TO THE POINT: Gold investments heat up in China as investors look to the enduring value of the precious metals as a haven against inflation. State-owned enterprises fare well, with profits growing in the first four months. The civil aviation industry is bursting with vitality as air traffic booms. Chinese service outsourcers gain a chance to shine as multinationals farm out non-core businesses. Wind turbine maker Goldwind, however, is struggling to make ends meet since the entire sector reels from a price war and overcapacity.

Gold Fever

Chinese investors are snapping up gold, enabling the country to become the world's largest buyer of investment-grade gold products.

In the first quarter of 2011, Chinese consumers purchased 90.9 tons of gold bars and coins valued at $4.1 billion, said the World Gold Council (WGC). That is more than double the amount in the same period last year, and more than the 85.6 tons bought by Indian consumers.

The two countries accounted for 51 percent of all gold products sold from January to March globally, said the WGC. Demands for gold include jewelry, industrial and dental uses and investment.

The culture's deep-rooted preference for the precious metal, the impending inflationary fears, and limited domestic investment channels will drive further growth in Chinese gold demand, said Albert Cheng, Far East Managing Director of the WGC.

China produced 340 metric tons of gold last year and consumption was about 700 tons, leaving a gap of 350 tons to 360 tons, he said.

"With an increasing demand, China will have to rely on imports to fill the gap between demand and supply," he said.

Like several other commodities, gold prices have risen noticeably in the past year, indicating simmering risks of correction, said Liu Shan'en, a senior researcher with the Beijing Gold Economic Research Center.

SOEs Boom

China's state-owned enterprises (SOEs) have harvested juicy returns so far this year, though growth has moderated.

In the first four months of 2011, SOEs raked in a combined profit of 712.6 billion yuan ($109.6 billion), an increase of 24.2 percent from a year ago, said the Ministry of Finance (MOF). Central SOEs earned 501.3 billion yuan ($77.1 billion) in profits.

SOEs' revenues totaled 11.12 trillion yuan ($1.7 trillion), soaring 24 percent year on year.

The SOEs also experienced a decrease in profitability as their profit-to-sales ratio came in at 4.8 percent, 0.1 percentage points lower than the same period last year.

Not every industry fared well. The steel industry and the country's biggest five power generators, for example, continued to spill red ink, said the MOF.

Aviation Euphoria

The civil aviation industry is soaring, drawing strength from a surge in air traffic.

The sector generated 4.16 billion yuan ($640 million) of net profit in April, skyrocketing 53.8 percent from a year ago, according to data from the Civil Aviation Administration of China. Of this total, airlines earned 3.18 billion yuan ($489.2 million) and airports raked in 510 million yuan ($78.5 million), growing 57.9 percent and 11.1 percent, respectively, from the same period last year.

The bright performance was in large part because of a significant run-up in transportation needs. In April, passenger volume surged 13 percent year on year to 24.37 million, and cargo volume edged up 2.6 percent from the previous year to reach 478,300 tons.

But one cause for concern was climbing prices of jet fuel, which makes up around 40 percent of airlines' costs, said Li Lei, a senior analyst with the China Securities Co. Ltd.

The devastating earthquake in Japan also dealt a blow to airlines that have high revenue exposure to Japanese routes, such as China Eastern Airlines and Air China, said the international investment bank Morgan Stanley, in a recent report.

While they tried to lure more customers, Chinese airlines need to strengthen value-added services, such as in-flight retail sales, baggage handling and hotel bookings, said Michel Brekelmans, a Shanghai-based partner with the L.E.K. Consulting.

Those services contribute barely 1 percent to profits of airlines in China, far below the 35 percent in developed countries, he said.

Outsourcing Spring

China's service outsourcing industry is picking up momentum, though challenges remain.

From January to April, the sector received $5.2 billion worth of offshore service outsourcing contracts, more than doubling that of a year ago, said Wang Chao, Vice Minister of Commerce. The amount for 2010 totaled $14.5 billion, soaring 43 percent from 2009.

In a bid to save costs, the crisis-stricken multinationals are increasingly farming out their non-core businesses ranging from handling payrolls to running customer call centers. In addition, Chinese policymakers have been offering incentives for the industry, including tax breaks and subsidies.

By the end of 2010, there had been 12,706 service outsourcers in China, employing more than 2.3 million people. "The sector has become a growth engine of many provinces and a driving force for the country to rebalance the economy and rely more on environment-friendly businesses," said Huo Jianguo, President of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

The international consulting firm KPMG expected the market to grow at a compound annual rate of 26 percent by 2014 thanks to lower costs and language capabilities. "Increasing investment by overseas companies in China is also sparking bigger demand for outsourcing services," it said in a report.

As China tries to catch up with the market leader India, it needs to consolidate the highly fragmented industry and achieve the economies of scale, said Qu Lingnian, President of Beijing Association of Sourcing Service.

Moreover, it is necessary to strengthen efforts to cultivate professional talent and protect intellectual property rights, said Qu.

Growing Pains

The Xinjiang-based wind turbine maker Goldwind Science and Technology Co. Ltd. lost some of its recent shine due to fierce competition and industrial overcapacity.

In the first quarter of 2011, the company saw its profit plunge 17 percent year on year to 206 million yuan ($31.7 million). The revenues were 1.856 billion yuan ($285.5 million), up 0.04 percent.

The company expected its profits for the first half of this year to dive 50 percent, taking a blow from diving prices of turbines. Goldwind is China's second largest turbine maker, with a market share of 19.7 percent in 2010.

"As competition heats up, the simmering price war and costs inflation have severely hurt profitability of Goldwind," said Wu Gang, Chairman of Goldwind.

After several years of torrid growth, the entire industry is taking a breather in part because over-capacity looms, said Xiao Han, an analyst with the CIConsulting, an industry research company.

Over the next five years, at least 80 percent of small manufacturers will be forced out of market or acquired by bigger rivals, he said.

"The best solution is to explore the overseas markets and cushion the impact of domestic downturn," said Wu.

Its efforts to establish global presence are already underway. In April, the company received two U.S. orders with a combined capacity of 7.5 megawatts for its direct drive turbines.