FocusChina credit control slows petchem trade

11 December 2007 07:18  [Source: ICIS news]

By Clive Ong

SINGAPORE (ICIS news)--Petrochemical trades could slow in China next year as Beijing’s plans to further tighten credit controls could hit small and medium-sized companies, traders said on Tuesday.

The Chinese central bank recently announced that it would set quarterly targets for new loan quotas in 2008, in an attempt to tighten control over banks’ lending.

"With China’s credit tightening to continue next year, small and medium-sized companies are likely to find it more difficult to obtain credit. Trades will slow down in China, and there will be more uncertainty," a Japanese acrylonitrile (ACN) trader said.

Companies could face more problems in obtaining LCs (letter of credit) from banks as institutions were expected to become increasingly stringent on loans, the traders said.

"Cash will be tight next year for the market, although buyers who can obtain LCs will continue to import and side-step the need for cash," said a Chinese orthoxylene (OX) trader.

However, smaller players, with limited cash, could increasingly turn to domestic parcels as they might not be able to find LCs, traders said.

Beijing’s credit control measures this year has already curbed trades in the petrochemical markets, especially towards the end of the year amid the lull season, traders said.

The cost of LCs increased after the interest rate hikes and this made looking for credit more difficult, said a trader in eastern China.

Demand for toluene and solvent grade xylene imports had also been restricted by the credit regulations launched by the Chinese government, said a south China-based trader. Trading was lacklustre as less cash was available.

"Cash flow is limited these days, and people are trying to sell off inventory in order to pay back the bank," said another chemical trader.

China’s economy has grown double-digits for the fifth consecutive year in 2007 and the government was determined to keep the economy from overheating and rein in inflation.

The Chinese government raised for the tenth time, on 8 December, the cash reserve requirement ratio at commercial banks by 1 percentage point to 14.5%. Its benchmark one-year lending rate had also breached 7% in the second half of 2007, after successive hikes this year.

These measures were aimed at reducing excess liquidity in the key sectors such as construction and infrastructure, real estate and equities, but have spilled over into the petrochemical markets, said a trader in eastern China.

Mahua Chakravarty, Helen Yan and Hong Chou Hui contributed to the story.

By: Clive Ong
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