Numbers of the Week

50%

China has contributed more than 50 percent to global economic growth in 2009, said Zhu Min, Vice Governor of the People's Bank of China, the central bank.

1.2 billion

China's health insurance system will have covered more than 1.2 billion residents by the end of 2009, according to the Ministry of Human Resources and Social Security.

TO THE POINT: By pledging to enforce a harsher policy on house and land purchases, China tries to alleviate real estate bubble tensions. The central bank vows to uphold a more balanced credit policy next year in a move to restore economic health. Chinese automaker BYD hits a pothole on the path toward electric cars as a vital component plant records a painful loss. Dropping out of the overseas buying trend, the Bank of China Ltd. puts its focus back on domestic markets. Baosteel comes under fire after raising its steel prices in the run-up to iron ore negotiations.

By HU YUE

Real Estate Conundrum

In the face of an overheating real estate market upholding the current economic momentum, China is gently letting air out of the price bubbles.

Coming off a rock bottom earlier this year, real estate prices in major cities have spiraled out of control due to rampant speculation. In response, the government on December 18 made an announcement to raise the down-payment requirement for land acquisitions to at least 50 percent of the total. This was intended to pour cold water on property developers who are paying peak prices for land. But analysts believe the restriction could make less of a difference for deep-pocketed developers cashing in on the housing boom.

On December 9, the State Council ordered people who sell homes less than five years after the initial purchase to again pay a 5.55-percent business tax starting in 2010, prompting a new sales explosion as buyers rush to buy houses before the tax increase takes effect.

The increase is believed to have set the tone for a relatively tight policy stance next year, but it is hard to see how policymakers can hit the market hard given its importance as a powerful driving force for the overall economy.

Currently, priority has been given to calming the real estate fever by increasing affordable home supplies, said Qin Hong, a senior researcher with the Ministry of Housing and Urban-Rural Development.

Rebalancing Act

In its fight against economic imbalances, China is now seeking to wield credit controls.

The government will enforce stringent control over new loans to polluting or energy-depleting industries or those with severe overcapacities, said the central bank in a statement on December 23.

The State Council had previously pointed to nine industries as the most distressed, including the steel, cement, plate glass, coal chemicals and wind turbine industries. According to data from the Shanghai Wind Information Co. Ltd., a consulting firm, 17 Shanghai-listed companies in the nine sectors are currently waiting for approval for their refinancing plans with a combined value of nearly 90 billion yuan ($13.2 billion). But analysts believe they are less likely to get the green light, which would come as a relief for the stock market already saddled with share oversupplies.

The credit control would be a needed accelerator for the country's economic shift to a more healthy growth, said Lu Zhenwei, chief economist with the Industrial Bank Co. Ltd.

The credit supply is less likely to fall sharply in 2010, but will be more rational and balanced, he added.

Bumpy Road for BYD

No one can doubt that the Shenzhen-based battery and automaker BYD is a rising star in China's auto industry. But the stardom has been built predominantly on the hype from Warren Buffet's investment and the promise of electric cars needed to facilitate a green economy. As financial distress and technological barriers loom large, BYD's electric car ambitions appear to be a distant dream.

The largest indicator of arising problems was the painful loss BYD's semiconductor subsidiary maker based in Ningbo, Zhejiang Province, recorded annually, according to a recent report by the 21st Century Business Herald.

BYD paid 171 million yuan ($25 million) for the chip producer in October 2008, as the battery maker geared up to produce motor drivers for electric cars. The insulated gate bipolar transistor chip is a key component of the motor driver, a part no Chinese manufacturer has been able to make.

The acquisition was an encouraging attempt to wean BYD's reliance on expensive imports, but the risks were obvious from the start, as the chip-producer had been struggling on the brink of bankruptcy due to outdated equipment and backward technologies.

Absorbing the bad news, prices of Hong Kong-listed BYD shares nose-dived nearly 15 percent in the last two weeks of November.

Analysts estimate that introducing a new set of advanced equipment and technologies for the semiconductor plant will cost $800 million, dealing a heavy blow to BYD's balance sheet whose profitability is already raising concerns.

Despite a sales boom in conventional cars, its profit margin in the first half of this year dipped from 15 percent to 9 percent year on year.

With few options available to recoup its losses and achieve the technological progress necessary, BYD expects a helping hand from policymakers.

"Government financial support is needed to tackle the technological barriers and build up charging stations," said Wang Chuanfu, founder and president of the company.

BOC's New Strategy

While its domestic counterparts scramble to expand overseas, the Bank of China Ltd. (BOC), the fourth largest bank in the country, is stepping back.

In 2009, the bank has held back in overseas acquisitions and expansions. Meanwhile, its holdings of foreign currency securities by the end of June had fell 13 percent year on year.

The hesitation is a sharp switch from its past aggressive outward expansion. As the largest foreign exchange lender in China, the bank has more than 600 branches around the globe and relies on overseas markets for around 40 percent of its profits. In July 2008, it paid 60 million yuan ($8.8 million) for a 30-percent stake in the Heritage Fund Management Ltd. in Switzerland.

Analysts believe the trigger for the strategic shift was a significant downturn in its overseas profitability, which dragged down the overall performance of the bank.

The Wall Street meltdown in 2008 sent a chill through Western banking industries. But what made matters worse for BOC was its excessive reliance on traditional loaning businesses as a source of revenues, said Zhang Xi, a banking analyst with the Beijing-based China Galaxy Securities Co. Ltd.

Taking a hit from its exposure to sluggish foreign markets and U.S. mortgage-related securities, BOC saw a 13-percent increase in its 2008 net profit, well below the 30.6-percent growth rate of the Chinese banking sector as a whole.

Xiao Gang, Chairman of the Board of BOC, said the bank will refocus on domestic markets where the economic boom offers a higher level of earnings. But this does not mean the bank is wavering in its efforts for a global foothold, he added.

"We will strengthen financial services for Chinese enterprises that push forward investments globally," he said.

Iron Ore Backlash

In the run up to the 2010 iron ore pricing negotiations, China's push for a deeper price discount for imports seems to be backfiring at home.

Baosteel Group Corp., China's largest steelmaker and top negotiator, on December 10 announced its intentions to raise the prices of its steel products for January 2010 by up to 600 yuan ($87.8) per ton. Seeing the Baosteel prices as a market bellwether, many other steel firms, including the Wuhan Iron and Steel Corp., have announced similar increases.

The price hikes are understandable given the buoyancy of the steel market. A number of steelmakers have even kept their machines humming longer to fulfill escalating demands for high-end steel products, mostly from the booming housing and automobile markets.

But coming right before the iron ore negotiations, the move has triggered suspicions that Baosteel is chasing profits at the expense of national interests.

The price hikes could bump up steelmakers' profits but will put Chinese negotiators in a weaker position to bargain for cheaper ores, said Qiao Peitao, an analyst with the Shenzhen-based Great Wall Securities Co. Ltd.

Analysts believe Baosteel may intend to uphold market confidence and give a lift to trade sentiment, but the gains would still eventually be offset by iron ore price increases, they said.