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China lending restrictions to hit petchems?

China, Economics, Olefins, Polyolefins
By John Richardson on 06-Dec-2007

China annnounced on Wednesday that it had shifted its monetary policy stance to “tight” from “prudent” in response to food-price driven inflation, soaring real-estate prices, the surge in local stock markets and continued strong growth in industrial investment.

How this policy shift will be implemented remains unclear, but media reports suggest that total bank-lending growth could be limited to 13% next year from 15% in 2007.

The concern is that this will affect working capital as well as funding for new projects.

The ICIS pricing team is already picking up anecdotal evidence of petrochemical producers and buyers struggling to afford and source working capital in China during this year. This is the result of several interest rate hikes and increased reserve requirements imposed on the banks by China’s central bank.

Next year could therefore be even tougher for cash flow. But the greater danger is that if the government doesn’t succeed in taking some of the heat out of China’s economy, and that some of the froth might end up making one giant bubble – to quote Alan Greenspan.

Loss of working capital is a small price to pay for avoiding the popping of a bubble which would have huge consequences for the global economy.