TO THE POINT: China orders another increase in interest rates as the country gears up to calm inflationary jitters. The purchasing managers index tumbles to a 28-month low, a reflection of weaknesses in the manufacturing industry. Chinese steelmakers reel from severe costs inflation. The government adds a new category of "micro-enterprises" in a move to help small businesses. The Swiss food giant Nestle launches a bid to acquire Chinese candy maker Hsu Fu Chi.

Growing Interest Rates

The People's Bank of China, the central bank, on July 6, announced a rise in interest rates for the third time this year in a bid to curb inflation and tame climbing property prices.

Effective on July 7, the one-year benchmark deposit rate rose to 3.5 percent from 3.25 percent, while the one-year benchmark lending rate grew by the same 25 basis points to 6.56 percent, said the central bank.

As inflation remains an acute concern for the economy, policymakers have taken steps to soak up market liquidity. The central bank has also raised the reserve requirement ratio six times so far this year.

The consumer price index (CPI), a main gauge of inflation, accelerated to 5.5 percent in May, the highest level in 34 months and well above the government's target ceiling of 4 percent.

"The move is expected since China's interest rates remain negative in real terms," said Ba Shusong, Deputy Director of the Research Institute of Finance at the Development Research Center of the State Council. "It would also help fight inflation if China can further increase its currency flexibility."

Lian Ping, chief economist with the Communications Bank of China, expected the CPI to peak in June before it tapers off in the latter half of the year.

"China's inflation battle is almost at an end," said Frederic Neumann, an economist with the HSBC in Hong Kong. "Already, there are signs that price pressures are coming off, and the latest rate increase may therefore have been the last in the cycle."

Manufacturing Falters

The purchasing managers index (PMI), a barometer of manufacturing activities, stood at a 28-month low of 50.9 percent in June, falling 1.1 percentage points from May, said the China Federation of Logistics and Purchasing (CFLP).

It was the third consecutive month of decline for the index, but it was still above the boom-and-bust line of 50 percent. A reading above 50 percent indicates economic expansion.

It shows that the broader economy remains on a steady track of growth, though an economic slowdown continues, said the CFLP.

The new orders sub-index, an effective gauge of domestic demand, stood at 50.8 percent in June, down from 52.1 percent in April. The input prices sub-index, a measure of how much factories pay for raw materials and other intermediary goods, slowed to 56.7 percent, compared with 60.3 percent in May.

"Inventory adjustment, the biggest factor draining steam out of the economy, is only temporary," said Zhang Liqun, a researcher with the Development Research Center of the State Council, in the CFLP statement. "A deeper downturn is less likely given the three robust drivers of the economy—investment, consumption and exports."

"Some policymakers might be more concerned about over-tightening and might consider slightly adjusting their policy stance," said Lu Ting, an economist with the Bank of America Merrill Lynch.

Tao Wang, chief China economist at the UBS, said the Chinese economy may rebound after July or August as companies stop destocking and domestic demand recovers.

Steelmakers' Pains

China's steelmakers are struggling to make ends meet as acute costs inflation squeezes their profits.

The China Iron and Steel Association (CISA) said 80 large steelmakers across the country raked in combined profits of 42.8 billion yuan ($6.6 billion) in the first five months of this year, falling 2 percent from the previous year. Their profit-to-sales ratio averaged 2.91 percent, down 0.67 percentage points from a year ago.

Surging iron ore prices have put Chinese steelmakers in a tight spot. China imported 280 million metric tons of iron ores from January to May, growing 8.1 percent from a year earlier. The average import prices stood at $159.6 per ton, compared with $108.1 per ton a year ago, according to data from the General Administration of Customs.

Meanwhile, because of lackluster domestic demand, three larger steel-makers have lowered their steel prices for July, including Baosteel, Ansteel and Wusteel.

"Downturn in the automobile and machinery industries has made a dent on demands for steel," said Wang Zhaohua, an analyst with the Sinolink Securities Co. Ltd. "But massive construction of affordable housing will help cushion the blow."

In response, the steelmakers are supposed to focus on costs control and tighten efforts to improve operation efficiency, said Luo Bingsheng, Deputy Director of the CISA.

Shoring Up Micro-firms

China has subdivided small and medium-sized enterprises (SMEs) by adding a category of "micro-sized enterprises."

According to a statement of four ministries including the National Development and Reform Commission and the Ministry of Industry and Information Technology, industrial companies with 20 employees or less or those with 3 million yuan ($461,538) in annual income or less are included as micro-sized enterprises. In addition, the government also lowered the standard for SMEs.

The move is designed to better shore up the micro-businesses with more targeted favorable policies, said the statement. It is estimated that micro-enterprises account for nearly 40 percent of job creation in the country.

Zhu Hongren, chief engineer with the Ministry of Industry and Information Technology, said creating the new standard will make it easier for the government to roll out suitable support measures for micro-firms.

"Micro-enterprises" are not new to many foreign countries. The European Union, for example, defines micro-enterprises as those that meet two of three criteria and have not failed to do so for at least 10 years—fewer than 20 employees, balance sheet total below $800,000 and turnover below $800,000.

In China, a string of incentives to stimulate the micro-businesses is already underway. South China's Guangxi Zhuang Autonomous Region plans to extend subsidies to micro-enterprises started by migrant workers and unemployed urban dwellers.

Express Delivery Safety

An express delivery industry conference was held in Beijing on July 6. Nearly 100 researchers and industry insiders attended the meeting to discuss problems worrying the growing but fragmented industry, such as delayed deliveries and lack of compensation for missing packages.

Cui Zhongfu, Vice Chairman of China Federation of Logistics and Purchasing, said express delivery firms should make firm efforts to ensure safety of the packages and further improve their compensation systems.

Consumers should increase their awareness of risks and buy insurance for delivered packages, said Qiu Jianguo, Director of the Customer Complaint Department with China Consumer Association.

A Win-Win Deal

The Swiss food giant Nestle is in acquisition talks to take over the Chinese candy maker Hsu Fu Chi.

Hsu Fu Chi, based in Guangdong Province, leads the Chinese candy market with a market share of 6.6 percent in 2009. It has a market capitalization of 3.18 billion Singaporean dollars ($2.59 billion) on the Singapore exchange. If the deal is finally realized, it will be the biggest takeover of a Chinese firm by a foreign company.

Hsu Fu Chi said it "has long been pursuing strategic talks with potential confectionery partners in the market. Interactive contacts have been conducted with counterparts from Japan, Europe and the United States for years including Nestle."

"Buying Hsu Fu Chi would boost Nestle's product offerings and distribution networks in China, allowing it to accelerate forays into China's burgeoning confectionery market, especially those in smaller cities," said Zhou Siran, a senior researcher with the Shenzhen-based industrial research institute CIConsulting.

Paul Bulcke, CEO of Nestle, said the company wanted revenues from emerging markets to comprise 45 percent of the total by 2020, up from the current 38 percent.

"Hsu Fu Chi could benefit from Nestle's deep pockets, technological expertise and management experience," said Zhou. "The tie-up would also pave way for the Chinese company to expand overseas."

But the deal still needs to receive regulatory approval from the Chinese Government.