MARKET WATCH

By HU YUE

TO THE POINT:For two straight quarters, China has replaced Japan as the world’s second largest economy, but experts believe the Chinese economy is not without its fl aws. The country remains a favorite destination for foreign investors as FDI pours in. China remains the largest foreign holder of U.S.Treasury securities. The auto market continues to burst with vitality as vehicle sales pick up across the nation. Chinese steelmakers are facing some serious headwinds as costs rise eats into their pro fi ts. PC giant Lenovo fares well, with quarterly pro fi ts soaring.

Big But Not Strong

For two consecutive quarters, China’s GDP has climbed higher than that of Japan,making the Chinese economy the second largest in the world.

The Japanese Government on November 15 reported the country’s GDP at $1.37 trillion in the third quarter, compared with China’s $1.42 trillion. Japan still leads with$3.97 trillion for the January-September period. But if the current pace of growth continues, China is expected to surpass Japan for the entire year of 2010.

China’s leap past Japan is a reflection of the former’s economic boom in the past decades, said Guo Tianyong, Director of the Research Center of China’s Banking Industry at the Central University of Finance and Economics.

However, this success is far from guaranteed since China’s economy faces a number of problems, such as its over-reliance on investments and environmental pollution, he said.

Learning lessons from Japan, China should expand domestic demand and step up its clampdown on asset bubbles, said Guo.

China still has a long way to go toward prosperity as its per-capita GDP is only$3,800, ranking 108th in the world, said Zhao Xijun, Deputy Director of the Financial and Securities Institute at the Renmin University of China.

Meanwhile, efforts are also needed to bolster the country’s technological expertise,

innovation capacity, brand competitiveness and education, he said.

FDI Momentum

China has maintained its appeal to foreign investors despite a slowdown in the macroeconomy.

The October fi gure brought the amount for the first 10 months of the year to $82 billion, surging 15.71 percent year on year.From January to October, a total of 21,181 foreign-funded companies were approved,an increase of 16.62 percent over the previous year.

As the Chinese economy takes off,many foreign investors have focused on the Chinese market, instead of exports back to their home countries, said Yao Jian, a MOFCOM spokesman on November 16.

Meanwhile, a growing stream of FDI is shifting from the manufacturing industry to the service sector, he said. From January to October, 45 percent of the FDI went to the service sector, while 47.6 percent went to manufacturing industry.

Adding U.S. Assets

China in September increased its holdings in U.S. Treasury securities for the third consecutive month by $15.1 billion to$883.5 billion, said the U.S. Department of Treasury.

China remains the largest foreign holder of U.S. Treasury securities, ahead of Japan,which increased its holdings by $28.4 billion in September to $865 billion. Total holdings of Treasury securities by all foreign countries amounted to $4.269 trillion, an increase of 1.3 percent from the previous month.

The securities are key to funding the massive U.S. budget deficit that reached a dizzying $1.29 trillion in the 2010 fi scal year ending on September 30, slightly down from the record $1.42 trillion de fi cit set in 2009.

Economists believe the U.S. Treasury securities are still a relatively safe home for capital given clouds gathering over the global economy. For China, it is also an effective channel of investment for the country’s trade surplus, said Jiang Shu, a senior analyst at the Industrial Bank Co. Ltd.

Hot Wheels

Despite a slowdown in the macroeconomy, Chinese automakers are basking in the glow of a sales boom.

Vehicle sales across the nation grew a robust 25.5 percent in October from a year ago to reach 1.54 million units, said the China Association of Automobile Manufacturers(CAAM).

The October fi gure brought sales in the first 10 months to 14.7 million units, com-pared with 13.65 million for the entire year in 2009.

The market euphoria is expected to continue as dealers step up year-end promotions,said Xu Yingbo, an analyst at the CITIC Securities Co. Ltd.

Customers may also rush into showrooms before the favorable tax policy expires at the end of this year, said Xu.

China allowed buyers to pay only 7.5-percent tax for purchases of cars with small engine displacements (less than 1.6 liters)in 2010. But it remains unclear whether the policy will be continued next year.

While the Chinese market thrives,their foreign counterparts are struggling to recoup losses. The October vehicle sales in Germany and Japan nose-dived 20 percent and 26.7 percent from a year ago,respectively. But the U.S. market seems to be waking up from its slumber. Its October sales jumped 13 percent as buyers gained con fi dence in the economy and new models lured them into dealerships.

Numbers of the Week

340 billion kwh

China’s power consumption in October rose 8.5 percent from a year ago to reach 340 billion kwh,said the China Electricity Council on November 16.

786 billion yuan

China’s fi scal revenue in October rose 14.8 percent year on year to 786 billion yuan ($118.4 billion), said the Ministry of Finance.

MEASURES AGAINST INFLATION: Vendors prepare their vegetables for sale in Lianyungang, east coastal Jiangsu Province. The cityhas increased supplies to curb further vegetable price increases

Steelmakers’ Pains

After a strong start to 2010, Chinese steelmakers lost ground in the third quarter,raising red fl ags for the rest of the year since they are expecting to be hit by anemic demand and costs rise.

China Iron and Steel Association (CISA)said 77 large and medium-sized steelmakers raked in a combined pro fi t of 5.8 billion yuan($865.7 million) in September, diving 20.25 percent from a year ago. The September fi gure brought the third-quarter total pro fi ts to 12.5 billion yuan ($1.9 billion), compared with 21.7 billion yuan ($3.2 billion) in the January-to-March period.

From January to September, 10 steelmakers were in the red with losses totaling 2.4 billion yuan ($358.2 million), said the association.

The industry now faces some chilly headwinds due to falling exports and lackluster domestic demands this winter, said Luo Bingsheng, Deputy Director of the CISA.

The Chinese Government canceled export rebates for 406 items, including certain steel products, effective as of last July 15.

But the biggest concern was soaring iron ore prices that are eating into pro fi ts. China’s CIF (cost, insurance, freight) prices of iron ore imports averaged $121.7 per ton in the fi rst nine months, surging 56 percent year on year. Global miners this year forced through a new quarterly pricing system for the volatile spot market.

Pricing negotiations for 2011 have already started, and China will push for a return to the old benchmark system of annual contracts, said Luo.

But China lacks some bargaining power since the world’s biggest three miners—Vale, Rio Tinto and BHP Billiton—have monopolized global supplies, said Xu Xiangchun, a senior analyst at Mysteel.com, a steel information service company based in Shanghai.

Lenovo Cashes In

Chinese PC maker Lenovo generated$76.58 million in net profits in the fiscal quarter ending on September 30, soaring 44.2 percent year on year. Its global sales jumped 41 percent year on year to $5.8 billion.

The world’s fourth largest PC fi rm suffered a string of quarterly losses in 2009,leading to painful job cuts and corporate restructuring. It also refocused its efforts on China and other emerging markets, a strategy that appears to have paid off.

Lenovo said its China sales surged 32 percent to $2.6 billion, accounting for 46 percent of global revenues. Its market share stood at 28.8 percent, up 2.3 percentage points from the previous year.

In other emerging markets, PC shipments skyrocketed 185 percent in Russia,68 percent in Latin America and 60 percent in India. Its business in the mature markets,much of which was inherited from IBM, also returned to the black as spending by corporate customers picked up.

“We have good momentum to keep growing, especially outside China,” said Yang Yuanqing, CEO of Lenovo.

“We will also look for merger and acquisition opportunities in the sector,” said Wong Wai Ming, CFO of the company.

$7.66 billion of foreign direct investment (FDI) in October,up 7.86 percent from a year ago, said the Ministry of Commerce (MOFCOM). This was the 15th consecutive month of growth.