TO THE POINT: The World Bank makes history by selling yuan-denominated bonds in Hong Kong for the first time. China's manufacturing industry loses steam as the Purchasing Managers Index slowed in December 2010. Despite a gloomy year in 2010, hopes remain high for the stock markets to wake up from their slumber. Pressures mount on China's shipyards to make ends meet. Property developers cashed in on the real estate bonanza by selling a record number of houses last year.

By HU YUE

Milestone Bond Issue

The World Bank on January 4 issued its first bond denominated in the yuan, China's currency also known as the renminbi. The 500 million yuan ($76 million) of two-year fixed-rate notes, due on January 14, 2013, offers investors a semi-annual coupon of 0.95 percent.

This is the first renminbi bond issuance in the Hong Kong capital markets in 2011, and the World Bank's first renminbi bond ever.

The transaction comes at a time when China's shareholding in the World Bank is set to increase as part of the realignment of voting shares announced in April 2010. If the realignment is formally approved and subscribed as proposed, China would become the third largest shareholder in the World Bank after the United States and Japan.

The entry of the World Bank into the renminbi bond market in Hong Kong will further deepen the market and permit investors to diversify their currency holdings and expand their renminbi exposure.

Doris Herrera-Pol, Global Head of Capital Markets at the World Bank said, "This is a landmark transaction for the World Bank, and signals its strong interest in supporting the development of the renminbi market."

Anita Fung, Group General Manager and Head of Global Banking and Markets, Asia-Pacific, HSBC, said, "Hong Kong continues to take decisive steps in its development as an offshore renminbi center. Backed by our deep Greater China experience and international connectivity, HSBC is proud to lead the bond issuance and help drive the development of the offshore renminbi market in Hong Kong."

PMI Slows

The Purchasing Managers Index (PMI), a barometer of manufacturing activities, reached 53.9 percent in December, down 1.3 percentage points from November, said the China Federation of Logistics and Purchasing (CFLP). Before dropping in December, the index had been rising for four consecutive months, said the CFLP.

But this still marked the 22nd straight month in which the index was above the boom-and-bust line of 50 percent. The PMI includes a package of indices to measure manufacturing sector performance. A reading above 50 percent indicates economic expansion.

It seems that the manufacturing industry is expanding at a slower pace, said Zhang Liqun, a researcher at the Development Research Center of the State Council.

"The new orders sub-index dropped to 55.4 percent in December, compared with 58.3 percent in November, as stocking demands of enterprises tapered off," he said. "But the macroeconomy is less likely to wither, since exports and investments have been burning hot."

Meanwhile, it is believed the slight drop in PMI will help soothe worries that inflation is getting out of hand in the country.

"Growth is not overheated, and the chance of inflation spinning out of control is unlikely," said Ting Lu, an economist at the Bank of America-Merrill Lynch in Hong Kong. "Policy will be tightened, but don't expect excessive measures."

Bumpy Road

For many Chinese equity investors, 2010 meant more despair than cheer.

While the economy picked up steam, the Shanghai Composite Index tumbled more than 14 percent in 2010, one of the worst performances among major global markets. The CSI 300, an index of China's top 300 stocks, nosedived 14.3 percent while the Shenzhen Composite index, which tracks the country's second bourse in Shenzhen plunged 11.4 percent.

The bearish sentiment gained traction amid growing fears over the economic slowdown and inflation that may require aggressive policy measures to soak up excess liquidity. The central bank has told commercial banks to slow their pace of lending and also raised the ratio of deposits that banks must set aside in reserve seven times.

But many analysts and investors reckon that the recent market decline represents a buying opportunity, rather than the start of a long-term bear market.

"Valuations are still far from the over-stretched levels seen in 2007 when rate hikes induced more profit taking," said Helen Zhu, a senior analyst at Goldman Sachs. "There are still some significant contributors to a rosy market prospect. The domestic macro-environment is robust; fiscal policies are supportive and monetary policies are more selective but still relatively accommodative. Despite likely weak external demand, we believe China will gradually decouple by stimulating domestic growth, both in consumption and investment."

Jerry Lou, an analyst at Morgan Stanley, agreed. "The market's downside risks should be very limited," said Lou. "Cheap valuations, solid corporate earnings visibility, contained inflation risk with stable monetary policies, and strong currency will provide support to equity markets in 2011."

Shipbuilders Struggle

China's shipbuilders are recouping their strength, but uncertainties still hang over their prospects.

Chinese shipyards received new orders of 9.37 million deadweight tons in November 2010, soaring 140 percent over October, said the China Association of the National Shipbuilding Industry (CANSI). The figure brought the amount in the first 11 months to 63.98 million deadweight tons, 2.8 times that of the previous year.

The industry, however, has yet to move out of the shadow of the financial crisis. "The outlook for 2011 isn't too bright since there's already less demand for vessels," said Wang Jinlian, General Secretary of CANSI.

The Baltic Dry Index, a proxy for shippers' costs and profits, plunged 41 percent in 2010. More disturbing is the fact that many shippers have postponed vessel deliveries and payments, which would exacerbate financing woes for shipbuilders.

The CANSI in a recent report even expected the industry to spill red ink in 2013, receiving a deadly blow from costs inflation and appreciation of the yuan. "Chinese ship makers source around 70 percent of their orders from overseas," the report said. "If the yuan gains 1 percent in value against the U.S. dollar, the industry would lose at least 4 billion yuan ($601.5 million)."

"In response, the enterprises are required to improve their technological innovation to compete with foreign rivals," said Wang. "South Korea, for example, is making a push into green vessels while Japan seeks to adopt more advanced information technologies."

Property Fares Well

Chinese property developers reaped a bumper harvest in 2010, basking in the glow of significant market euphoria.

Topping all domestic developers, China Vanke Co. Ltd. reported sales revenue of 8.35 billion yuan ($1.3 billion) in December 2010, skyrocketing 51.3 percent from a year ago. The December figure brought the total amount last year to 108.16 billion yuan ($16.3 billion), up 70.55 percent from 2009. The Poly Real Estate Group Co. Ltd. was estimated to have sold 66 billion yuan ($9.9 billion) worth of houses last year, compared with 43.4 billion yuan ($6.5 billion) in 2009.

The sales boom came as no surprise, given how buoyant the market was in early 2010. Prospective buyers jumped off the sidelines for fear that they may miss out on a bull market, while real estate developers scooped up plots of land to lock up future profits.

In response, policymakers stepped up a stringent clampdown on the real estate sector, including higher down payment requirements and tighter mortgage rules. House prices in 70 large and medium-sized cities grew 7.7 percent year on year in November, the seventh consecutive month of slowdown from the peak of 12.8 percent in April.

While the big developers held up well, many smaller players are feeling the pinch of austerity policies, said Yang Hongxu, a senior researcher at the Shanghai-based E-house China Research and Development Institute.

The government is expected to further keep its feet on the brakes to rein in speculation, and also bump up supplies of affordable houses, said Yang.

"It may be a buyers' market in 2011 since the investment demands have been seriously restricted," said Tan Huajie, Secretary of Board of Vanke. "House prices are likely to stabilize this year, if not heading south."