FocusChina petrochemical projects may be hit as lending tightens

13 December 2010 06:15  [Source: ICIS news]

By Judith Wang and Pearl Bantillo

SHANGHAI (ICIS)--Funding for new petrochemical projects in China may be at risk as the country leans towards a tighter monetary policy to guard against further spikes in consumer prices, analysts and traders said on Monday.

China may hike its key interest rates soon after inflation soared to a 28-month high of 5.1% in November, analysts said.

On 10 December, the People’s Bank of China (PBoC) announced that the bank reserve ratio would be raised by another 50 basis points on 20 December, the third such move in a month and the sixth to be implemented this year.

For China’s big banks, the reserve requirement, or the portion of deposits that must be parked with the central bank, would be 19% for selected banks.

“Monetary tightening will definitely affect the companies’ financing to build new [petrochemical] plants, as it is not easy for them to apply loans from banks in the future,” said Kang Tieniu, a Beijing-based analyst at brokerage firm Hongyuan Securities.

But the potential problems of securing funds would likely just hit smaller petrochemical players, analysts said.

“[The bank reserve requirement hike] is obviously intended to withdraw liquidity from the banking system to prevent excessive lending,” said Jun Ma, Hong Kong-based chief economist at Deutsche Bank.

China has been trying to mop up excess money, generated from a very aggressive lending policy adopted in 2009, through tweaking the bank’s reserve requirement.

It had kept its key interest rates unchanged for nearly three years until October of this year.

China’s new loans continued to be strong this year, even after curbs in property lending were introduced. In the first 11 months of the year, new loans stood at yuan (CNY) 7,450bn ($1,120bn), based on official data.

“By all indications, [Chinese authorities] are not finished raising [interest] rates. It’s a little unclear whether they would do it before the end of the year,” said David Cohen, Singapore-based chief economist at research firm Action Economics.

Deutsche Bank’s Ma said the reserve requirement ratio could be raised by another 150-200 basis points in the next three to five months.

“But [interest] rate hikes are likely to be delayed to early next year,” he said.

The much-anticipated interest rate hike over the weekend did not materialise even as the Chinese authorities emphasised on maintaining price stability as its economic priority during the National Economic Work Conference.

“One consideration that might have entered into their decision was the fact that higher interest rates would put higher upward pressure on exchange rate,” said Cohen of Action Economics.

“I think they might still see the usefulness of continued depreciation of the currency as another tool to help contain inflation pressures,” he said.

China released a slew of economic data over the weekend showing that economic activities continued to be robust, with industrial production posting a 13.3% year-on-year growth in November.

($1 = CNY6.65)

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By: Judith Wang
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