| TO THE POINT: By ordering another hike in the reserve requirement ratio, China strengthens efforts to combat inflation. Housing prices continue to creep up in tracked cities. Domestic enterprises look to expand beyond China's borders as reflected in the soaring outbound direct investment. The aviation sector loses steam as profits fall dramatically. China's Internet giant Tencent sees its profit growth slow down.
By HU YUE
Liquidity Squeeze
The People's Bank of China, the central bank, on March 18 announced it will increase the reserve requirement ratio by another 0.5 percentage points in a move to siphon excess liquidity from the market. It was the third hike this year after six increases in 2010.
Effective on March 25, large commercial banks must set aside 20 percent of their deposits in reserve, locking down nearly 360 billion yuan ($54.8 billion) that they could otherwise lend.
In the wake of proliferating inflationary fears, China has vowed to take a prudent monetary stance this year. The central bank has soaked up liquidity through a series of market operations and required commercial banks to slow their pace of lending.
"The aggressive move is beyond market expectations since the problem of excessive liquidly has obviously abated," said Zhu Baoliang, chief economist at the State Information Center. "The growth of money supplies is already tapering off this year."
The policymakers may be concerned about the ripple effect of massive monetary expansion in Japan, he said.
"This is clear evidence that the tightening agenda is still alive in China and signals that when nerves have settled, we will get more interest rate hikes," said Stephen Green, a Shanghai-based economist for Standard Chartered Bank.
China may continue to rely on the reserve requirement ratio to fine-tune its monetary environment since there is less room for interest rate adjustments and currency policies, said Wang Qing, chief economist for Greater China of Morgan Stanley.
Housing Woes
China's home prices have defied austerity policies and continued heading north.
In February, 56 out of 70 major cities witnessed month-on-month increases in prices of new commercial residences, while only eight reported declines. Prices stood unchanged in six cities, said the National Bureau of Statistics (NBS).
As for second-hand homes, prices kept climbing in 50 cities in February from January, and only four cities saw their prices drop.
The NBS has stopped releasing national average property prices, which do not reflect sharp differences between cities and may lead to misunderstanding.
In attempts to let air out of the property bubble, the policymakers are trying a variety of options. In the latest move, the government ordered to raise the minimum down payment for second-home buyers to 60 percent from 50 percent of the property's value and approved the launch of property taxes in Shanghai and Chongqing. The country has also pledged to bump up supplies of affordable houses and put a damper on financing to property developers.
Liu Yuan, a senior manager of the Centaline Group, a Hong Kong-based property agency, said excess liquidity shored up house prices, though the transaction volume shrank sharply.
Over the long term, the wealth boom of residents and fast urbanization will remain drivers of house prices, he said.
"Home buyers and sellers are now stuck in the stalemate, waiting for the other side to compromise first," said Yang Hongxu, an analyst with Shanghai-based E-house China Research and Development Institute. "The turning point is likely to arrive in April or May, with more property developers offering discounts to stimulate sales as their cash flow gradually tightens."
Expanding Globally
With deep pockets at their disposal, ambitious Chinese companies are quickening their pace of venturing abroad.
China's outbound direct investment (ODI) in the non-financial sector stood at $5.27 billion in the first two months of this year, surging 13.1 percent from a year ago, said the Ministry of Commerce (MOFCOM).
The figure had brought the country's accumulated ODI in non-financial sector to $264 billion by the end of February.
During the January-February period, Chinese entrepreneurs invested in 680 overseas enterprises in 88 countries and regions, said Yao Jian, spokesman of the MOFCOM.
"This wave was driven by China's thirst for natural resources," said Xing Houyuan, Director of the Research Center for Overseas Investments of the Chinese Academy of International Trade and Economic Cooperation, a MOFCOM-affiliated think-tank.
Meanwhile, more companies are looking to snap up brands and technological know-how, said Xing.
The government will also loosen the approval procedures and smooth the way for companies to establish overseas footholds, said Kong Linlong, Director of the Department of Foreign Capital and Overseas Investment of the National Development and Reform Commission.
"But offshore expansion is not without risks," said Yao. "The political turmoil in Libya, for example, has taken a painful toll on China's 50 contracted projects in the African country worth around $18.8 billion."
"That added urgency to building an effective insurance system for companies going global," he said.
Turbulent Skies
After a prosperous year of explosive growth, China's aviation sector is facing some serious headwinds.
The industry raked in a net profit of 1.74 billion yuan ($267.7 million) in February, diving 53 percent from a year ago, said the Civil Aviation Administration of China (CAAC). Of this total, airlines generated 1.21 billion yuan ($186.2 million) and airports earned 190 million yuan ($28.9 million), dropping 56.1 percent and 73.8 percent, respectively, compared with February 2010.
The result came as a disappointment given the significant euphoria last year. The civil aviation industry reaped profits of 43.7 billion yuan ($6.7 billion) last year, three times more than that of 2009.
"The downturn was attributable to the slowing broader economy that put a damper on cargo transport," said the CAAC. "In addition, February has always been an off-peak season for airlines as winter freeze weakens the demands for travel."
February cargo transport was down 11.8 percent from the previous year to reach 300,700 tons.
"Rebounding exports were the backbone of last year's pick-up in air freight,'' said Li Lei, a senior analyst at the China Securities Co. Ltd. "But uncertainties have been hanging over China's exporters this year due to the vulnerability of the world economy."
Li expected the industry to grow 15 percent in 2011 in part because of a higher comparison base.
From a long-term perspective, the air cargo market is bound for a bright prospect as manufacturers start producing more high-value products which would require faster shipments, said Cai Chengyu, CEO of Globelink China Logistics Co. Ltd.
Tencent Cashes In
China's Internet giant Tencent Holdings Ltd. reported 2.2 billion yuan ($338.5 million) in net profits for the fourth quarter of 2010, soaring 45.9 percent year on year, thanks to the strong performance of online and mobile games. The growth rate, however, was the slowest in more than three years.
Fourth-quarter revenue totaled 5.5 billion yuan ($846.2 million), up 49.8 percent from the previous year. Sales of Internet value-added services, including online games and QQ-related subscription fees, rose 54 percent to 4.38 billion yuan ($673.8 million). Online advertising revenues went up 39 percent to 388.1 million yuan ($59.7 million).
Tencent said its active user accounts of the QQ instant-messaging service totaled 647.6 million at the end of 2010.
In the wake of intensifying domestic competition, Tencent has been diversifying its businesses and weaning its reliance on online games. In February, it joined hands with the U.S. coupon company Groupon to launch a group-buying website in China.
Tencent also said it will step up investments to boost its social networking services, search engine and e-commerce sites Paipai and Tenpay.
"There are lots of opportunities to differentiate the markets in China's budding e-commerce industry, though competition is also pretty keen," said Tencent CEO and Chairman Pony Ma. "There will be a considerable amount of time whereby companies will be operating at losses and only several players will ultimately survive in the competition." | 
