FocusSpeculative trades at risk as China moves to curb lending

13 January 2010 07:26  [Source: ICIS news]

By Judith Wang and Pearl Bantillo

SHANGHAI (ICIS news)--China’s surprise monetary tightening may temper the buoyant mood in regional trading of petrochemicals on concerns that it would translate to weaker demand, analysts and industry sources said on Wednesday.

But its real negative impact would likely be concentrated on speculative trades, where excess money could be flowing, analysts said.

The country’s central bank – the People’s Bank of China (PBoC) took clear moves recently to curb aggressive lending, which may have boosted the local banks’ new loan portfolio by nearly CNY10,000bn ($1,460bn) in 2009 based on estimates of analysts.

The polymers futures market was spooked, with contracts for linear low density polyethylene for May delivery closing 3.7% lower on the Dalian Commodity Exchange (DCE) on Wednesday morning trade.

Imported LLDPE was selling as low as CNY11,300/tonne ex-warehouse in north China on Wednesday, traders said. Last Friday, the quotes were at CNY11,800-12,300/tonne ex-warehouse north China, according to China chemicals market intelligence service ICIS Chemease.

On Tuesday, PBoC announced that it would raise its reserve requirement - a portion of deposit that banks must park with the central bank – by 50 basis points to 16% on 18 January.

It has also raised the interest rates for its one-year bills by eight basis points to 1.8434%.

These followed an unexpected increase in PBoC’s three-month bills late last week, which may have signalled an end to China’s expansionary monetary policy, analysts said.

“Investors’ money will be drained in near term, but in the long run, the impact will not be significant,” Xu Chao, an analyst from Shanghai-based brokerage house Dalu Futures Company.

The recent move should soak up more than CNY200bn in liquidity from the financial system, according to Ma Jun, Hong Kong-based chief economist for Greater China at Deutsche Bank.

“In the longer term, there will be a minimal impact on the petrochemicals market, which is not just dependent on the domestic economy but [on] the overall global economy and the fundamentals for petrochemicals in China are very strong,” said Victor Shum of energy consultancy Purvin & Gertz, in Singapore.

China, the world’s third biggest economy and the biggest petrochemical importer in Asia, almost single-handedly drove up chemical prices in 2009 and has continued to play the same role at the start of this year on the strength of the government’s CNY4,000bn stimulus package.

“A tightening of the monetary policy helps reduce an asset bubble, and this is good for the Chinese economy in the long term,” said Shum.

China’s economy rose a dazzling 8.9% year on year in the third quarter of 2009, and it overtook Germany as the world’s biggest exporter of goods in 2009. Its December exports soared 17.7% year on year.

For the whole of 2009, the economy may beat its own expectations and post an annual growth of 8.5%, said David Cohen, chief economist at research firm Action Economics.

The country witnessed an unparalleled credit boom in 2009, likely logging a year-on-year growth of 30%, he said. In the first week of January 2010 alone, Chinese banks reportedly expanded their loan pie by another CNY600bn.

“The government wants to moderate credit growth this year,” said Cohen, citing that the higher auction rates for the central bank’s three-month bills and the hike in reserve requirement on Tuesday were consistent with this aim.

Analysts expect Chinese banks to cut their lending by about a fifth this year to CNY7,500bn.

“The general picture shows policy makers are getting a little more wary of [economic] overheating. But I think the withdrawal of economic stimulus would be slow,” he added.

Policymakers across the world need to toe the line of supporting the economic recovery underway and being mindful of inflationary pressures and of bloating the fiscal deficits, analysts said.

Aggressive policy actions are more likely in the second half of the year, when the strength of the economic recovery was ascertained, they said.

($1 = CNY6.83)

With additional reporting by Dolly Wu, Felicia Loo and Chow Bee Lin

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By: Judith Wang
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