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Market Watch
Business> Market Watch
UPDATED: April 22, 2011 NO. 17 APRIL 28, 2011

EXPORT HEALTH: Businessmen look at sanitary and bath ware products at the 109th China Import and Export Fair, or Canton Fair. The first phase of the fair was held on April 15-19 in Guangzhou, capital of Guangdong Province. Buyers in the first two days of the fair totaled 72,371, up 14.29 percent from last year (CHEN YEHUA)

Numbers of the Week

$3.0447 trillion

China's foreign exchange reserves reached $3.0447 trillion at the end of March 2011.

2.37 billion yuan

China's civil aviation industry earned 2.37 billion yuan ($362.9 million) in profit in March, down 27.2 percent from a year earlier, said the Civil Aviation Administration of China.

TO THE POINT: By ordering another hike in the reserve requirement ratio, China attempts to soak up excess liquidity. Chinese commercial banks issued higher-than-expected new loans in March, highlighting simmering inflation risks. House prices continue edging higher in most major cities, despite tough policies. State-owned enterprises are bursting with vitality, reaping juicy profits in the first quarter. China is bound to benefit from emerging global electric vehicle demand, though challenges remain. China's telecom equipment maker Huawei cashes in on profitable overseas markets.


Punching Liquidity

The People's Bank of China, the central bank, on April 17 ordered an increase to the ratio of deposits that commercial banks must set aside in reserve in a move to cool inflation. It was the fourth hike this year after six increases in 2010.

Commercial banks would have to set aside an additional 0.5 percent of their deposits in reserve, locking around 370 billion yuan ($56.5 billion) that they could otherwise lend.

A flood of liquidity is sloshing around the Chinese economy because of two years of heavy lending, leading to consumer price growth across the country. Rising global commodities prices are also fueling inflationary jitters.

Alongside hikes in the reserve requirement ratio, the central bank has also raised the benchmark interest rates four times since last October to battle persistent inflation.

UBS economist Wang Tao said a large amount of foreign exchange inflows in the first quarter added to excess liquidity, putting intense pressure on China's central bank to implement tightened controls.

Robust economic growth has left room for the country to tackle inflation, and more tightening measures are already on the way, said Lian Ping, chief economist of the Bank of Communications.

As a side effect, the tighter monetary environment will exacerbate capital strains on smaller enterprises, and put a dent in commercial banks' profitability, said Guo Tianyong, Director of the Research Center of China's Banking Industry under the Central University of Finance and Economics.

Credit Binge

New loans denominated in the yuan totaled 679.4 billion yuan ($103.7 billion) in March, compared with 535.6 billion yuan ($81.8 billion) in February, said the central bank.

The March figure brought the amount in the first quarter to 2.24 trillion yuan ($342 billion), decreasing nearly 14 percent from the previous year.

The broad money supply (M2), which covers cash in circulation and all deposits, increased 16.6 percent year on year to 75.81 trillion yuan ($11.6 trillion) by the end of March.

Lu Zhengwei, an economist with the Industrial Bank Ltd., said rapid loan growth indicates lingering inflationary pressures.

Loans have substantially raised liquidity in the Chinese capital markets, overtaking food prices to become the major driver of inflation, said Qu Hongbin, China economist with HSBC in Hong Kong.

"The excess liquidity is not yet out of control, but the central bank is likely to hike the reserve requirement ratio in the near future," said Zuo Xiaolei, chief economist at the China Galaxy Securities Co. Ltd.

Housing Conundrum

House prices continue creeping up in most Chinese cities.

In March, 50 out of 70 monitored major cities witnessed month-on-month increases in prices of new commercial residences, while only 12 experienced declines. Prices stood unchanged in eight cities, said the National Bureau of Statistics (NBS).

As for second-hand homes, prices rose in 44 cities in March over February prices, and 16 cities saw their prices head south.

"Ample liquidity, de facto negative interest rates coupled with a continuously appreciating Chinese currency, has been facilitating the growth of home prices despite tightening measures from the Central Government," said Liu Ligang, a Hong Kong-based economist with the Australia & New Zealand Banking Group.

In the latest move to let air out of the property bubble, the government has sent inspection groups to ensure that the austerity measures are properly put in place across the country.

But property developers have yet to feel the pinch of the government clampdown. China Vanke Co., the nation's largest listed developer, said its sales revenues in the first quarter of 2011 skyrocketed 135.3 percent from the previous year to reach 35.5 billion yuan ($5.4 billion).

Looking ahead, pressures will mount on developers to lower prices as supplies outweigh demands, said a recent report by the Shenzhen WorldUnion Properties Consultancy Co. Ltd.

While clouds gather over markets in big cities, the smaller ones have gained a chance to shine because they are mostly not subjected to purchase restrictions.

SOEs Fare Well

China's state-owned enterprises (SOEs) reaped handsome returns in the first quarter, drawing strength from a robust economy.

In the January-to-March period, SOEs raked in a combined profit of 512.35 billion yuan ($78.2 billion), rising 27.5 percent from a year ago, said the Ministry of Finance (MOF). Of this total, central SOEs earned 368.11 billion yuan ($56.2 billion), and the rest went to local SOEs.

SOEs' revenues totaled 8.09 trillion yuan ($1.2 trillion), representing an increase of 24.7 percent year on year. The SOEs also made an improvement in profitability as their profit-to-sales ratio came in at 4.7 percent, up 0.1 percentage point from the same period last year.

But not every industry was in the black. The country's biggest five power generators, for example, continued to spilling red ink due to surging coal prices, said the MOF.

It is reported that the National Development and Reform Commission has ordered to raise the on-grid electricity tariffs for some loss-making thermal power companies in an effort to cushion the costs inflation.

Going Electric

Driven by four global mega trends—reducing carbon emissions, oil concerns, growing congestion, and rapid technology advances—countries worldwide are focusing strongly on vehicle electrification with China emerging as an important test-bed for innovation, said the World Bank in a recent report.

"From policy to technology to new business models, China is innovating on all the building blocks needed to successfully deploy electric vehicles (EVs)," said Ede Ijjasz, Sustainable Development Manager for the World Bank in China and Mongolia.

Currently, Chinese policies promote electric vehicles through purchase subsidies, which is not unusual at this stage of market development. Looking ahead, policies will need to support institutional and technological innovation, vehicle-charging infrastructure and manufacturing capacity, said the World Bank.

The infrastructure and technology for charging electric vehicles in China focus on buses, trucks or taxis. However, as private car demand rises, integrated battery charging solutions will be needed to ensure that vehicle charging is safe, does not disrupt the electrical grid, and provides quality service to consumers.

As the industry matures, new common standards for charging, safety and battery disposal will be needed for both manufacturers and consumers.

Developing common standards within China, where there are fewer larger utilities, should be easier than in other countries. The State Grid Corp. of China has established charging standards, but these differ from U.S. and European standards which would add to costs and inhibit access to global markets, it said.

Huawei's Boom

Huawei Technologies Co. Ltd., China's largest mobile network equipment maker, is gaining momentum thanks to a solid overseas foothold.

The Shenzhen-based company reported 185.2 billion yuan ($28.4 billion) of sales revenues last year, rising 24.2 percent year on year. The net profits went up 30 percent from a year ago to 23.8 billion yuan ($3.6 billion).

"This progress was mainly driven by significant growth in our overseas market," said Ren Zhengfei, CEO of the company.

Huawei's overseas sales accounted for 65 percent of its total in 2010, 5 percentage points higher than in 2009.

Rapid and balanced development in major business segments—telecom networks, devices and global services—was another significant contributor to the growth, said Ren.

While the company extends its footprint overseas, its expansion into the U.S. market has run into problems. In February, it dropped plans to acquire patents from the U.S. server firm 3Leaf Systems as a U.S. security panel refused to approve the deal.

Despite the failure, Huawei remains keen on a U.S. acquisition and sees the United States as a key market for purchasing patents, said Song Liuping, chief legal officer of the company.

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