China petchems markets wary after rate cuts

27 November 2008 11:17  [Source: ICIS news]

SHANGHAI(ICIS news)--China’s petrochemicals markets were still watching for positive impact after China’s central bank made the highest interest rate cuts in 11 years, as demand from downstream plants remained weak amid the global economic downturn, analysts and producers said on Thursday.

“I had predicted a benchmark interest rate cut by 54 basis points, but the government announced a 108-basis point cut, indicating that China’s economy growth is worse than expected,” said Li Hongrong, a Shenzhen-based macroeconomist at Ping An Securities, in Mandarin.

China’s central bank on Wednesday cut interest rates to boost lending and consumption amid weakness in the economy.

The People's Bank of China (PBOC) said its one-year lending rate would be cut to 5.58% from 6.66% and its one-year deposit rate to 2.52% from 3.6%, effective from Thursday.

The interest rate cut is the highest since October 1997, when the PBOC slashed the one-year borrowing cost by 144 basis points to support growth and withstand the impact of the Asian financial crisis.

“I don’t think the higher rate cuts are beneficial for reviving market confidence, as many people might doubt whether there is a big problem in the economy,” said Li.

“They will likely ask themselves, ‘Should I hold back purchases and wait’?” said Li, adding that the impact of the rate cut still needs some time to be felt.

“I believe the move is just the government’s sweet dream, and I don’t think it will help my business much,” a melamine producer in northern Tianjin said in Mandarin.

Reactions from polyester and polystyrene (PS) producers were lukewarm due to very weak demand, producers in east China said.

However, Arden Dai, an analyst from Frost & Sullivan in Shanghai, said the strong move may insert confidence for consumers.

Many end-users will likely have more confidence to consume, Arden said, which would naturally drive the demand for upstream sectors, such as polyolefins and styrene monomer (SM).

“The economy still needs two to three years to revive. The petrochemical market will not recover soon as it is a global financial turmoil,” Arden said.

In the first nine months of the year, the country’s GDP grew 9.9% to yuan (CNY) 20.16 trillion ($2.95 trillion), down from the 12.2% expansion rate for the first three quarters of 2007, according to China’s National Bureau of Statistics.

Third-quarter GDP growth decelerated to a slower-than-expected 9.0% from 10.1% in the second quarter.

($1 = Y6.83)

Dolly Wu, Echo Han and Vivian Liu contributed to this article
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