TO THE POINT: Economic data for January indicate inflation remains a concern, with CPI climbing 4.9 percent and PPI edging up 6.6 percent. Foreign trade is recovering health with both imports and exports bouncing back quickly in January. China is still the largest foreign holder of U.S. Treasury securities despite a shedding of $4 billion last December. The crisis-stricken dairy industry has made a solid comeback, though uncertainties still remain. Credit cards are gaining popularity across the nation.

By HU YUE

January Economic Figures

CPI and PPI

The consumer price index (CPI) rose 4.9 percent in January over the previous year, said the National Bureau of Statistics (NBS).The figure is 0.3 percentage points higher than December, and 0.2 percentage points lower than the 28-month high in November.

The producer price index (PPI), the main gauge of inflation at the wholesale level, rose 6.6 percent in January year on year.

The CPI was largely driven up by food prices, which surged 10.3 percent in January over the previous year.

"Extremely cold weather in parts of China and Spring Festival holiday spending pushed up consumer prices," said the NBS.

Although the figure is lower than market expectations of more than 5 percent, inflation remains a daunting challenge given the ongoing winter drought in north China, wage inflation of migrant workers and global commodity price hikes, said Lu Zhengwei, an economist at the Industrial Bank Co. Ltd.

In response, the central bank is likely to further raise the interest rate and the ratio of deposits that commercial banks must set aside in reserves, he said.

Foreign Trade

China's foreign trade surged 44 percent year on year in January to $295.01 billion due to busy shipments in advance of the nation's traditional Spring Festival.

Exports totaled $150.73 billion, soaring 37.7 percent from a year ago while imports skyrocketed 51 percent to reach $144.28 billion, said the General Administration of Customs. The trade surplus hit a nine-month low of $6.45 billion, plunging 53.5 percent over the previous year.

The Chinese New Year fell on February 3 this year, and exporters and importers frontloaded their trading activities in January, said Lu Ting, an economist with the Bank of America-Merrill Lynch.

Export growth momentum is supported by improvements in the economic health of China's major trading partners, and imports are boosted by strong domestic demand growth, said Yu Song, an economist at Goldman Sachs.

China's domestic demand remains buoyant due to continued loose liquidity conditions despite a spate of tightening measures aimed at cooling the economy, he said.

Although the trade surplus contracted sharply, said Wang Tao, an economist with UBS Securities, the figure at the start of the year was routinely smaller than other times of the year because of seasonal factors.

Bank Lending

Newly extended loans denominated in the yuan totaled 1.04 trillion yuan ($158.1 billion) in January, 318.2 billion yuan ($48.38 billion) less than the same month last year, said the People's Bank of China.

It seems that the hikes in the reserve requirement ratio and the benchmark interest rate are starting to take effect, said Zuo Xiaolei, chief economist with China Galaxy Securities Co. Ltd.

Wang Jianhui, chief economist with Southwest Securities, said while new lending slowed in January, the figure is still "relatively high," reflecting a strong appetite for lending among banks.

Wang expected the central bank to continue to raise the reserve requirement ratio in the first half, and to raise the benchmark interest rate by 75 percentage points in total in three moves during the year.

Money Supply

China's broad money supply (M2), which covers cash in circulation and all deposits, increased 17.2 percent year on year to 73.56 trillion yuan ($11.2 trillion) as of the end of January, 8.9 percentage points lower than the same period last year, said the People's Bank of China.

Shedding U.S. Assets

The U.S. Treasury Department said China trimmed its holdings of U.S. Treasury securities last December for the second consecutive month by $4 billion, or 0.4 percent of its total holdings. China still holds $891.6 billion in U.S. Treasury securities. The net reduction in 2010 amounted to $3.2 billion.

China remains the largest foreign holder of U.S. Treasury securities, ahead of Japan, which increased its holdings by $6.4 billion in December to $883.6 billion. Total holdings of Treasury securities by all foreign countries amounted to $4.37 trillion at the end of December 2010.

Total foreign purchases of Treasury notes and bonds were $54.6 billion in December, compared with $61.7 billion in November. The securities are key to funding the massive U.S. budget deficit that reached a dizzying $1.29 trillion in the 2010 fiscal year ending September 30, 2010.

Economists believe prospects for accelerated U.S. economic growth, propelled by Federal Reserve's purchases of treasuries, are drawing in overseas investors, along with concerns about the creditworthiness of debt-stricken European nations. 

Dairy Boom

The dairy industry is regaining strength, though concerns linger.

Profits for the dairy sector jumped 35.8 percent over the previous year to reach 2.95 billion yuan ($448.3 million) in the fourth quarter of 2010, said a report by the China Economic Monitoring Center under the National Bureau of Statistics. Sales reached 52.5 billion yuan ($8 billion), an increase of 20 percent year on year.

The magnitude of the bounce-back was a reason to celebrate, given how much the tainted formula scandal affected consumer confidence. On top of the reputation crisis came the global financial meltdown that rippled through China's economy.

Policymakers have spared no effort to revitalize the sector. The General Administration of Quality Supervision, Inspection and Quarantine announced in November 2010 that all dairy firms must apply for new production certificates in 2011 and those with weak quality guarantees will be shut down.

"Industry profitability has recovered to the highest level since 2008," said the report. "The momentum will continue into this year, but growth may slow down because of a relatively high comparison base."

But one cause for concern was exports, which nosedived 19.6 percent year on year in the fourth quarter of 2010. "It seems that the industry still has a long way to go before moving out of the shadow of the health scare in 2008," said Song Kungang, President of the China Dairy Industry Association.

In addition, cost inflation is also threatening to eat into profits, he said.

Credit Card Fever

By the end of 2010, Chinese banks had extended a total credit card debt of 2 trillion yuan ($304 billion), compared with 1.3625 trillion yuan ($207.1 billion) as of the end of 2009, said the central bank.

This should be good news for the country, which is pinning its hopes on the consumer market to help lessen its reliance on exports and investment as a source of growth.

Moreover, concerns over the risk of bad debt began to abate. Credit card debt overdue at least six months was 7.689 billion yuan ($1.2 billion) in 2010, a decline of 0.1 percent from the previous year, said the central bank.

MasterCard, the world's second largest payment network, expects China to overtake the United States as the biggest credit card market globally by 2020, with 800 to 900 million credit cards in circulation.

Accelerating urbanization and a wealth boom are enabling Chinese consumers to buy more on credit, it said.