TO THE POINT: China drains excess liquidity out of the market by further hiking the reserve requirement ratio. China offloads its holdings of U.S. Treasury securities for the fifth consecutive month in a bid to diversify its foreign exchange reserves. Home prices remain on the rise in most Chinese cities, though the government has tried to cool the property fever. China's thermal power generators incur painful losses as coal prices soar. E-reader manufacturer Hanvon swims in red ink as sales plunge, possibly due to the iPad's popularity.

Soaking Up Liquidity

The People's Bank of China, the central bank, on May 18 increased the reserve requirement ratio to siphon excess liquidity out of the market. It was the fifth such hike this year after six increases in 2010.

Commercial banks will be required to set aside an additional 0.5 percent of their deposits in reserve, locking around 370 billion yuan ($57 billion) that they could otherwise lend.

China's inflation showed signs of easing, with the consumer price index dipping slightly to 5.3 percent in April from a 32-month record of 5.4 percent in March. But it was still higher above the government-set target of 4 percent for the entire year.

Inflation pressure remains strong so a policy move signaling the central bank's determination to control inflation is still needed, said Wang Qing, Morgan Stanley's chief China economist in Hong Kong.

"Controlling inflation will definitely entail a slowdown in economic growth, but that doesn't indicate there will be a hard landing," he said. "That's why the policy priority at the moment is still to control inflation."

Liu Yuhui, a senior researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said small and medium-sized enterprises may face more intense difficulties in obtaining bank credit.

One solution for these enterprises is to tap into capital markets like bonds and stocks, he said.

Shedding U.S. Assets

For a fifth straight month, China trimmed its holdings of securities by $9.2 billion in March, according to the U.S. Treasury Department. China retained its position as the largest foreign holder of U.S. Treasury securities with $1.1449 trillion in its portfolio.

Meanwhile, the second largest foreign holder, Japan, continued its net buying, increasing its holdings by $17.6 billion to $907.9 billion. This move eased concerns that the devastating earthquake and tsunami would lead Japan to scale back its purchases and use the capital for reconstruction.

Total holdings of U.S. Treasury securities by all foreign countries rose by $4.9 billion to $4.4792 trillion at the end of March. The securities are key to funding its massive U.S. budget deficits. China's net sales of U.S. Treasury securities amounted to $9.2 billion in March, down from $11.2 billion in last November.

Given a weakening U.S. dollar and rising government debt, worries about safety of China's Treasury holdings are proliferating.

Zhao Changhui, a senior analyst with the Export-Import Bank of China, said dollar depreciation and inflation in the United States would devalue China's foreign exchange reserves, though the U.S. Government is less likely to default on its sovereign debt.

John Silvia, chief economist at Wells Fargo, the fourth largest U.S. bank, said the current U.S. budget situation was unsustainable over time.

"If significant progress is not made, you will probably get a depreciating dollar, probably higher interest rates, higher inflation, which means that many Asian investors will have capital losses on their U.S. treasury portfolios," he said.

Yi Gang, Deputy Governor of the People's Bank of China and Director of the State Administration of Foreign Exchange, downplayed the concerns. "For years, China has spared no effort to diversify investments of its foreign exchange reserves and ensure asset returns and safety," he said.

Property Bull

House prices continued heading north in April, in spite of the government's tough policies.

In April, 56 out of 70 monitored major cities experienced month-on-month increases in prices of new commercial residences, while only nine cities witnessed declines and five cities' prices stood unchanged, said the National Bureau of Statistics.

As for second-hand homes, prices rose in 41 cities in April over March, and 16 cities saw their prices head south.

Policymakers have pushed all their buttons to let air out of the real estate bubble. It is reported that the government is mulling measures to prevent windfall profits of property developers, including windfall tax. Since April 2006, China has been levying windfall tax on the oil industry.

"It seems that speculators are shifting from major cities to shield from government restrictions," said Liu Ligang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. "The property measures are only working in some cities but not nationwide, and it is raising new challenges for the government."

"Reduced bank lending, rising interest rates and increasing property supply would inevitably bring down sales and profit margins while also worsening their balance sheet liquidity for some developers," said Moody's Investor Service in a recent report.

The tightening measures would hinder further price rises and lead to a mild correction in cities where housing price soared over the past 12 to 18 months, said the credit rating agency.

Power Pinch

China's thermal power generators are struggling to make ends meet as coal prices surge.

From January to April, the country's five largest electricity companies—Huaneng, Datang, Huadian, Guodian and China Power—incurred combined losses of 10.57 billion yuan ($1.6 billion) from thermal power generation, 7.29 billion yuan ($1.1 billion) more than the loss during the same period last year, said the China Electricity Council (CEC).

The March steam coal price at Qinhuangdao Port, an industry benchmark in the country, climbed at least 5 percent from the previous year.

"The power sector is suffering serious setbacks, which makes it harder to ensure electricity supplies during the peak season this summer," said the CEC.

Power shortages are sweeping China, especially eastern and southern regions. East coastal Zhejiang Province and Jiangsu Province, for example, started rationing electricity in May.

To avoid further losses, many smaller power plants have cut or even halted production, exacerbating power shortages, said Han Xiaoping, Chief Information Officer of China5e.com, a major energy information site.

But the root cause lies in the unbalanced pricing system, said Lin Weibin, Deputy Director of the Research Center of Energy and Strategic Resources under Beijing Normal University.

The government has kept on-grid power tariffs under control while coal prices are allowed to float in line with market demand, he said.

As a result, a permanent solution is to deregulate electricity prices and, at the same time, make a push into renewable energies to wean off reliance on coal, said Lin.

Hanvon's Woes

Hanvon Technology Co. Ltd. is facing serious headwinds as the e-reader manufacturer reels from plunging sales.

The Shenzhen-listed company reported 46.18 million yuan ($7.1 million) of losses for the first quarter of 2011, compared with profit of 41.87 million yuan ($6.4 million) in the same period last year. Its sales revenues totaled 158 million yuan ($24.3 million), nose-diving 50.1 percent year on year.

Hanvon is China's largest producer of e-readers that provide a paper-like reading experience. Liu Yingjian, chairman and founder of the company, attributed the losses to heavy expenses on advertising and technology research, as well as the impact from Apple's iPad.

An iPad buying spree across the country since last year has put a dent in Hanvon's sales. The Chinese company sold 149,800 e-readers from January to March this year, down 22.62 percent from the last quarter of 2010, according to data from the Beijing-based Zero2IPO Research Center.

"High prices have impeded customer acceptance of Hanvon products," said Zhang Yanan, a senior analyst with Zero2IPO. "That has put an onus on the company to reduce costs and lower prices."

Despite the deep downturn, Liu still saw a bright growth outlook for his company. "As more of an entertainment terminal, the iPad cannot replace e-readers," he said.

Moreover, the company will shift its business model to rely more on books rather than e-reader sales, said Liu.

Hanvon is expanding its online store to provide more than 300,000 books for customers to download, he said.