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Market Watch
Business> Market Watch
UPDATED: May 6, 2011 NO. 19 MAY 12, 2011


PROPERTY GLOOM: A commercial residential complex is under construction in Fuzhou, capital of southeast China's Fujian Province. Sales of new commercial residences in the city from March 28 to April 27 dropped 32.2 percent month on month as the government stepped up a clampdown on property markets ZHANG GUOJUN 

Numbers of the Week


During the three-day May Day holiday which ended on May 2, China's mainland visitors to Hong Kong reached 303,637, representing an increase of 21.6 percent over the same period last year, said the Hong Kong Tourism Board.

20.64 billion yuan

Sinopec Corp., China's top oil refiner, said its net profits in the first quarter this year rose 25.22 percent year on year to 20.64 billion yuan ($3.17 billion).


China's manufacturing activities keep slowing down. The "big four" state-owned commercial banks have reaped juicy profits, though capital adequacy remains a concern. In striking contrast, the steelmakers are struggling to make ends meet as costs inflation erodes profit margins. The consumer market booms as usual during the May Day holiday. The search engine Baidu benefits from torrid traffic growth and a diversified market strategy.

Manufacturing Slackens

The purchasing managers index (PMI), a barometer of manufacturing activities, reached 52.9 percent in April 2011, falling from 53.4 percent in March, said the China Federation of Logistics and Purchasing (CFLP).

The new orders sub-index, an effective gauge of domestic demand, stood at 53.8 percent in April, down from 55.2 percent in March. The input prices sub-index, a measure of how much factories pay for raw materials and other intermediary goods, slowed to 66.2 percent from 68.3 percent in March.

The data showed an "appropriate adjustment" in growth as the country rebalances the economy, said the CFLP.

The drop is in line with the lackluster growth in domestic demand and may add to possibilities of a macroeconomic slowdown, said Zhang Liqun, a researcher with the Development Research Center of the State Council.

"It shows that government measures to rein in inflation are taking root," said Cai Jin, Vice President of the CFLP. "But domestic demands turned tepid in part due to strained market liquidity."

April's PMI still marked the 26th straight month in which the index was above the boom-and-bust line of 50 percent. A reading above 50 percent indicates economic expansion.

Bank Profits Up

China's "big four" state-owned commercial banks are getting into full swing as their interest income continues expanding.

Industrial and Commercial Bank of China (ICBC), the country's top lender by assets, said first-quarter profits soared 29 percent from the previous year to reach 53.84 billion yuan ($8.3 billion).

The bank's net interest income, which reflects the difference in revenue from lending and the cost of deposits, surged 25 percent to 85.4 billion yuan ($13.1 billion) in the January-to-March period. Net fee and commission income from products and services such as credit cards, wealth management and insurance sales rose 42 percent to 25.9 billion yuan ($4 billion).

China Construction Bank, the second largest lender, saw its net profits climb 34.2 percent to 47.23 billion yuan ($7.3 billion).

Bank of China's first-quarter profits rose 28.03 percent to reach 35.01 billion yuan ($5.36 billion).

Agricultural Bank of China (ABC) generated 34.1 billion yuan ($5.2 billion) in net profits, up 36.4 percent.

In attempts to cool inflation, the central bank has twice raised interest rates and hiked the ratio of deposits that commercial banks must set aside in reserves four times this year. Despite those tightening measures, demand for credit remains buoyant as the economy picks up momentum, said Guo Tianyong, Director of the Research Center of China's Banking Industry at the Central University of Finance and Economics.

Jiang Jianqing, Chairman of ICBC, said the impact of rising interest rates on ICBC was largely neutral because any drop in borrowing demand was offset by higher income from interest margins.

The industry, however, was not without concerns. ICBC recorded a capital adequacy ratio of 11.7 percent by March, down 0.5 percentage points from the end of 2010. The ratio of ABC even dipped to 11.4 percent, below the government-set minimum requirement of 11.5 percent.

Steelmakers' Woes

Chinese steelmakers are facing some serious headwinds as skyrocketing iron ore prices eat into their profits.

The China Iron and Steel Association (CISA) said 77 large steelmakers across the country raked in combined profits of 24.46 billion yuan ($3.8 billion) in the first quarter, with an average profit margin of 2.91 percent, well below the average ratio of 6.2 percent for all major industrial sectors.

Worse still, 10 companies spilled red ink, with losses totaling 650 million yuan ($100 million), said the CISA.

The iron ore prices continue heading north, putting Chinese steelmakers in a tight spot, said Qu Xiuli, Deputy Secretary General of the CISA.

China's iron ore imports soared by 14.4 percent to 177 million tons in the first quarter, while the average price rose by 59.5 percent year on year.

China is in a weak bargaining position as the three global mining giants—Vale, BHP Billiton and Rio Tinto—have monopolized around 70 percent of global supplies.

Meanwhile, serious overcapacity has rubbed salt into wounds of the steelmakers, said Qu. In 2010, China's crude steel output amounted to 626 million tons, accounting for more than half of the world's total crude steel output.

In response, the country will further consolidate the fragmented industry and step up a clampdown on polluting and energy-depleting capacities, said Zeng Jiesheng, a senior analyst with the Mysteel.com, a steel information service company based in Shanghai.

Efforts are also needed to strengthen iron ore exploration at home and wean the country's reliance on imports, he said.

Shopping Spree

The consumer market burst with vitality as holiday cheer created a buying mood among consumers.

Key retail enterprises across the country witnessed their sales revenue surge 19.7 percent year on year during the May Day holiday (April 30-May 2), said the Ministry of Commerce (MOFCOM). The average daily sales volume even jumped 51.2 percent from April 29.

Traditional festival goods, including food, liquor, clothing and household appliances all experienced a buying surge. In Beijing, major electronics retailers—Gome, Suning and Dazhong—experienced an average 35-percent surge in sales during the holiday.

In addition, the gold market gained momentum as consumers snapped up valuable trinkets in part because of simmering inflationary fears. Beijing Caishikou Department Store, the largest gold jewelry retailer in Beijing, reported an 88.4-percent growth in gold and jewelry sales during the holiday.

The spending spree should be good news as the country gears up to rebalance the economy to rely more on domestic demands. Private consumption is expected to account for 45 percent of the Chinese economy by 2015, up from the current 36 percent, said Stephen Roach, Non-executive Chairman of Morgan Stanley Asia.

To achieve that, the country needs to raise residents' income and repair the social safety net, he said.

"If precautionary saving persists, it will be exceedingly difficult for China to convert incremental growth in wage income into increased consumer spending," he said.

Baidu Shines

China's largest search engine Baidu cashed in on the Internet bonanza, gaining steam from solid traffic growth and diversified businesses.

The company generated 1.07 billion yuan ($186.7 million) in net profits in the first quarter, skyrocketing 122.8 percent from a year earlier, while sales revenues stood at 2.44 billion yuan ($372 million), up 88.3 percent year on year.

Baidu currently controls 75.8 percent of China's search engine market, followed by 19 percent of Google, according to data from the Beijing-based research firm Analysys International.

The company will continue to support long-term growth by focusing significant investment on research and development, marketing and network infrastructure, among other things, in the coming quarters, said Jennifer Li, Baidu's CFO.

Baidu's CEO Robin Li, however, said the company's growth will likely slow compared to last year, when it was boosted by its fledgling keyword advertising system—Phoenix Nest.

While it enjoys dominance in the search market, Baidu is diversifying into e-commerce, online video and social networking. It has joined hands with Japan's e-commerce giant Rakuten to build China's largest online shopping mall. Meanwhile, the company in April 2010 launched a video sharing site Qiyi.com to compete with Youku.com and Tudou.com. The site now has 150 million users, and is likely to make profits next year.

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