FocusChina credit controls keep trade sluggish

09 September 2008 05:42  [Source: ICIS news]

China credit controls keeps trade sluggishBy Judith Wang and Bohan Loh

SINGAPORE (ICIS news)--China’s restrictions on access to funds have already put  several small downstream players out of business and is expected to keep petrochemicals trade sluggish in the months ahead, industry sources said on Tuesday.

The People’s Bank of China moved to cool an overheating economy from late last year by curbing lending, virtually shutting easy access to additional working capital for small businesses.

“The smaller players had either shut down or gone bankrupt as they did not have sufficient working capital to afford high feedstock costs. Lull demand conditions also means a locked liquidity position,” Wang Fang, a trader with Shaoxing-based Vision Export Co said.

Over 10,000 businesses in the Chinese textile industry have gone bankrupt in the first six months of the year and another two-thirds of manufacturers are on the brink of insolvency based on official data from the National Development and Reform Commission (NDRC).

The deposit reserve ratio - a commonly used anti-inflationary tool - was hiked five times in the first half of 2007 and an additional six times in the first half of this year to tighten money flow, according to the central bank.

The bank also hiked the one-year lending rate, a total of six times through 2007 from 6.39% in March to 7.47% in December but has kept them steady in 2008.

Recently eased banking regulations have done little to ease the credit crunch with some players remaining oblivious to loan quotas that have been raised 5% for national banks and 10% for local banks since early August.

“It remains very difficult to apply for loans from the banks due to a series of complicated procedures despite the quotas being raised,” a southwest China producer said.

Some petrochemical makers were losing opportunities to do business due to scarce capital availability.

A source from melamine producer, Tianjin Kaiwei complained: “There is more business to be done out there but we do not have sufficient cash to buy urea feedstock to keep up melamine production.”

Trade recovery has been very slow after the Beijing 2008 Olympic Games.

The fast appreciation of the Chinese yuan, rising labour and raw materials costs have also weighed on sentiment, market players said.

Analysts said that further relaxation of credit rules were needed as the government tries to steer the nation’s economic growth.

China’s CPI (consumer price index) is likely to fall in the following month and the government may ease access to funds to further boost economic development,” Arden Dai, a manager at consultancy firm Frost and Sullivan, said.

Steve Tan has contributed to this article

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By: Judith Wang
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