China Stays Firm On Credit

By John Richardson

CHINA signalled yesterday that there would be no major easing of the credit squeeze that is slowing the economy down.

“At present, the overall liquidity in China’s banking system is at a reasonable level, but due to many changing factors in the financial markets and also because of the mid-year point, the requirements for commercial banks in liquidity management have become higher,” China’s central bank, the People’s Bank of China (POBC) said in a statement dated June 17, but which was only published on its website yesterday.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said in a research note published yesterday:  “We believe this is another sign that the PBOC is not willing to loosen policies or inject liquidity to bring down interest rates.

“The decision to put this note on its website suggests the PBOC wants to reiterate its policy stance.”

Hence, the Shanghai Composite Index fell by 5.3% on Monday. It closed at a four-and-a-year low.

But, as we have emphasised before, successful economic reforms in general would be good news for the economy in the long run.

And making the allocation of credit much more efficient would be excellent news for the small and medium-sized enterprises (SMEs), the lifeblood of chemicals demand in China.

At the moment, as the government-owned Xinhua news agency said in a commentary released over the weekend, the SMEs are struggling to access credit (we referred to another part of the same commentary yesterday).

“It is not that there is no money, but the money has been put in the wrong place. The banks are short on cash, the stock market and small- and medium-sized enterprises (SMEs) are short on cash, but there is ample money supply in the market,” wrote Xinhua.

“Many large companies are still spending heavily and making large purchases in wealth management- products [part of the shadow-banking system]. There is also a lot of hot money seeking speculative investments and private lending is still widespread.”

An Indian chemicals trader, who has just returned from a trip to China, told the blog: “While large enterprises still have access to bank credit, SMEs have to borrow from non-banking channels [the shadow-banking system again] and, as a result, have to pay interest rates of 15.20%.”

But he added that the positive news was that construction companies were unable to obtain finance at less than 20-22%, which indicates that efforts to rein-back over-investment have begun in earnest.

It is worth stressing again, though, that less credit means less speculation in chemicals and polymers, and thus lower growth rates in apparent demand over the short and medium-term.

We also think that, given the PBOC’s firm stance over liquidity, chemicals traders will be looking at their inventory positions very carefully. Destocking remains a strong possibility.

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