China rates cut unlikely to revive petchems

16 September 2008 07:37  [Source: ICIS news]

China rates cut unlikely to revive petchemsBy Bohan Loh

SINGAPORE (ICIS news)--China’s move to slash interest rates for the first time in six years is unlikely to revive the ailing domestic petrochemical industry, analysts and traders said on Tuesday.

The People’s Bank of China (PBOC) late on Monday reduced its benchmark one-year lending rate by 0.27% to 7.2% in a move to shore up confidence even as the global financial crisis grew bigger after US banking giant, Lehman Brothers, was brought to its knees by a $613bn (€429.1bn) debt.

"Supply and demand fundamentals still take precedence. The marked slowdown in both the US and European economies coupled with the plunge in crude prices are leading factors for the weak trade conditions," an analyst with a global European bank said.

"With the Chinese Golden Week holidays starting in about two weeks, I really doubt conditions are going to improve anytime soon," he added.

The Chinese central bank also reduced the deposit reserve ratio for smaller banks by one percentage point, effective 25 September, but did not specify the final level.

"With the financial debacle in the US and to a lesser extent Europe, orders of finished goods from these countries to China had declined, manufacturing levels are down and therefore exports are looking down," a China-based acrylonitrile-butadiene styrene (ABS) trader said.

"The global economies are looking bad, so the Chinese government is now focusing on the one economy where at least they have some control - their own," he said explaining the central bank’s decision.

Other market players said that the central bank’s move was too little, too late as customers had already retreated to the sidelines in anticipation of lower prices following drastic plunges in crude values.

Despite the widespread scepticism, some believed that the positive effects of the government’s effort to allow more liquidity into the markets were yet to be felt.

"I think there will be some influence on the market, but the China central bank only just released that information so we will see some impact in two to three weeks," said a Shanghai-based trader.

He also expected a series of reforms from the central bank, which would help shore up China’s flagging economy as a significant number of small to medium sized factories remained shut.

"Although China’s GDP grew by 10% [in the three months to 30 June], tax rates have gone up by 33%," he said.

Meanwhile, shockwaves from Lehman Brothers collapse sent shares plunging.

By 12:00 noon Singapore time on Tuesday (04:00 GMT), the Strait Times Index was down 53.77 points to 2,432.78 after already shedding 84.12 points in Monday’s trade.

The benchmark Shanghai Stock Exchange 180 slid 3.46% to 4568.08 points. The Hang Seng Index plunged a near 6% in early morning trade to settle at 18,210.49 by mid-day while the Nikkei 225 lost 5.3% to 11,567.35.

($1 = €0.70)

Steve Tan, Helen Yan and Clive Ong contributed to this article
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