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Market Watch
Business> Market Watch
UPDATED: November 26, 2010 NO. 48 DECEMBER 2, 2010

'TIS THE SEASON: Christmas decorations are on display at a shop in Yiwu, a commodity hub in east coastal Zhejiang Province. Manufacturers in the city have stepped up supplies to meet growing needs for Christmas products (HAN CHUANHAO)

Numbers of the Week

38.64 million

China's 3G users totaled 38.64 million at the end of October, soaring 295.7 percent from a year ago, said the Ministry of Industry and Information Technology.

7 billion yuan

China's 77 large and medium-sized steelmakers raked in a combined profit of more than 7 billion yuan ($1.1 billion) in October, up 21 percent from September, said the China Iron and Steel Association.

TO THE POINT: The central bank on November 19 ordered commercial banks to set aside an additional 0.5 percent of their reserves amid looming inflationary risks. Investors are on the defense and preparing for the worst by buying up gold as a safe haven against inflation and market uncertainties. China's state-owned enterprises earned a combined profit of 1.626 trillion yuan ($245 billion) from January to October this year, soaring 44.8 percent year on year. In a push into renewable energies, China should enhance efforts in hydropower, wind power and inter-provincial trade, as well as green electricity schemes, said the World Bank. The aviation industry booms as air traffic increases.


Mopping up Liquidity

The People's Bank of China (PBOC), the central bank, on November 19 issued an order raising the reserve requirement ratio (RRR) by 0.5 percentage points, effective as of November 29. This is the fifth such hike this year and the second increase in November. It is expected to freeze liquidity worth around 300 billion yuan ($45.2 billion).

The central bank said the move was intended to "enhance liquidity management and moderately regulate credit supply."

By mopping up excess liquidity, the government is trying to fend off the ripple effect of the U.S. quantitative easing policy that may fuel inflation and asset bubbles in emerging markets, said Fan Gang, Director of the National Economic Research Institute.

China's consumer price index (CPI), a barometer of inflation, hit a 24-month high of 4.4 percent in October. In a recent report, UBS Securities expected China's CPI to surge to 5 percent in November and then level off in December.

"Given the nature of CPI inflation so far, we think the sequential momentum of food price increases may be near its peak," said Wang Tao, an economist at UBS Securities. "Unless there is unusually bad weather or any natural disasters, we expect the year-on-year CPI inflation to stabilize in the next few months and stay in a moderate range in early summer 2011."

"The PBOC is under pressure, and it needs to do something to show its determination to tame inflation. However, it has no intention to kill growth by aggressively hiking interest rates or imposing a lending squeeze," said Lu Ting, China economist at the Bank of America-Merrill Lynch.

Compared with interest rate increases, the RRR rise has a more direct impact on the excess liquidity, and more such increases are probably already in the pipeline, said Zuo Xiaolei, chief economist at the China Galaxy Securities Co. Ltd.

Tan Yaling, a senior analyst at the Bank of China Ltd., said China is less likely to raise the interest rate in the near future as bigger interest rate differences between China and other major economies would quicken inflows of hot money.

Gold Bonanza

As inflation jitters proliferate, Chinese investors are seeking refuge in the gold market.

In a recent report, the World Gold Council (WGC) said Chinese investors continued to "flock into gold" during the third quarter, with demand for bars and coins reaching 45.1 metric tons, valued at about 120 billion yuan ($18.1 billion). This topped the previous quarterly record of 39.6 tons in the January-to-March period.

Demands for gold include jewelry, industrial and dental uses and investment. China is already the world's second biggest gold consumer, with jewelry buying contributing the lion's share and investment also on the rise.

With the stock market fluctuating and the property sector subdued, the gold market seems to be a safe haven for capital, said Zhang Yingying, an analyst at China Galaxy Securities Co. Ltd.

So far this year, prices of gold futures at the Shanghai Gold Exchange have gained around 24 percent on buoyant demand.

The price is likely to continue north as central banks around the globe boost their gold reserves, straining supplies to the markets, said Wang Peifu, President of Zhaojin Mining Industry Co. Ltd., a gold miner based in east Shandong Province.

A bigger appetite from India and China for gold is expected to boost demand for the yellow metal globally, said the WGC report.

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