TO THE POINT: The severe drought sweeps five provinces along the Yangtze River, causing heavy economic losses. By hiking non-residential retail electricity prices, the government tries to relieve nationwide power shortages. The manufacturing industry continues to lose momentum as reflected by the falling PMI. The central bank has issued licenses to 27 third-party payment service companies, marking the first step to reorganizing the crowded industry. Chinese PC giant Lenovo fares well, with profits skyrocketing in the fiscal quarter ending on March 31.

Painful Loss

A prolonged drought is plaguing five provinces along the middle and lower reaches of the Yangtze River, causing heavy economic losses.

Since early January, rainfall in Jiangsu, Anhui, Jiangxi, Hubei and Hunan provinces has been about 40 to 60 percent less than last year, said the Ministry of Civil Affairs.

The country's two largest fresh water lakes—Dongting Lake in Hunan Province and Poyang Lake in Jiangxi Province—have both seen their water level drop dramatically.

By May 29, more than 104.4 million mu (6.96 million hectares) of farmland had suffered from water shortages, said the State Flood Control and Drought Relief Headquarters.

In the five most disaster-stricken provinces, at least 34.83 million people were affected and the direct economic losses had topped 14.94 billion yuan ($2.3 billion) by May 27.

Meanwhile, the drought is pushing up food prices, re-igniting inflationary jitters across the nation. The average cabbage and cole prices during May 10-20 in 50 major cities soared 11.9 percent and 16.4 percent, respectively, from the previous 10 days, according to data from the National Bureau of Statistics.

As the disaster hit China's rice-growing areas, it may add fuel to the inflation worries, said Mao Changqing, a senior analyst with the CITIC Securities Co. Ltd.

Shen Jianguang, Greater China chief economist at Mizuho Securities Asia Ltd., expected China's inflation rate to exceed 6 percent in June as food price growth picks up pace.

Hiking Power Prices

The National Development and Reform Commission ordered to raise retail electricity prices, the first hike in more than a year, to cool buoyant demand and boost power generation as the nation battles with a severe power shortfall.

As of June 1, power prices for industrial and agricultural users in 15 provinces and municipalities increased 16.7 yuan ($2.58) per megawatt-hour. The prices for residential users remain unchanged.

As soaring coal prices eat into their profits, many thermal power generating companies have curtailed operations, exacerbating power shortages ailing parts of China.

China witnessed the worst power shortage in decades in 2004, but the State Grid, the country's leading power distributor, said this year might prove worse.

Shuai Junqing, Deputy General Manager of the State Grid, said China may face power shortages of up to 40 million kw this summer, due to strained coal supplies' insufficient power generation and grid transmission problems.

The electricity price hike will be an incentive for power generators to restart their idled machines and help soothe the hunger for power, said Han Xiaoping, CIO of China5e.com, an energy information website.

But it may not be enough to recoup losses of the generators given rising coal costs this year, he said.

The steam coal prices at Qinhuangdao Port, an industry benchmark in the country, have climbed at least 6 percent so far this year.

Lin Boqiang, Director of the China Center for Energy Economics Research at Xiamen University, said the move has no direct impact on consumer inflation, but is likely to push up industrial costs and feed into the producer price index.

Manufacturing Withers

The purchasing managers index (PMI), a barometer of manufacturing activities, stood at 52 percent in May 2011, falling from 52.9 percent in April, said the China Federation of Logistics and Purchasing (CFLP).

It was the second consecutive month of decline for the index, which also hit a nine-month low. But it still marked the 27th straight month in which the index was above the boom-and-bust line of 50 percent. A reading above 50 percent indicates economic expansion.

It shows that the broader economy is cooling down but remains on a stable track, said the CFLP.

The new orders sub-index, an effective gauge of domestic demand, stood at 52.1 percent in May, down from 53.8 percent in April. The input prices sub-index, a measure of how much factories pay for raw materials and other intermediary goods, slowed to 60.3 percent, compared with 66.2 percent in April.

"Signs are emerging that the Chinese economy is more likely than not to slow down," said Zhang Liqun, a researcher with the Development Research Center of the State Council. "Meanwhile, inflationary pressures seem to be abating as input prices head south."

Peng Wensheng, chief economist with the China International Capital Corp. Ltd., expected the PMI to continue decreasing because of power rationing in some regions. "But that will not prevent policymakers from releasing more tightening measure," he said.

Payment Prospect

The People's Bank of China, the central bank, on May 26, issued the first batch of licenses to 27 qualified third-party payment service providers, including Alipay, Tenpay and 99bill. These companies serve as the third party between buyers and sellers to complete payment settlement through the Internet, telephones or mobile phones.

The move has been anticipated since last June when the government ordered that all companies in the industry apply for a license by September 2011 as an effort to regulate the burgeoning, but crowded, sector.

China, the world's largest Internet market, has about 457 million netizens, among whom 148 million were active online shoppers as of the end 2010.

In the first quarter of this year, the transaction value of China's online third-party payment sector amounted to 397.3 billion yuan ($61.1 billion), skyrocketing 98.7 percent from a year ago, said the Beijing-based Analysys International Consulting Co. Ltd., in a recent report.

The policymakers selected enterprises that have efficient management, reliable risk control, as well as bright profit prospects, said Zhang Meng, an analyst with the consulting firm.

The licenses provided a legal status for involved enterprises so they can develop in a more standard and healthy manner, she said.

"Due to an implicit regulatory environment, many companies used to be hesitant to expand and explore innovative business models," said Zhang.

Lenovo's Comeback

Chinese PC maker Lenovo gained $42.13 million in net profits in the fiscal quarter ending March 31, up 250 percent year on year, thanks to its thriving China business and robust corporate demands. Its revenues climbed 13 percent year on year to $4.88 billion.

The Chinese market continued to be a bright spot, accounting for 46.4 percent of the company's sales in the past fiscal year as it made forays into smaller cities and rural areas.

As the financial crisis punched demands from corporate customers, the world's fourth largest PC firm received a deadly blow. It reported three losing quarters before returning to the black in the quarter ending in September 2009.

"The momentum in the commercial PC demand has gradually picked up, benefiting from the corporate refresh cycle, while consumer PC demand weakened due to a worsening macroeconomic environment and increasing competition from tablet products," Lenovo said in a statement.

The increasing number of smart phone and tablet computers users—particularly the iPhone and iPad—has already eaten up majority of the PC sales, it said.

In order to cash in on the rising potential of the mobile market, Lenovo has staged its own smart phone and tablet PC, respectively called the LePhone and LePad.