MARKET WATCH

MARKET WATCH

By HU YUE

To THE POINT:Chinese automakers cash in on a sales boom in the first half, but signs emerge that a pothole-filled path lies ahead. China maintains appeal to foreign investors as the June FDI surged nearly 40 percent year on year. The steel-makers stand on wobbly legs as June profits shrink due to weak demands. The China Banking Regulatory Commission said Chinese lenders extended 7.66 trillion yuan ($1.14 trillion) of loans to local financing vehicles, arousing concerns over the financial black hole. The gold industry has been bursting with vitality as risk-aversion came to the fore as inflation fears and stock market volatility rattled investors.

Auto Boom

China’s auto market continues to thrive, though the sales boom is losing some shine.

Vehicle sales nationwide totaled 9 million units, skyrocketing nearly 48 percent from one year earlier, said the China Association of Automobile Manufacturers(CAAM). The auto output was 8.9 million units, a growth of 48.8 percent year on year.

Sales of China’s home-made passenger vehicles hit 3.18 million units during the fi rst half, accounting for 47.35 percent of the market.

Sales in June reached 1.41 million units, up 23.48 percent compared to a year ago, but down by 1.83 percent compared to May. This was widely seen as a signal that the market is topping out.

The explosive growth last year was in part in fl ated by a low comparison base, said Jia Xinguang, a renowned independent auto analyst.

Weighing down market confidence were also uncertainties of the macroeconomy and withdrawal of some stimulus measures, said Jia.

The Chinese Government has raised the sales tax on small cars to 7.5 percent this year after halving it to 5 percent in 2009.

Demand may continue to weaken in the rest of the year, mounting pressure on dealers to clear inventories, said Zhao Hang, President of China Automotive Technology and Research Center.

But the slowdown is helpful with health of the industry, and a deep market gloom is less likely, he said.

Capital Destination

Inward foreign direct investment (FDI)of China stood at $12.5 billion in June,soaring 39.6 percent year on year. The fi gure for the fi rst half of the year was $51.4 billion, and newly approved foreign companies numbered 12,400, said the Ministry of Commerce.

Among the world’s major FDI recipients, China was the second largest in 2009 with around $95 billion after the United States, said the World Investment Report recently issued by the United Nations Conference on Trade and Development(UNCTAD).

China’s economic rebalancing and industrial upgrade are expected to create new opportunities for foreign investors,those with cutting-edge technology and research prowess, in particular, said James X.Zhan, Director of Davison of Investment and Enterprise under the UNCTAD, at the release ceremony of the report.

Meanwhile, outward investments are also on the rise with the economy gaining strength, said Zhan. The report said outward FDI of China stood at $48 billion in 2009, ranking sixth in the world.

As Chinese companies head overseas,they face daunting challenges of protectionist restrictions, as well as political risks like riots and wars. This has enhanced the need to build a reliable investment insurance system to protect interests of Chinese investors, said Zhan.

Global FDI witnessed a modest, but uneven recovery in the fi rst half of 2010.The gradual improvement of macroeconomic conditions, corporate profits and stock market valuations observed in early 2010 is expected to continue, supporting renewed business con fi dence, said the report.

Developing and transition economies attracted half of global FDI in fl ows, and invested one quarter of global FDI out fl ows,it said.

Steel Gloom

Reeling from weak demands and overcapacity, Chinese steelmakers are caught on a tight spot.

The China Iron and Steel Association(CISA) said 77 large and medium-sized domestic steelmakers raked in a combined pro fi t of 6.25 billion yuan ($922 million)in June, a sharp drop from 10 billion yuan($1.5 billion) in May.

Demands for steel remain lackluster in part due to deep downturn on the real estate market. Domestic steel prices have been on a downward trend since April until a timid rebound in middle July.

More disturbing, though, was the problem of overcapacity that has cast an ominous shadow over prospect of the industry, said Xu Xiangchun, a senior analyst at the mysteel.com, a steel information service company based in Shanghai.

On top of the worries came the government order to cancel tax rebate for exports of 406 items, including some types of steel products. This is expected to rub salt into wounds of the steelmakers, said Xu.

In response, Chinese plants have cut back on their output to shore up prices and also weaned off reliance on imported iron ores to save costs. While domestic production of iron ores hit a record high of nearly 102 million tons in June, the imports have been declining for three consecutive months since April, said the National Bureau of Statistics.

Numbers of the Week29.1%

Revenues of China’s software industry rose by 29.1 percent year on year to 604.8 billion yuan($89.34 billion) in the first half of 2010, said the Ministry of Industry and Information Technology.

71.8%

Profits of China’s industrial enterprises climbed 71.8 percent year on year to hit 1.61 trillion yuan($237.5 billion) in the first six months,said the National Bureau of Statistics.

RURAL PROSPERITY: A farmer in Mengcun Village of Nanning,Guangxi Zhuang Autonomous Region shows off a bumper grape harvest.The added value of Guangxi’s primary industry grew 3.9 percent year on year in the first half of 2010 to reach 47.2 billion yuan ($7 billion)

Local Debt Concern

Commercial banks have disbursed 7.66 trillion yuan ($1.14 billion) to financing vehicles of local governments by the end of June, said the China Banking Regulatory Commission (CBRC). Of this total, about 23 percent are faced with serious default risks due to a lack of quali fi ed borrowers or warrantors, said the commission.

“But these questionable loans may not necessarily turn sour as most of them have eligible collateral or a secondary source of repayment,” said CBRC.

As part of the country’s effort to lift the economy out of quagmire, Chinese lenders gave out a record 9.6 trillion yuan($1.4 trillion) of new loans last year, a big chunk of which went to the local fi nancing vehicles.

But worries have been bubbling over the hidden fi nancing vehicles due to their reckless expansion and operational mismanagement. In May, the government even vowed to step up a stringent clampdown on the fi nancing vehicles.

CBRC said it would conduct on-site inspections over the next three months and urge banks to make adequate provisions to prevent possible increases in bad loans.

Golden Profit

Gold producers of China are reaping windfall, basking in the glow of prolonged market euphoria.

China National Gold Group Corp.(CNGGC) said its profits in the first half of this year added up to 1.55 billion yuan($228.7 million), 1.2 times that of last year as a whole. Its revenues from January to June grew a hefty 98 percent from a year earlier to 27.67 billion yuan ($4.1 billion) and the full-year revenue is expected to reach 50 billion yuan ($7.4 billion),said Sun Zhaoxue, General Manager of CNGGC.

As China’s top gold producer, CNGGC controls 30 percent of gold reserve in the country and accounts for more than 20 percent of national output.

In addition, gold fi rms of the country reported a combined net pro fi t of 7.95 billion yuan ($1.17 billion) in the first five months, up 76.8 percent from one year ago, said the Ministry of Industry and Information Technology.

Risk-wary investors across the country are rushing to board the gold canvas to seek safe haven from brewing in fl ation and the fi ckle stock markets. Prices of gold futures at the Shanghai Gold Exchange have gained more than 11 percent in the fi rst half of this year.

With a bright prospect in sight, the company will enhance efforts in gold mining, as well as boosting resource reserves through mergers and acquisitions, said Sun.