TO THE POINT: China slashes import duties on 33 items, a move expected to stimulate imports and benefit a series of relevant sectors. Growth of industrial profits is slowing down due to costs inflation and tightening monetary policies. Foreign banks operating in China see a rosy future for their businesses. Mounting debt poses risks to local governments. By closing 56 unlicensed express delivery firms, China aims to streamline the crowded and chaotic industry. Suning takes majority control of the Japanese company Laox as the Chinese appliance retailer expands abroad.

Bolstering Imports

The Ministry of Finance recently announced to slash import duties on 33 items, mostly energy products and raw materials in a move to boost imports and rebalance trade of the country.

The import tariffs on diesel and jet kerosene are removed while duties for gasoline and fuel oil are lowered to 1 percent, effective as of July 1.

"The latest reduction is expected to help ensure refined fuel supplies in the domestic market and soothe simmering inflationary jitters," said Bai Pengming, a researcher with the Shenzhen-based think-tank CIConsulting.

The move will also relieve some profit pressures of Chinese oil refiners, said Deng Yong, an analyst with the Haitong Securities Co. Ltd. Sinopec, for example, reported losses of 576 million yuan ($88.6 million) in the first quarter for its oil refining businesses due to surging international crude oil prices.

The biggest beneficiaries are airlines, which are struggling with costs inflation and competition from emerging high-speed railway, said Deng.

Jet kerosene makes up around 30 percent of Chinese airlines' costs, and the country relied on imports to meet 40 percent of its needs for jet kerosene in 2010, he said.

Industrial Slowdown

Industrial enterprises above designated size—sales revenue of 20 million yuan ($3 million)—raked in combined net profits of 1.92 trillion yuan ($295.4 billion) in the first five months, up 27.9 percent, 1.8 percentage points slower than the January-to-April period, said the National Bureau of Statistics.

Revenues of their main businesses totaled 31.1 trillion yuan ($4.8 trillion), an increase of 29.4 percent from a year ago.

Of the monitored 39 industries, 37 witnessed year-on-year increases in profits while two sectors suffered declines. The best performers included oil and natural gas exploration, mining, chemicals and transportation equipment.

"Enterprises are facing some headwinds due to rising raw material and labor prices, as well as financing costs," said Lu Zhengwei, chief economist at the Industrial Bank Ltd.

Local Debt Concern

In a recent report, the National Audit Office (CNAO) reported that debt of China's local governments had amounted to 10.72 trillion yuan ($1.6 trillion) by the end of 2010, with a debt ratio of 52.25 percent.

Of this total, 4.97 trillion yuan ($764.6 billion) were raised through financing vehicles of local governments, accounting for 46.4 percent of the total. By 2010, there had been 6,576 financing vehicles across the country.

Worries have abounded over sustainability of the debt as clouds gather over the property markets and local governments heavily rely on land-transferring fees as a major source of fiscal revenues.

The debt burden remains within solvency capacities of the local governments, though risks in certain areas and industries still loom large, said Liu Jiayi, Auditor General of the CNAO.

Qu Hongbin, HSBC's chief economist in China, said that although the size of the debt was still manageable, authorities needed to take immediate action to restructure these debts to mitigate the risk of defaults.

Around 5.7 trillion yuan ($876.9 billion) of debt are expected to come due in two years and a half, he said.

"I think allowing local governments to issue bonds should be the most feasible option in the near term," he said.

The CNAO also suggested the government should further clear the financing vehicles and prohibit local governments from illegal guarantees.

Banking Prospect

Despite increasing funding constraints, foreign banks operating in China remain confident about their prospects in the Chinese market, said the accounting firm PricewaterhouseCoopers (PwC) in a recent report. It was based on a survey on CEOs and top bankers of 42 overseas banks in China between April and May.

Of the polled foreign banks, 22 expect their China revenues to grow between 20 percent and 50 percent in 2011, and all the respondents believed that their revenues will continue to grow over the next three years.

"Their optimism stems from the continued opening up of the Chinese economy, and its transition toward a convertible currency," said PwC.

In 2010, the 127 foreign banks operating in China commanded combined banking assets of around 1.7 trillion yuan ($261.5 billion), accounting for 1.83 percent of the country's total, compared with 1.71 percent in 2009.

"China's economy may not be expanding as rapidly as in recent years, but it's still growing at a faster rate than the banks' own home markets," said Raymond Yung, financial services leader for PwC China. "With the Chinese Government taking steps to internationalize the yuan, more business opportunities will develop."

Meanwhile, three quarters of the respondents said liquidity tightening had affected their lending, while the impact of the increase in reserve requirements has yet to be felt.

In addition, some banks worry that it will be difficult to attract enough deposits to meet the required loan-deposit ratio of 75 percent.

Express Reshuffle

China has launched a crackdown on unlicensed express delivery firms as the country gears up to consolidate the crowded industry.

The State Post Bureau of China recently announced suspensions for 56 unlicensed express enterprises, mostly franchised outlets of the country's four largest express delivery networks—ZTO, Shentong, Yunda and Yuantong.

Express firms are mushrooming across the country as the industry picks up momentum thanks to a significant e-commerce boom. In 2010, the sector generated net income of around 57.3 billion yuan ($8.8 billion), up 19.6 percent from the previous year, according to data from the China Express Association (CEA).

But a series of problems have cast an ominous shadow over the sector's growth prospect, including reckless expansion and weak services. Meanwhile, price wars are simmering in the markets as smaller companies vie for businesses, said Shao Zhonglin, Deputy Secretary General of the CEA.

In attempts to reorganize the fragmented industry, policymakers have spared no effort. The government has initiated a program to hand out policy incentives for major express enterprises and encourage mergers and acquisitions in the sector. Moreover, the government also pledged to support share listing and bond sales of express firms. The goal was to foster a batch of internationally competitive giants over the next five years.

Appliance Acquisition

Home appliance giant Suning Appliance on June 28 announced it will acquire a majority stake of Japanese electronics retailer Laox, marking a solid step toward global expansion.

Laox will issue 9 billion yen ($111 million) worth of new shares through a private placement to Suning. After the deal, Suning will hold 51 percent of Laox as its largest stockholder.

"The move is essential to Suning's long-term strategy to expand overseas and increase product lines," said Sun Weimin, Vice Chairman of Suning. "Laox will help us gain more knowledge of overseas markets and help us build a team for overseas expansion."

Suning said it will attempt to integrate Laox's design and manufacturing advantages to develop supply chain for the company, learn advanced expertise for store layouts and services, and train employees through Laox stores to power its overseas expansion.

Laox also plans to make forays into China and open 150 stores over the next five years.

Fan Zhijun, head of Suning's operations department, said Suning and Laox stores will procure independently but will share logistics, accounting and information.