28 June 2013 12:43 [Source: ICB]
A signal towards tighter monetary policy spooks global markets and leads to lowered expectations for China GDP growth. Could crude oil be ripe for a fall?
Volatility is once again taking hold of the global markets, with huge swings in stocks, bonds, currencies and commodities. While a number of factors are causing turbulence, the big story is China - specifically a potential shift in monetary policy and the impact that would have on credit availability and economic growth.
A liquidity squeeze that sent China interbank lending rates rocketing to record highs on 19-20 June spooked investors. The central bank's reluctance to intervene and inject funds into the system until 21 June, and its subsequent statements on the need for more efficient capital allocation, signals that it means business when it comes to reining in excessive speculation that comes from loose monetary policies. Read more in our cover story on page 10.
The China central bank's shift in tone coincided with US Federal Reserve chairman Ben Bernanke outlining prospects for tapering down the Fed's massive quantitative easing (QE) program that has been buying up $85bn in government and mortgage debt every month.
The shift in stance of the central banks of the number one and two world economies towards tighter money has, understandably, caused equity and bond prices to plunge.
In Asia's petrochemical sector, players are beset by uncertainty on the policy shift's impact. Tighter credit would hamper trading activity, along with raising the prospects for a lower rate of economic growth in China - even lower than previously lowered expectations.
Indeed, a number of investment banks lined up to slash their China GDP growth forecasts for 2013 to less than China's official target of 7.5%.
Goldman Sachs, Barclays, HSBC and China International Capital Corp all lowered their GDP targets. Goldman now sees 2013 GDP growth at 7.4% and 2014 GDP growth at 7.8% - down from 7.8% and 8.4%, respectively. It said the tightening of the interbank lending market sends a "strong policy signal" that credit growth will be more constrained going forward.
Chinese growth rates
Even before the latest liquidity crisis, US-based chemical company CEOs at the American Chemistry Council (ACC) annual meeting in June said that growth in China appeared to be well below the official growth rates of 7-8%.
For those looking to the stock market as a leading indicator of economic activity, the Shanghai Stock Exchange Composite Index paints a grim picture. Stock prices have plunged almost back to 2008-2009 crisis levels and are off 43% from their post-crisis highs.
And while stock markets in the US, Europe and Japan have at least bounced off their recent lows, China's equity market has yet to find a bottom.
As global chemical companies close out their June quarters and prepare for earnings season, the impact from China will be a key question on conference calls as analysts gauge profit expectations going forward.
Interestingly, the global slide in asset prices from the prospects of a weaker China economy has not had much impact on crude oil - one barometer of global industrial activity. Brent crude continues to hover at around $100/bbl with US West Texas Intermediate (WTI) at $95/bbl.
The high oil price may mitigate chemical price declines in the short term.
But if China's economic growth slows much further, crude oil may be the next asset class to see a sharp fall. Chemicals would follow.
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