China’s surprise monetary tightening could impact the buoyant mood in regional petrochem trading

14-Jan-10

China’s central bank; the People’s Bank of China (PBoC) has taken clear measures to curb aggressive lending. PBoC announced plans to raise its reserve requirement (a portion of deposit that banks must park with the central bank) by 50 basis points to 16% on 18 January and has raised interest rates for its one-year bills by eight basis points to 1.8434% as per ICIS. These followed an unexpected increase in PBoC’s three-month bills late last week, which may have signalled an end to China’s expansionary monetary policy. China’s surprise monetary tightening could impact the buoyant mood in regional petrochem trading on concerns that it would translate to weaker demand, as per ICIS. However, the actual negative impact would likely be concentrated on speculative trades, where excess money could be flowing. Over the past few months, aggressive lending by banks in China is estimated to have boosted the local banks’ new loan portfolio by nearly CNY10000 bln (US$1460 bln) in 2009. China, the world’s third biggest economy and the biggest petrochemical importer in Asia, almost single-handedly drove up chemical prices in 2009 and has continued to play the same role at the start of this year on the strength of the government’s CNY4000 bln stimulus package. China’s economy rose a dazzling 8.9% year on year in the third quarter of 2009, and it overtook Germany as the world’s biggest exporter of goods in 2009. Its December exports soared 17.7% year on year. The country witnessed an unparalleled credit boom in 2009, likely logging a year-on-year growth of 30%, he said. In the first week of January 2010 alone, Chinese banks reportedly expanded their loan pie by another CNY600 bln. The government wants to moderate credit growth this year, with Chinese banks expected to cut their lending by about a fifth this year to CNY7500 bln. Policy makers are getting a little more wary of economic overheating, but at the same time, withdrawal of economic stimulus will be seen at a slower pace. The investors’ money will be drained in near term, but there will be minimal impact on the petrochemicals market in the long run. The recent move should soak up more than CNY200 bln in liquidity from the financial system.