TO THE POINT: The central bank on November 19 ordered commercial banks to set aside an additional 0.5 percent of their reserves amid looming inflationary risks. Investors are on the defense and preparing for the worst by buying up gold as a safe haven against inflation and market uncertainties. China's state-owned enterprises earned a combined profit of 1.626 trillion yuan ($245 billion) from January to October this year, soaring 44.8 percent year on year. In a push into renewable energies, China should enhance efforts in hydropower, wind power and inter-provincial trade, as well as green electricity schemes, said the World Bank. The aviation industry booms as air traffic increases.

By HU YUE

Mopping up Liquidity

The People's Bank of China (PBOC), the central bank, on November 19 issued an order raising the reserve requirement ratio (RRR) by 0.5 percentage points, effective as of November 29. This is the fifth such hike this year and the second increase in November. It is expected to freeze liquidity worth around 300 billion yuan ($45.2 billion).

The central bank said the move was intended to "enhance liquidity management and moderately regulate credit supply."

By mopping up excess liquidity, the government is trying to fend off the ripple effect of the U.S. quantitative easing policy that may fuel inflation and asset bubbles in emerging markets, said Fan Gang, Director of the National Economic Research Institute.

China's consumer price index (CPI), a barometer of inflation, hit a 24-month high of 4.4 percent in October. In a recent report, UBS Securities expected China's CPI to surge to 5 percent in November and then level off in December.

"Given the nature of CPI inflation so far, we think the sequential momentum of food price increases may be near its peak," said Wang Tao, an economist at UBS Securities. "Unless there is unusually bad weather or any natural disasters, we expect the year-on-year CPI inflation to stabilize in the next few months and stay in a moderate range in early summer 2011."

"The PBOC is under pressure, and it needs to do something to show its determination to tame inflation. However, it has no intention to kill growth by aggressively hiking interest rates or imposing a lending squeeze," said Lu Ting, China economist at the Bank of America-Merrill Lynch.

Compared with interest rate increases, the RRR rise has a more direct impact on the excess liquidity, and more such increases are probably already in the pipeline, said Zuo Xiaolei, chief economist at the China Galaxy Securities Co. Ltd.

Tan Yaling, a senior analyst at the Bank of China Ltd., said China is less likely to raise the interest rate in the near future as bigger interest rate differences between China and other major economies would quicken inflows of hot money.

Gold Bonanza

As inflation jitters proliferate, Chinese investors are seeking refuge in the gold market.

In a recent report, the World Gold Council (WGC) said Chinese investors continued to "flock into gold" during the third quarter, with demand for bars and coins reaching 45.1 metric tons, valued at about 120 billion yuan ($18.1 billion). This topped the previous quarterly record of 39.6 tons in the January-to-March period.

Demands for gold include jewelry, industrial and dental uses and investment. China is already the world's second biggest gold consumer, with jewelry buying contributing the lion's share and investment also on the rise.

With the stock market fluctuating and the property sector subdued, the gold market seems to be a safe haven for capital, said Zhang Yingying, an analyst at China Galaxy Securities Co. Ltd.

So far this year, prices of gold futures at the Shanghai Gold Exchange have gained around 24 percent on buoyant demand.

The price is likely to continue north as central banks around the globe boost their gold reserves, straining supplies to the markets, said Wang Peifu, President of Zhaojin Mining Industry Co. Ltd., a gold miner based in east Shandong Province.

A bigger appetite from India and China for gold is expected to boost demand for the yellow metal globally, said the WGC report.

Consumers in the world's two largest gold markets continue to appreciate the enduring value of gold due to their rising income, high savings rate and strong economic growth, it said.

Profitable SOEs

China's state-owned enterprises (SOEs) are reaping handsome profits, drawing strength from a robust macroeconomy.

In the first 10 months of this year, the SOEs generated a combined profit of 1.626 trillion yuan ($245 billion), skyrocketing 44.8 percent from a year ago, said the Ministry of Finance (MOF).

Their revenues totaled 24.568 trillion yuan ($3.7 trillion), an increase of 33.9 percent year on year. But on a month-to-month basis, the October revenue dropped 3.7 percent from September, said the MOF.

Meanwhile, the SOEs staged an improvement in profitability as their profit-to-sales ratio stood at 6.6 percent, 0.5 percentage points higher than the previous year.

But not every industry was faring well. The ministry said several sectors suffered a decline in profits, including tobacco, real estate, electricity, coal and transportation.

The broader economy has steered a steady course of growth, providing a solid floor under corporate profitability, and offsetting the impact of costs inflation, said Xia Minren, a senior analyst with the China Securities Co. Ltd.

China's SOEs reported a record profit of 1.62 trillion yuan ($244 billion) in 2007. Nevertheless, the euphoria faded abruptly as the sweeping financial storm rippled through China. The SOE profits dropped to 1.22 trillion yuan ($183.7 billion) and 1.34 trillion yuan ($201.8 billion) in 2008 and 2009, respectively.

New Energy Campaign

Accelerating hydropower development, improving wind power performance, promoting inter-provincial trade in renewable energy and green electricity schemes could help China achieve its goal of a 15-percent reduction of its primary energy consumption through non-fossil fuels by 2020, said a recent World Bank report.

"China has achieved remarkable progress in developing renewable energy sources during the last three decades," said Ede Ijjasz, World Bank China Sector Manager for Sustainable Development.

In 2009, China's installed capacity reached 55 gigawatts of small hydropower, 22.68 gigawatts of wind power, 4 gigawatts of biomass, and 300 mw-peak of photovoltaic solar power. Consequently, China became the world's leader in small hydropower development and second only to the United States in installed wind power capacity.

To help China achieve its target in an effective manner, the report made the following recommendations:

- Developing hydropower faster. Hydropower rehabilitation could help achieve the new energy target at a lower cost because hydropower is already competitive with coal.

- Improving the performance of wind power. China's experience has been less than optimal in planning wind farms and operational integration between developers and grid operators. If not addressed adequately, the high level of inefficiencies could increase the cost to the nation of the envisaged wind program.

- Promoting trade. With trade, provinces can achieve their mandated targets. Renewable energy transactions would amount to about 360 terawatt hours, 42 percent of the total of the envisaged government target. And more importantly, trade would reduce the cost of the planned renewable energy target by about 56-72 percent.

- Developing green electricity schemes. Green electricity has been extensively studied in China and piloted in Shanghai. Deploying green electricity schemes at the national and regional levels should be considered among the options to pay for the incremental cost resulting from the development of renewable energy.

Flying High

China's aviation sector is soaring thanks to a surge in air traffic.

The industry generated a net profit of 4.92 billion yuan ($741 million) in October, more than double one year ago, said the Civil Aviation Administration of China. Of this total, domestic airlines earned 4.28 billion yuan ($644.6 million), and the airports raked in 340 million yuan ($51.2 million).

After hitting rock bottom in 2008, the aviation industry moved out of the red last year with profits totaling 12.2 billion yuan ($1.8 billion).

The demands for air traffic picked up in part due to the National Day Holiday and the Shanghai World Expo, said Li Fan, a transport analyst at the China Jianyin Investment Securities Co. Ltd.

In October, passenger volume soared 12.7 percent year on year to 24.5 million, and cargo volume surged 18.3 percent from the previous year to reach 496,400 tons.

In addition, the industry still has deep potential to explore as household income booms, making air flights affordable for more Chinese, he said. In 2009, per-capita annual air flights for Chinese residents were 0.17, well below 1.7 in the United States and Europe.