TO THE POINT: By ordering another hike in interest rates, China spares no effort to combat inflation. China's oil giants are faring well, though rising crude prices are putting pressure on Sinopec, China's top oil refiner. China reorganizes the dairy industry, forcing many unqualified producers out of the market. The manufacturing industry has staged a swift comeback, with the purchasing managers index rebounding in March. The U.S. chemicals guru The Dow Chemical Co. makes a push into the Chinese market by building a joint venture with Shandong-based Befar Group Co. Ltd.

By HU YUE

Interest Rate Hike

The People's Bank of China, the central bank, on April 6 raised interest rates for the second time in 2011 in a bid to tackle inflation and let air out of the asset bubbles.

The one-year benchmark deposit interest rate rose to 3.25 percent from 3 percent, while the one-year benchmark lending rate rose from 6.06 percent to 6.31 percent, said the central bank.

As inflation remains a daunting challenge for the economy, China has spent the past six months draining market liquidity and adopting supply-side measures to curb consumer price surges.

"The timing of this particular rate hike is earlier than we have expected, as we forecast that the rate hike would be made in May-June when the headline inflation rate is expected to pick up significantly," said Wang Qing, a Morgan Stanley economist in Hong Kong.

"Our current CPI forecast is 5.2 percent year on year for March," he said. "The interest rate increase also suggests that the Chinese authorities are confident in the sustainability of the underlying growth momentum."

The interest rate hike is necessary since the benchmark one-year deposit rate still lags behind the CPI, said Zhuang Jian, a senior economist with the Asian Development Bank, China Office.

Meanwhile, inflationary pressures are mounting in the country due to massive monetary expansion in Japan and the political unrest in the Middle East, which forced up global commodities prices, he said.

Oil Bonanza

China's oil giants are reaping windfall profits, drawing strength from strong domestic demand for refined oil and chemical products.

PetroChina, the country's biggest oil producer by output, raked in 140 billion yuan ($21.5 billion) in net profits last year, rising 35.6 percent from a year ago.

The offshore oil explorer CNOOC shined as well. Its net profits surged 84.5 percent year on year to reach 54.41 billion yuan ($8.4 billion) in 2010. The crude futures prices in London averaged $79.47 a barrel in 2010, up 29.2 percent from a year earlier.

Compared with their upstream-focused peers, performance of the oil refiner Sinopec was less bright as rising crude prices made a dent to its refining division. The company earned net profits of 70.71 billion yuan ($10.9 billion) last year, up 12.8 percent from 2009.

Sinopec relied on imports to meet 78 percent of its needs for crude oil, but the refiner is less able to pass the costs pressure to consumers.

Under the current fuel pricing regime, policymakers consider price adjustments when the moving average of international crude oil prices changes more than 4 percent over a period of 22 consecutive working days. In its lastest move, the National Development and Reform Commission on April 7 raised the domestic wholesale prices of gasoline and diesel by 500 yuan ($76) and 400 yuan ($61) per ton, respectively.

However, last year's retail price increase was much smaller than the surge in crude prices as the government worried about inflation.

Sinopec said that its future sustainable development will depend partly on further discoveries or acquisitions of oil and natural gas resources.

The company plans to invest 54.3 billion yuan ($8.3 billion) in the exploration and development sector in 2011, accounting for 43.8 percent of its total capital expenditure.

Dairy Shake-Up

Nearly half of all Chinese dairy producers will have to halt production as the country gears up to streamline the scandal-tainted industry.

The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) ordered in November 2010 that all dairy firms must apply for new production certificates by the end of March 2011 and those with weak quality guarantees will be shut down.

As of March 31, only 643 dairy companies, or about 55 percent of the total 1,176 milk enterprises, were granted licenses to continue production, said Li Yuanping, spokesman of the AQSIQ.

In addition, local authorities are required to strengthen their efforts to crack down on unlicensed production, and enhance supervision over those qualified companies to guarantee their product safety, said Li.

Of the 533 producers that failed to obtain a license, 426 face permanent closure, while 107 were told to suspend operations until they carried out improvements, he said.

China's dairy industry received a deadly blow from a melamine-tainted baby formula scandal in 2008, which undermined consumer confidence for domestic dairy brands.

Though the industry has regained much of the lost ground, product safety remains an acute concern. As recently as February, there were media reports that dairy products containing leather-hydrolyzed protein, a banned additive, were still sold in markets.

"The industrial wind-up is a needed boon," said Wang Dingmian, a dairy expert and former Executive Director of the Dairy Association of China. "Many smaller companies will be forced out of market, which is good news for bigger players."

Manufacturing Rebounds

The purchasing managers index (PMI), a barometer of manufacturing activities, reached 53.4 percent in March, rebounding from 52.2 percent in February, said the China Federation of Logistics and Purchasing (CFLP).

This was the first month-on-month increase after three consecutive monthly decreases. But it still marked the 25th 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.

The results may ease concerns that the Chinese economy is losing steam, though the longer-term trend remains to be seen, said the CFLP, in a statement.

"China's economic growth is only moderating rather than slowing," said Qu Hongbin, HSBC's chief economist in China. "More importantly, the rate at which prices are rising has also started to slow."

The input prices sub-index, a measure of how much factories pay for raw materials and other intermediary goods, eased to 68.3 percent in March from 70.1 percent in February.

But Lu Ting, an economist with the Bank of America Merrill Lynch, said the PMI data were distorted by migrant workers returning to their jobs after the Lunar New Year holiday (February 2-8) and that high inventory levels may lead to a slowdown in manufacturing.

Chemical Joint Venture

The U.S. chemicals giant The Dow Chemical Co. and China's Befar Group Co. Ltd. (Binhua) have signed a memorandum of understanding for a new 50-50 joint venture to produce perchloroethylene (PCE), a key building block material for non-ozone depleting refrigerants used in industrial, automotive, consumer and other applications.

The PCE manufacturing facility in Binzhou, Shandong Province, will have an initial target capacity of 40,000 tons per year, and is expected to begin production in 2014.

"The new partnership aligns well to both companies' strategies and allows Dow to grow our presence in China," said Carol Williams, Group Senior Vice President of The Dow Chemical Co.

Peter Sykes, President of Greater China of The Dow Chemical Co., underscored the importance of the relationship with Befar to Dow's regional capabilities in China to meet customer demand in this growing marketplace.

"We look forward to jointly supporting the rapid China market growth in a sustainable and environmentally responsible manner." he said.