Tighter credit policy in China to impact polyolefin market

11-Oct-11

Buying interest for olefins has dampened in China. This can be partly attributed to the new monetary policy introduced in China on September 19 that restricts the opening of letters of credit (LC). As per ICIS, under the new policy, the local State Administration of Foreign Exchange stated that China's five state-owned commercial banks were forbidden to draw LC at 30-90 days from September 20-30 in Ningbo. The new policy means that deals can only be settled in cash or LC on sight. Whether the policy would extend into October has not been specified. The policy change is believed to be a government effort to control cash flow in an effort to curb nationwide inflation. Unaccepted by local importers, this id leading to weakened import sentiment for PP. Small- and medium-sized enterprises (SMEs) have been badly affected by the reduction in credit as the better politically-connected state-owned enterprises have received most of the lending still available through the official banking system. Left with no option but to source their credit from private lending companies, SMEs are sometimes paying interest rates as high as 30%. This in turn results in reduced ability of the SMEs to buy polyolefin raw materials. SMEs that double as traders have really suffered a setback, as the Chinese government tries to rein in speculative activity blamed for driving up commodity, food and property prices.