Bearish sentiments in Asia on Chinese government decision to raise reserve requirements at the country’s banks to head off inflation

22-Nov-10

Markets where the Eid holidays were being celebrated last week are returning to business this week amidst big changes in market dynamics. Just prior to last week’s holidays, the Chinese government had taken the decision to raise reserve requirements at the country’s banks in order to head off inflation, as per Chemorbis. The move immediately deflated some of the speculative fervor seen at the start of the month. This fervor was causing huge price jumps as players speculated about seeing higher prices in the near future because of inflation and the falling US dollar after the US Fed took a path of “quantitative easing”. Apart from the reserve requirement change in China, crude oil prices began to move down on the Friday prior to the holiday, further denting speculation in the plastics sector. As a result, bearish sentiment took hold in the Chinese market last week, affecting the overall trade flow and in particular, causing price declines for domestic PP and PE. Chinese producers were forced to take back some of their massive increases from the week before by reducing their PP prices by CNY200-500/ton (US$30-78/ton) and their LDPE and LLDPE prices by CNY500-1100/ton (US$76-166/ton). HDPE got by relatively unscathed yet. Likewise, the PVC market was protected by tight supplies as power rationing has affected both the output of PVC and the ability to move the material around the country. The PS market was beginning to falter but not to the extent of PP and PE due to the tight margins. At the end of the holiday, the Chinese government made its second reserve requirement hike of this month on Friday, November 19 to be effective as of November 29. The central bank raised the reserve requirement by another 50 basis points as it had done on November 10. Speculators will now have to weigh a myriad of factors including further steps the government may take to tighten liquidity and stem inflation, including an interest rate hike and potentially limiting prices of commodities as the government has hinted may be necessary, against the potential for profit from rising inflation due to an influx of fresh dollars due to the Fed’s policies and a strengthening yuan against the US dollar. Into the mix come power rationing in the country and efforts to increase diesel supplies which have boosted naphtha prices.