TO THE POINT: Manufacturing activities continue to lose steam as the purchasing managers index drops for the third consecutive month. The U.S. retail giant Best Buy trims its China presence after struggling to survive amid cut-throat competition. But an increasing number of U.S. companies are still expanding into China to cash in on the vibrant market. The aluminum behemoth Chalco jumps back into the black due to growing prices of the light metal. China's leading portal website Sina makes a push into the online shopping market by acquiring a stake in an online apparel retailer.

By HU YUE

Manufacturing Slows

The purchasing managers index (PMI), a barometer of manufacturing activities, reached 52.2 percent in February 2011, down 0.7 percentage points from January, said the China Federation of Logistics and Purchasing (CFLP).

This was the lowest reading in six months, and the third consecutive monthly decrease. But it still marked the 24th straight month in which the index was above the boom-and-bust line of 50 percent.

The PMI includes a package of indices to measure manufacturing sector performance. A reading above 50 percent indicates economic expansion.

We expect the PMI to head south in the months ahead; that may reduce the possibility of more stringent measures from the Central Government, said Tang Yonggang, an analyst from Hongyuan Securities Co. Ltd.

Still, Bank of America-Merrill Lynch economist Lu Ting said that China's January and February readings for the PMI "could be quite misleading" due to distortions from the Lunar New Year holiday (February 2-8).

"The short history of this index and the volatile timing of the Chinese New Year holiday mean that no seasonal adjustment method can give us a credible result," he said.

Best Buy Retreats

Best Buy Co., the world's largest consumer electronics retailer, recently decided to shut all of its nine Best Buy branded stores in China and retail headquarters in Shanghai as it struggled to compete with local rivals.

"It was a difficult decision to close the stores but we are confident in our business strategy," said Kal Patel, Best Buy Asia President.

The U.S. giant entered China in 2006 by paying $180 million to take control of Jiangsu Five Star Appliance Co., the country's fourth largest electronics retailer at that time. But its Western-style business model failed to gain a solid China foothold.

Chinese retail giants like Suning and Gome lease their stores to appliance manufacturers and take a portion of the sales revenues. In striking contrast, Best Buy purchases products from suppliers and sells them at higher prices. That means it has to bear heavier costs including property leasing and labor costs of sales personnel.

"In addition, it had less bargaining power with suppliers due to a limited scale," said Han Jianhua, Secretary General of Shanghai Trade Association of Home Appliances. "It was hard for Best Buy to survive in a price-sensitive market dominated by local competitors."

Best Buy said it would instead continue expansion of its Chinese subsidiary Five Star and disclosed plans to open 40 to 50 additional Five Star stores in 2010.

"We remain committed to the Chinese markets, and are trying to figure out the business model that is going to work for us in China," said Patel.

Eyes on China

More U.S. businesses are looking to broaden their footprint in China where the economy is gaining momentum.

About three fourths of over 400 member companies surveyed by the American Chamber of Commerce (AmCham) in South China said their primary operation target is to provide goods or services for the Chinese market. The proportion, however, was only 46 percent in 2006.

This fact, together with other positive signs, indicated that China still has a solid business environment, said Harley Seyedin, President of AmCham in South China.

The huge market also provides significant profits for U.S. companies which, in return, increased investment and added to their payrolls, according to the survey.

About 82.5 percent of respondents said they made profits in China, the highest proportion since 2006. Seyedin said the proportion was 79 percent last year.

About 89 percent of the companies made additional investments last year, more than the survey results from early last year.

Two thirds of the respondents said they have raised their investment budgets in China for the coming three years.

The vast domestic market means huge business opportunities for both local and foreign businesses, Seyedin said.

The member companies also said they face challenges of rising inflation, protectionism from other countries and the rising Chinese currency, the yuan, according to Seyedin.

Chalco Cashes in

The Aluminum Corp. of China Ltd. (Chalco), the nation's largest producer of the light metal, swung back to profits in 2010 thanks to growing aluminum prices.

The company generated a net profit of 778 million yuan ($118 million) last year, reversing a painful loss of 4.62 billion yuan ($689.6 million) a year earlier. Its revenues totaled 121 billion yuan ($18.6 billion), up 72 percent year on year.

"The turnaround was attributable to efficient cost controls and rising market prices," said Xiong Weiping, Chairman and CEO of Chalco.

Despite the turnaround, Xiong pointed to daunting challenges facing the company.

"Though the industry has left the downturn behind it, the fundamentals have not changed yet. It's still a low-profit industry reeling from overcapacity," he said.

Austerity government policies will also put pressure on the company's balance sheet, he added.

Chalco announced plans to raise up to 25 billion yuan ($3.8 billion) this year in the inter-bank bond market and more than 9 billion yuan ($1.4 billion) via additional share issues, in a move to optimize debt and replenish liquidity.

Meanwhile, the company vowed to continue its overseas expansion this year to ensure sustainable resource supplies.

Bauxite, iron ore and steam coal will be the main mines on Chalco's shopping list, said Luo Jianchuan, President of Chalco.

Sina Extends Reach

China's leading portal website Sina agreed to pay $66 million for a stake in the Mecox Lane Ltd., a Shanghai-based and Nasdaq-listed online apparel retailer, to set foot in the booming online shopping market.

Sina will buy almost 11 million American depositary shares, or a stake of about 19 percent, in Mecox Lane from Sequoia Capital.

"E-commerce is growing very fast in China, and this investment is our first step to be involved in the market," said Sina President and CEO Charles Chao.

Online shopping is experiencing a surge in the country, with the transaction value totaling 498 billion yuan ($76 billion) in 2010, almost double that of 2009, said the iResearch Consulting Group.

"The deal will also help Mecox Lane lower its marketing costs and lure customers from Sina's huge user base, and the involvement of large portal websites in e-commerce will be a big trend in future," said Henry Yang, President of iResearch.