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.