Credit Expansion Linked To Dalian Boom?

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Source of Picture: http://blogs.suntimes.com/ebert/

We have just started doing our research and so more details later – but see attached this Excel spreadsheet –

lendingVDalianOI.xls

It compares the increase in lending from China’s banks with the amount of open interest in the Dalian Commodity Exchange’s linear-low density polyethylene (LLDPE) futures contracts.

Volume traded on the exchange has risen to mind-boggling heights this year – 99.9% of which is cash settled involving no intention by either party to provide or receive physical delivery.

As you can see from the Excel, when lending rises in one particular month the following month has seen increases in activity on the exchange.

Up to July 17, open interest on Dalian was at Yuan250bn with lending rising by Yuan1.43t trillion in June.

If July carries on its current pace Dalian activity might well exceed that in June after only Yuan664.4bn of credit was issued in May.

“An increase in available credit in China normally takes about a month to find its way into people’s pockets and so there may be a correlation,” a friend who reports on the financial industry told me over the weekend.

“It would be interesting to also compare the rise in credit with the response of local stock markets (up by around 80% from their November lows) and other physically and paper-traded commodities.”

The other way to look at it could be to take the overall rise in credit this year to see the year-on-year influence on markets. This should also include the property sector, which, according to The Economist, has seen home purchases rise by 80% up until June.

Those who speculate on the stock market are likely to also to chance their arm on property – with some of these same gamblers also chemicals traders (so you might seeing switching of exposure between different markets, leading to dips and rises in activity that doesn’t always respond in simple straight lines to increased credit; in other words keep it simple by just looking at the effect of the overall rise in lending).

Our obvious next step is also to see if any similar pattern has emerged in “physical” PE markets.

This might go someway towards answering the concern that the price recovery – which still shows no signs of faltering, according to ICIS pricing (see slides below) – involves a great deal of speculation.

PP-PEICIS20July.ppt

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