TO THE POINT: China widens the tax rebate program for Hainan Province to stimulate the island's tourism industry. The banking sector fares well with profits surging last year. By imposing a higher resource tax on rare earth exploration, China tries to streamline the fragmented industry. The shipping giant COSCO jumps back into the black thanks to buoyant market demands. The international consulting firm McKinsey & Co. expects China to replace Japan as the world's top luxury goods market by 2015.

By HU YUE

Shopping Paradise

Tropical Hainan Province has been given the chance to shine as China expands its tax refund program in the southern island to cover domestic tourists.

The new policy, effective May 1 this year, sets the rebate cap on purchases of no more than 5,000 yuan ($762) per person per trip and applies to domestic and overseas tourists 18 years and older who will fly to other destinations in China from the island. It covers 18 categories including jewelry, artwork, wristwatches and cosmetics.

Each eligible tourist can claim rebates twice a year, while island residents can claim rebates once a year. The refunded taxes include customs duties, importation value added taxes and excise taxes.

The program is part of the country's vigorous efforts to turn Hainan, once an agricultural backwater, into an international tourist destination.

The tax incentive is expected to add to the island's attractiveness, said Wang Keqiang, Deputy Director of the Hainan Provincial Department of Commerce.

The island hosted nearly 26 million tourists in 2010, 97 percent from the mainland. "Domestic travelers have great purchasing power, and Hainan will likely benefit from this," he said. "But we still have a lot to do to improve our infrastructure and shopping services."

Xia Feng, a research fellow with the Haikou-based China Institute for Reform and Development, said Hainan must make further progress if it's going to compete with destinations like Hong Kong, and the two sides will strengthen cooperation to propel common prosperity.

Banking Euphoria

China's banks raked in a combined after-tax net profit of 899.1 billion yuan ($137 billion) last year, soaring 34.5 percent from a year earlier, the fastest pace in three years, said the China Banking Regulatory Commission (CBRC).

The net interest margin contributed 66 percent to the profit while the rest came from investment gains and fees and commissions.

Asset quality continued to improve, as the ratio of non-performing loans stood at 2.4 percent at the end of 2010, compared with 3.29 percent in 2009.

The CBRC struck a note of caution, citing risks that may arise from financing vehicles of local governments and bubbling property markets.

Meanwhile, liquidity strains are hassling some banks as the central bank tightens its monetary stance to keep serious inflation at bay, said the CBRC.

In a recent report, the international credit rating agency Moody's Investors Service said the outlook for China's banking system is stable for the next 12 to 18 months, as the domestic economy remains strong and provides banks with ongoing opportunities to generate strong earnings.

The key issue facing the banking system is the extent to which credit expansion can slow to a sustainable level that checks inflationary pressures, while simultaneously accommodating the government's 7-percent real GDP growth target from 2011 to 2015, it said.

"We expect a rise in banks' non-performing loans, which typically follow in the wake of very strong loan growth," said Yvonne Zhang, a senior analyst of Moody's. "Robust earnings, significant loan loss reserves and additional capital raised from the capital markets will help the banks tackle challenges in asset quality and continue improving their balance sheets."

Taxing Rare Earth

China increased its resource tax rates on rare earth in a bid to consolidate the highly fragmented industry.

The new policy, effective April 1 this year, will increase the tax rates to 60 yuan ($9.2) per ton of light rare earth and 30 yuan ($4.6) for mid-heavy rare earth, from current 0.5-3 yuan ($0.08-$0.46) per ton.

Rare earth contains a class of 17 important chemical elements widely used to manufacture sophisticated products, including flat-screen monitors and electric car batteries.

Sun Fan, a senior analyst with the Goldstate Securities Co. Ltd., said the government needed to better protect the precious minerals and force smaller miners out of the market.

Reckless exploitation is depleting China's rare earth reserves. In 2009, China mined 97 percent of global rare earth minerals, but its reserves made up only around 36 percent of the world's total, against 43 percent in 1996.

Zhang Zhong, General Manager of Inner Mongolia Baotou Steel Rare Earth Hi-tech Co. Ltd., said the tax hike would benefit the industry over the long term, though it will boost the company's production costs by around 720 million yuan ($110.8 million) this year.

Policymakers have also spared no effort to tighten regulation. The Ministry of Environmental Protection on March 1 announced tougher rules on emission limits for producing rare earth. Before that, the Ministry of Finance ordered export tariffs be lifted on some rare earth products for 2011.

Back in the Black

China COSCO Holdings Co. Ltd., a shipping conglomerate, swung back into profit territory in 2010 as energy-related bulk and container shipping volume improved.

The company said it earned 6.76 billion yuan ($1.04 billion) in net profit last year, compared with a net loss of 7.54 billion yuan ($1.16 billion) in 2009. The revenues skyrocketed 44.6 percent year on year to reach 80.58 billion yuan ($12.4 billion).

COSCO Holdings operates the world's largest bulk cargo fleet and is the world's fifth largest container shipping firm.

"The global container shipping market is expected to maintain its equilibrium in 2011," said the company. "The dry bulk businesses will also benefit from buoyant demands due to China's massive investments in railways and affordable homes."

But overcapacity of dry bulk shipping is casting an ominous shadow over the industry as it may affect the shipping rates, said Wei Jiafu, Chairman of COSCO Holdings.

The Baltic Dry Index, a proxy for shippers' costs and profits, has struggled to recover after touching its lowest point since February 2008. Meanwhile, the earthquake and tsunami in Japan, a major importer of commodities including iron ore and coal, are also expected to hit freight activity, said Sun Liping, a senior analyst at Guotai and Junan Securities Co. Ltd.

Luxury Boom

Luxury sales in China are expected to reach $27 billion by 2015, catapulting China past Japan as the world's largest luxury goods market, said a recent report by the global management consulting firm McKinsey & Co. The report was based on an extensive survey of over 1,500 luxury consumers across 17 Chinese cities last Spring.

While many other markets are stagnating or shrinking due to the global recession in 2009, luxury goods saw 16 percent of sales growth in China. Rapid increases in wealth, the wide availability of luxury products, and shifting attitudes toward the display of wealth are driving needs of Chinese consumers for luxuries, said the report.

Last year, over 30 percent of Chinese consumers traded up to more expensive brands, compared to only 6 percent of Japanese consumers. A growing number of consumers are seeking new experiences to round-out their luxury lifestyles, splurging on spas, massages and other wellness activities, it said.

"Most of the world's luxury goods companies are already in China or contemplating increased investment there," said Yuval Atsmon, Partner in McKinsey's Shanghai office.

As the government put a stringent handle over the property market, investors also turned to up-scale jewelries to hedge against inflation, said Michael Ouyang, CEO of the World Luxury Association China Office.

While big markets like Beijing and Shanghai glitter with vitality, smaller ones are catching up quickly, presenting great potential for the industry, he said.