mortgages and the financing vehicles of local governments, said a report by the CCXI.

But longer-term challenges remain as non-performing loans might rebound in the future, the report said.

Manufacturing Strength

The Purchasing Managers' Index (PMI), a barometer of manufacturing activities, reached 54.7 percent in October, up 0.9 percentage points from last month, said the China Federation of Logistics and Purchasing.

October's figure marked the 20th straight month that the index was above 50 percent. The PMI includes a package of indices to measure manufacturing sector performance. A reading above 50 percent indicates economic expansion.

The PMI's increase signals that the economic slowdown from torrid growth earlier this year will be mild, said Zhang Liqun, a senior researcher at the Development Research Center under the State Council.

Lu Ting, an economist from Bank of America-Merrill Lynch, said that the PMI's rebound since July, after declining for a few months beginning in April, shows the limited impact of the property tightening measures on developers' construction activities, and the government's big push on public housing.

Trade Outlook

The Ministry of Commerce (MOFCOM) on November 1 released the Report on China's Foreign Trade Situation (Autumn, 2010), providing an overview of the country's trade landscape.

After braving serious fallout last year, both imports and exports have returned to a steady growth course.

Looking ahead, foreign trade will maintain a promising course in the coming months as the world economy recoups its strength, said the MOFCOM report.

The report predicts that China's foreign trade will stand at $2.8 trillion in 2010, up 25 percent from the previous year.

In 2011, foreign trade is expected to grow, but at a slower pace given uncertainties such as a stronger yuan (Chinese currency) and simmering trade protectionism.

On September 16, the EU launched an anti-subsidy probe into Chinese-made wireless wide area networking (WWAN) modems, involving around $4.1 billion worth of exports. This was the largest trade remedy investigation China has ever experienced.

"Worse still, recovery of the developed world is losing momentum in part due to a fragile financial industry and the impact of the European debt crisis," the report stated. "Restocking is also slowing down in the emerging economies where the impact of inflation and asset bubbles is taking hold."

Domestically, exporters are coming under heavier cost pressures due to labor cost inflation and price increases for raw materials, said the report. It is therefore necessary to implement further measures to promote exports and encourage imports, especially advanced technologies.

E-commerce Rush

E-commerce in China is burning hot, drawing strength from a robust economy.

The e-commerce transaction volume in the country amounted to 1.2 trillion yuan ($180 billion) in the third quarter, up 6.6 percent from the April-July period, said a recent report by the Shanghai-based iResearch Consulting Group.

B2B remains the most vibrant activity, accounting for 88.5 percent of the e-commerce market. China's B2B platforms raked in combined revenue of 2.51 billion yuan ($374.6 million) from July to September, surging 46.6 percent year on year.

The B2B platforms received growing recognition from enterprises, especially the smaller ones, as foreign trade staged a significant comeback, said the report.

Alibaba.com remains the market leader with a majority 57 percent of the B2B market. The company is also expanding beyond the border. In August, it purchased the U.S. company Auctiva, a third-party software developer for e-commerce websites.

Meanwhile, online shopping experienced a surge as consumers enjoy the convenience of shopping with a mouse click from home. The third-quarter transaction value of online shopping soared 76.9 percent year on year to reach 121 billion yuan ($18.1 billion).

The third-party payment industry also fared well, with its market value skyrocketing 80.5 percent from one year ago to 248.2 billion yuan ($37 billion) in the third quarter.

The government in June ordered non-bank payment service providers to apply for a business license. The policy was expected to create a healthier business environment and steer the sector on a steady path toward growth, said the report.

Feeling the Heat

Hot money may be pouring into China again.

In September, the country's monthly increased foreign exchange reserves exceeded $100 billion for the first time, to reach $100.5 billion, according to the People's Bank of China. It also reported a dizzying 289.5 billion yuan ($43.2 billion) of increased money supply in circulation from foreign exchange inflows.

This has aroused concerns over the influx of international hot money, since the country's trade surplus and foreign direct investment stood at $16.88 billion and $8.38 billion, respectively, in September.

By lowering its interest rates to almost zero, the United States is providing speculators with more cheap credit into emerging markets where the economic uptick offers better returns, said Guo Tianyong, Director of the Research Center of China's Banking Industry under the Central University of Finance and Economics.

In addition, an expected appreciation of the yuan has only added to the appeal of investments in China, said a report by the Chinese Academy of Social Sciences.

Wang Tao, chief economist at the UBS Securities China, believed the recent interest rate hike may accelerate the pace of hot money inflows. But the impact will be limited since China has put a system of capital market regulations in place, said Wang.

In another move, the State Administra-tion of Foreign Exchange launched an investigation into hot money across the country that uncovered 197 illegal cases involving $7.34 billion by the end of October.