TO THE POINT: China's yuan exchange rate regime reform has produced mixed results for the economy. House prices hold up in most Chinese cities, though clouds are already gathering over the markets. Thermal power generators find themselves in a tight spot due to surging coal prices. The traditional Chinese medicine industry struggles with soaring raw material prices. China's largest online marketplace Taobao.com will be split into three companies.

Currency Flexibility

Since China restarted the reform of the yuan exchange rate regime one year ago, the yuan has gained 5.5 percent in value against the U.S. dollar, with its central parity rate against the U.S. dollar reaching 6.4716 on June 17, 2011. The yuan continued strengthening in the following week, to hit a record high of 6.4683 on June 22.

On June 19, 2010, the People's Bank of China, the central bank, restarted the reform of the yuan exchange rate regime and strengthen the flexibility of the yuan.

"The reform was surely a needed boon to relieve inflationary jitters," said Zhang Bin, a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.

As international commodities prices continue to creep up this year, a stronger yuan has made imports of raw materials more affordable for Chinese enterprises, he said.

In addition, the yuan's appreciation helped redress China's trade imbalance, said Lu Zhengwei, chief economist at the Industrial Bank Ltd. In the first quarter, China even recorded a trade deficit of $1.02 billion, the first quarterly trade deficit in six years.

"The negative impact on exporters is less severe than expected," said He Liping, Director of the Institute of International Finance at the Beijing Normal University. "Inexperienced financial institutions may be more vulnerable to the currency fluctuations," he said.

One side-effect is international hot money is leaking into China, hoping to cash in on rising value of the yuan, said Ding Zhijie, a finance professor with the University of International Business and Economics.

Property Euphoria

China's house prices remain bullish in spite of government efforts to let air out of the property bubble.

In May, 50 out of 70 monitored major cities witnessed month-on-month increases in prices of new commercial residences, while only nine experienced declines. Prices stood unchanged in 11 cities, said the National Bureau of Statistics (NBS).

As for second-hand homes, prices rose in 36 cities in May over April prices, and 23 cities saw their prices drop over April.

Policymakers have pulled all their levers to tame house prices escalating beyond reach of many working families. But larger property developers seem yet to have felt the pinch. The Shenzhen-based China Vanke Co. Ltd., for example, sold 52.42 billion yuan ($8.1 billion) worth of homes in the first five months, skyrocketing 87 percent from the previous year. The Poly Real Estate Group also fared well, with sales revenues in January-May period soaring 82 percent year on year.

"The government measures are taking root as the market stabilizes, though massive price declines did not happen," said Yang Hongxu, an analyst with the E-house China Research and Development Institute. "The turning point may arrive in August as supplies increase and developers come under greater financial pressure to lower prices."

In a recent report, the international credit rating agency Standard & Poor's (S&P) said a deepening correction is looming over China's real estate market, with prices set to fall 10 to 30 percent over the next 12 months.

"If sales volumes remain sluggish, developers' liquidity will quickly dry up, suggesting sporadic price discounting will likely intensify," said Bei Fu, an analyst with the S&P.

Power Pains

China's thermal power generators are still swimming in red ink as coal prices skyrocket.

From January to May, the country's five largest electricity companies—Huaneng, Datang, Huadian, Guodian and China Power—incurred combined loss of 12.16 billion yuan ($1.9 billion) from thermal power generation, 7.86 billion yuan ($1.2 billion) more than the loss during the same period last year, said the China Electricity Council (CEC).

Nationwide coal prices are creeping up, eating into profits of power generators. The Shandong Province-based Yanzhou Coal Mining Co. Ltd. said its coal prices averaged at 726.4 yuan ($111.8) per ton in the first quarter, up 18 percent from a year earlier.

In the wake of painful losses, many smaller generators have idled their machines, worsening power shortages sweeping through parts of China. In attempt to soothe the hunger for power, the government has recently raised power prices for industrial and agricultural users in 15 provinces and municipalities. But that may not be enough to regain lost ground of the generators, said the CEC.

The CEC called for resumption of the coal and electricity price linkage mechanism—electricity prices are allowed to rise if the price of thermal coal rises by more than 5 percent within a period of six months.

"But that is less likely to happen in the near future given simmering inflation pressures," said Lu Qizhou, General Manager of China Power. "A more effective solution is to make a push into renewable energies and wean off reliance on thermal power."

TCM Woes

The traditional Chinese medicine (TCM) industry reels from acute costs inflation, as natural disasters hamper production lines.

In 2010, 84 percent of the monitored 537 TCM ingredients' prices more than doubled in part due to buoyant demand. The upward trend continued this year, with prices of 399 ingredients experiencing year-on-year increases, said the China Association of Traditional Chinese Medicine (CATCM).

The industry generated net profits of nearly 30 billion yuan ($4.6 billion) last year, up 33 percent year on year. In a bid to propel the traditional industry, the government has handed out a string of incentives, including technology support and higher tax rebates.

Drought and floods in many provinces disrupted planting of herbal medicine, adding fuel to price surges, said Guo Fanli, an analyst with the Shenzhen-based industrial research company CIConsulting.

"Meanwhile, speculators are hoarding raw materials, hoping to cash in on the TCM bonanza," he said. "The price inflation came as a heavy blow to manufacturers of processed TCMs."

Yin Pinyao, General Manager of Yunnan Baiyao, a producer of TCM for bleeding and open wounds, said the company is under growing profit pressure because of heavier costs. "We are unable to pass the pressure to consumers since the pricing power is in the hands of the government," he said.

The price fluctuation has hurt the health of the industry, said Fang Shuting, President of the CATCM. He suggested the government step up a clampdown on speculation and tighten supervision over the markets.

Taobao Restructures

China's e-commerce giant plans to split its online shopping site platform Taobao.com into three units—Taobao, Tmall.com, a B2C platform, and Etao.com, a search engine for consumers to locate products.

The split will create more value for the whole industry and more benefits for the company and shareholders, said Jack Ma, President of Alibaba, who owns Taobao.

The three units can better focus on their own fields and be more flexible in management after the restructuring, he said.

Taobao.com had 370 million registered users by 2010. In the first quarter of 2011, the site controlled 90 percent of China's C2C market, with transaction value totaling 125.1 billion yuan ($19.2 billion), according to data from the Shanghai-based iResearch Consulting Group. But the company is facing increasingly fierce competition as Internet gurus like Baidu and Tencent make a push into e-commerce.

"The break-up is part of efforts to diversify our businesses and focus on needs of targeted group of consumers," said Shao Xiaofeng, Vice President of Alibaba.

Most importantly, the move is expected to accelerate Tmall's forays into the thriving B2C sector, said Su Huiyan, a senior analyst with iResearch.

"Independent operations allow the Tmall to better develop higher-end brands, and make a distinction with the more affordable products on Taobao," she said.