TO THE POINT: China's once-feverish manufacturing industry is cooling down as the purchasing managers index heads south. Commercial banks experience a surge in profits, but worries are proliferating about their shrinking deposits. Steelmakers, however, are feeling the pinch of lackluster demand and falling steel prices. The Swedish auto brand Saab is set to be acquired by two Chinese companies gearing up to expand globally. China is expected to become the world's second largest consumption market by 2020.

Manufacturing Gloom

The purchasing managers index (PMI), a barometer of manufacturing activities, stood at 50.4 percent in October, down 0.8 percentage points from September, said the China Federation of Logistics and Purchasing (CFLP).

The figure is approaching the boom-andbust line of 50 percent and is also the lowest since March 2009.

The new orders sub-index, an effective gauge of domestic demand, stood at 50.5 percent in September, compared with 51.3 percent of last month. The input prices subindex, a measure of how much factories pay for raw materials and other intermediary goods, dropped sharply to 46.2 percent, down 10.4 percentage points from September.

"The index signals a darkening prospect for the broader economy," said Zhang Liqun, a researcher with the Development Research Center of the State Council. "Export and investments are expected to taper off in the rest of the year while enterprises continue the process of destocking."

Given a stalling growth engine at home, speculation abounds that Chinese policymakers will ease the monetary stance in case of sapping growth momentum too much.

"China may be ready to further fine-tune its policies and roll out more pro-growth measures," said Lu Ting, a Hong Kongbased economist with Bank of America Merrill Lynch. "Challenges facing the government include tight credit, falling export growth, inflation and falling home sales."

Steelmakers' Pains

China's steelmakers reel from a gloomy market as demands turn lackluster and steel prices plummet.

The China Iron and Steel Association said 77 large steelmakers across the country generated combined profits of 7.9 billion yuan ($1.24 billion) in September, a drop of 6.6 percent month on month. Their profit-to-sales ratio averaged at 2.53 percent, down from 3.08 percent in the first seven months of this year.

The September figure brought their profits for the first nine months to 82.34 billion yuan ($12.97 billion), rising 27.74 percent from a year earlier.

"Many companies have been slashing steel prices to lure buyers as demand from the real estate, automobile and appliance sectors withers," said Xu Xiangchun, an analyst at Mysteel.com, a steel information service company based in Shanghai.

Liaoning Province-based Ansteel, for instance, has recently announced it will lower delivery prices for most products by 100-300 yuan ($16-$47) per ton.

"The industry will continue to face chilly headwinds in coming months as the export outlook worsens, though affordable house construction would generate some demands and offset the downturn." said Zhang Yongkai, an analyst with 315.com.cn, a Chinese commodities trading site.

Rescuing Saab

Two Chinese auto firms have agreed to purchase all shares of the crisis-stricken Swedish automaker Saab, saving the 60- year-old company from bankruptcy.

Saab's parent Swedish Automobile NV said it will sell Saab to China's Pang Da Automobile Trade Co. Ltd. and Zhejiang Youngman Lotus Automobile Co. Ltd. for 100 million euros ($142 million).

The two Chinese companies will provide sufficient financing so that a court-backed reconstruction process under creditor protection can continue, it said.

But the deal is still pending government approvals from China and Sweden.

Saab has been struggling to find cash and stay alive after it filed for bankruptcy protection in mid-September as it's short of funds to pay employees and suppliers. It had halted production earlier this year.

The majority of models made by Saab now are under licensed production from General Motors while Saab's old vehicle platforms and other power-train technologies were sold to China's Beijing Automotive Industry Holding Co. Ltd. in 2009.

"Even though the price seems favorable, the two companies may still face pressures to turn around loss-making Saab," said Jia Xinguang, chief analyst with China Automobile Industry Consulting Co. Ltd.

The two companies need to make full use of the Saab brand and learn from its marketing and technology prowess, said Li Yuheng, a researcher with the Shenzhenbased research firm CIConsulting.

Spending Spree

China's consumption will double to $4.8 trillion by 2020, making it the world's second largest consumption market, said the global management consultancy McKinsey & Co., in a recent report.

The report was based on a survey of over 15,000 consumers in 49 cities across the nation. Among the interviewees, 35 percent said they were trading up, buying more expensive goods, an increase from 26 percent in last year's survey. Meanwhile, 58 percent expected their incomes to rise next year, compared with 39 percent in 2010.

"Despite serious inflation, it's obvious that lots of Chinese people are more confident and optimistic about their future, with a better quality of life stimulated by favorable government policies," said Yuval Atsmon, a partner of McKinsey & Co. in Shanghai and co-author of the report.

In addition, the Internet has become an essential tool in consumers' daily lives. "The potential development of the e-commerce market in China is promising, as more Chinese consumers have started buying products, especially clothes and accessories, via Internet," said Atsmon.

He added that companies must have both the flexibility to adapt and the skills to innovate to keep in step with the Chinese market's development and the tastes of Chinese consumers.

Banking Boom

China's "big four" state-owned commercial banks get into full swing, but risks still loom large.

Industrial and Commercial Bank of China, the nation's top lender by assets, reported 164 billion yuan ($25.83 billion) in net profits for the first three quarters, up 28.3 percent from a year ago.

China Construction Bank, the second largest lender, saw its net profits climb 25.8 percent to 139 billion yuan ($21.89 billion) in the January-to-September period.

Bank of China's profits went up 22.1 percent to reach 101.3 billion yuan ($15.95 billion) in the first nine months.

Agricultural Bank of China generated 100.8 billion yuan ($15.87 billion) in net profits, up 43.6 percent in the first three quarters.

"But one cause for concern is the banks' weakening ability to attract deposits due to negative interest rates in real terms," said Qiu Zhicheng, an analyst with the Shenzhen-based Guosen Securities Co. Ltd. "Tightening monetary policies also drained liquidity from the economy."

Bank of China, for example, had 7.97 trillion yuan ($1.26 trillion) deposits at the end of September, representing a decrease of 125.6 billion yuan ($19.78 billion) from June.

"The reduction in deposits will pinch the banks' war chest to extend loans and thus cast an ominous shadow over their growth prospects," added Qiu.

But economists believe risks of financing vehicles of local governments are subdued as the debt burden remains tolerable.

The China Banking Regulatory Commission has recently allowed local governments to delay repayment for some of their debts, reducing the possibility of a debt crisis.

In addition, the Ministry of Finance has launched a pilot program to allow four local governments to issue bonds, which is expected to provide them easier access to capital.