China Central Bank Raises Reserve Ratio Again, Base Metal Prices to Extend Rises

SHANGHAI, Dec. 13 (SMM) -- On December 10th night, People’s Bank of China (PBOC) decided to raise bank requirement reserve ratio (RRR) again by 0.5 percentage points to a record high of 18.5%, effective from December 20th 2010. This is the third increase of the reserve requirement ratio (RRR) for banks in a month and the sixth in a year, an unprecedented move pointing to the urgency of curbing runaway lending amid accelerating inflation.

RRR Hike Related to Higher New Loans

Previously, officials from China’s Central Bank stated on different occasions that China’s central bank closely focuses on macro economic operation and liquidity, and may tighten money supply by lifting bank reserve requirement ratio as well as through open market operations and other monetary tightening policies.  With exacerbating of anti-inflationary pressure, market expectation of possible interest rate hike and reserve requirement ratio increase is growing. If China raises interest rate and leaves expanding interest rate spread between international currencies, a large amount of hot money may flow into China given that current global hot money is flooding, which is not helpful for curbing commodity prices. In this context, China’s central bank tends to raise bank reserve requirement ratio rather than to raise interest rate in order to control money supply.  China’s bank reserve requirement ratio which will not directly exert impact on market is the safest and mildest monetary tool, and is expected to be used more frequently than interest rate hike.

Severe Commodity Price Increases in China

According to data released by the National Bureau of Statistics (NBS) on December 11th, the November CPI rose by 5.1% YoY and 1.1% MoM, and was the 28-month high since August 2008, while CPI during January-November grew by 3.2% YoY, up 0.2% from CPI in January and October. The November PPI rose by 6.1% YoY and 1.4% MoM, respectively. Someone in the National Development and Reform Commission said CPI in the 1Q of 2011 is still expected high, despite it may fall below 5% in December 2010. Besides, based on data from China’s central bank, the November new loans were RMB 564 billion in November, and the overall loans reached RMB 7,400 billion this year, making it hard to meet the annual loan target set by the State Council early this year. Excess release of currency is obviously driving commodity prices up, and market players expect the Bank of China to constantly intensify efforts to regulate monetary policies. In general, pressure of commodity price increases in China is quite severe in the long run.  

Base Metal Prices to Extend Rises

China raised the reserve requirement ratio for banks instead of raising interest rates to combat inflation, and China’s higher imports of nonferrous metals in November improved expectations of market demand, and base metals inventories monitored by the LME decreased significantly, all helping drive up LME base metals prices. LME copper prices climbed to a new high on the Asian electronic trading on December 13th, rising by 1.8% to USD 9,138/mt. Traded prices for copper contracts on the New York Mercantile Exchange also hit a 31-month high. Base metals prices are expected to extend gains in the near future given rising inflation and anticipation of improving consumption. 

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