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Market Watch
Business> Market Watch
UPDATED: September 6, 2010 NO. 36 SEPTEMBER 9, 2010

EQUIPMENT EXPO: Visitors look at a controllable pitch propeller system used on vessels at the ninth China International Equipment Manufacturing Exposition. The expo opened on September 1 in Shenyang, capital of northeast China's Liaoning Province. More than 580 enterprises from home and abroad brought their latest products to the show (GUO YU)

Numbers of the Week

26.13 billion

Exports of Chinese agricultural products in the first seven months of 2010 surged 22.9 percent year on year to $26.13 billion, said the Ministry of Agriculture.

343.4 billion

Combined net profits of China's 16 listed banks reached 343.4 billion yuan ($50.5 billion) in the first half of this year, representing a growth of 45.67 percent from one year ago.


TO THE POINT: China's manufacturing sector is regaining momentum as reflected by a PMI increase in August. ChiNext-listed firms posted slower-than-expected half-year profit growth, taking some shine off the NASDAQ-style board. Foreign investors are finding their way into China's real estate market, which is currently under the heavyweight of a government clampdown. Steelmakers' profits shrank substantially in July due to high iron ore prices and declining domestic steel prices. With government stimulus gaining traction, the software industry's revenues surged in the first seven months of this year. E-commerce guru Alibaba.com taps into the U.S. market by acquiring Auctiva, a third-party software developer for e-commerce websites.


 PMI Warms Up

The Purchasing Managers' Index (PMI), a barometer of manufacturing activities, reached 51.7 percent in August, up 0.5 percentage points from July, said the China Federation of Logistics and Purchasing.

The PMI includes a package of indices to measure manufacturing sector performance. A reading above 50 percent indicates economic expansion. August's figure marked the end of a three-month decline, although it was the 18th straight month that the index was above 50 percent.

"The bounce-back bodes well for the outlook of the broader economy," said Zhang Liqun, a senior researcher with the Development Research Center of the State Council.

The only cause for concern is a surge in the price of raw materials, which mounts cost pressures on enterprises, he said.

ChiNext Pains

For ChiNext, China's NASDAQ-style growth enterprise board, growth should not be taken for granted.

According to financial data provider Shanghai Wind Information Co. Ltd., 93 of the 109 firms listed on ChiNext raked in a combined profit of 2.67 billion yuan ($392.6 million) in the first half of this year, growing 26 percent from one year earlier. But half of those profits came from bank interest on funds from their initial public offerings.

In addition, the profit growth was also much slower than the average growth rate on other markets. The 373 companies listed on the Shenzhen Small and Medium Enterprise Board earned a total of 22 billion yuan ($3.2 billion), surging 42 percent year on year. On the main board of the Shenzhen market, 973 companies have logged a combined 334.8 billion yuan ($49.2 billion) in profit, up 42 percent.

China launched the ChiNext index in October 2009 in an effort to provide financing to technology and innovation-driven startup companies. But the slower-than-expected profit growth has raised suspicions about the prospects of the companies.

Chances are some companies window-dressed their profitability to get listed on the ChiNext, said Zhang Kai, a senior analyst at the China Securities Co. Ltd.

If such tepid performance continues, the much-coveted companies might lose some investor interests, said Zhang.

Wang Caihong, an analyst at the Guosen Securities Co. Ltd., warned investors against the ChiNext fever. The small companies in emerging industries are more vulnerable to market risks, said Wang.

Eyeing Property

Foreign investors are making forays into China's property market despite clouds gathering over the sector. Foreign companies face restrictions on property development in China, but many are pouring in via tie-ups with local partners.

The world's biggest private equity firm Blackstone, for example, recently reached an agreement with Hong Kong-based Great Eagle Group to back its high-end apartment project in the northeast port city of Dalian, Liaoning Province. Prior to this, the UBS Global Asset Management Ltd. teamed up with China's Gemdale Group to launch an investment fund targeting real estate development in second-tier cities.

China has poured cold water on the sizzling housing market and put a squeeze on bank loans to the sector—that is why domestic property developers have turned to foreign investors for funds. From the long-term perspective, China's property market glitters with significant growth potential, and the current gloom provided an entry point for the foreign giants, said Xu Feng, Director of the Shenzhen-based Midland Realty National Research Center.

Meanwhile, concerns have abounded that the foreign capital could soothe the financial distress of developers, and water down China's efforts to let air out of the property bubble.

But Fang Yan, a senior analyst at the Guosen Securities Co. Ltd., dismissed these worries. "The foreign capital is far from enough to meet needs of developers, and is less likely to have a huge impact on the domestic markets," he said.

Steelmakers' Woes

Despite a strong economic recovery, Chinese steelmakers are feeling the pinch of lackluster demand.

China Iron and Steel Association said 77 large and medium-sized steelmakers raked in a combined profit of 2.86 billion yuan ($420.6 million) in July, diving 73 percent from the same period last year. Compared with that in June, the number represented a decrease of 54 percent.

Two factors are hurting the profitability of the steelmakers—a surge in iron ore prices and a decline in domestic steel prices, said Hu Yanping, an analyst at the Custeel.com, a steel information website.

The deep downturn on the real estate market has also put a dampener on demands for steel, forcing steelmakers to lower prices, said Zhang Lin, an analyst at the Beijing-based Lange Steel Information Research Center.

Ma Guoqiang, General Manager of the Shanghai-based Baosteel Group Corp. also stroke a note of caution. "Uncertainties will linger in the market for the remainder of the year, including waning domestic demands and the government policy to cancel export rebates for some steel products," he said.

The only consolation is that iron ore prices are likely to head south. The Brazilian mining giant Vale said it planned to unveil a reduction of 10 percent in ore prices from October as spot prices in China declined. This would represent the first decline this year since the miners switched to a new quarterly pricing system linked to the spot market.

Software Boom

Revenues in the software industry skyrocketed by 29 percent year on year to reach 723.1 billion yuan ($106 billion) in the first seven months of 2010, said the Ministry of Industry and Information Technology (MIIT).

The growth rate was 6.8 percentage points higher than that in the same period last year. Revenue in July alone hit 118.3 billion yuan ($17.4 billion), an increase of 28.5 percent year on year.

Software exports grew by 26.2 percent to $13.86 billion in the first seven months while outsourcing services provided by the country's software industry rose by 32.9 percent to hit $1.49 billion.

China has set the target of 1 trillion yuan ($147.1 billion) in revenue for the industry in 2010. To achieve that, the government handed out a series of policy incentives, including lowering value-added tax of software enterprises to 3 percent from 17 percent.

"The software sector will continue to boom in the next few years with domestic demands staying buoyant," said Chen Wei, Director of the Department of Software Service Industry under the MIIT.

Meanwhile, the development of third-generation mobile technology and integration of telecom, cable TV and Internet networks will inject fresh steam into the industry, he said.

Alibaba's Deal

The Chinese e-commerce giant Alibaba.com has made its second acquisition in the United States, purchasing Auctiva, a third-party software developer for e-commerce websites. Auctiva provides listing, marketing and management tools and online storage service for small business owners that sell on e-commerce sites including eBay. The terms of the deal were not revealed.

The deal is part of Alibaba's strategy to further tap into the U.S. market with an eye to capturing more online retailers. In June 2010, it announced to have acquired Vendio Services Inc., also a third-party software developer.

With the two deals, Alibaba is expected to win more than 250,000 new customers in the U.S. market and will be able to connect with suppliers worldwide.

Alibaba said it is aiming to increase its profit margin of online merchants by integrating its wholesale marketplace AliExpress with Auctiva and allowing customers to search for suppliers and merchandise.

Alibaba currently controls nearly 54.6 percent of China's business-to-business market, and its net profit in the first half of 2010 soared nearly 40 percent year on year to 693 million yuan ($102 million).

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