Shanghai Base Metals Fluctuate Narrowly on Rebounding CPI

SHANGHAI, Feb. 9 (SMM) –China's Consumer Price Index (CPI) rose higher than expected in January, diverging greatly from market initial judgment inflation would continue to fall stably, which dampened investor speculation about more loosening monetary policy from the People's Bank of China (PBOC). Consequently, Shanghai base metals suffered profit-taking and kept fluctuating in a narrow band. 

China's CPI rose 4.5 percent year-on-year in January, the National Bureau of Statistics (NBS) said on its website February 9th. Among which, grain prices climbed by 6.1 percent, contributing to 0.17 percentage point in January's CPI rise. Prices of meat and poultry were up 18.7 percent, contributing to 1.28 percentage points in the CPI rise, and pork prices rose by 25.0 percent, contributing to 0.75 percentage point of the CPI rise. China's Producer Price Index (PPI) rose 0.7 percent in January year-on-year, but down 0.1 percent month-on-month. Materials Price Index was up 2.0 percent year-on-year but down 0.3 percent month-on-month. With raw material costs rising rapidly while producer prices hard to rise, profit margins for producers were not likely to increase.

Previous data revealed new RMB loans at China's four largest banks were about RMB 320 billion in January, and based on this, total new RMB loans at all Chinese banks should stand at around RMB 800 billion in this month. New RMB loans data for January was closely watched by the market since it has long been regarded as a significant guidance for China's credit policy. China's economic growth has been dipping since 4Q 2011 amid tightening credit measures, which created prominent difficulties for financing needs of small and medium-sized enterprises (SMEs), and markets are therefore eagerly awaiting loosening monetary policy. However, the PBOC didn't cut Reserve Requirement Ratio (RRR) before the Chinese New Year Holiday as market anticipated, and the much expected appropriately loosening monetary measures also fell short of market expectation since new loans for January were only around RMB 800 billion. Nevertheless, against the backdrop of weak demand overseas and grim economic prospects, further implementation of tight credit measures is obviously unfavorable for the economic development. NBS data showed, though, China's inflationary pressures persistent for the time being as January's CPI rise remains high. Moreover, international commodity prices are also at high levels, and rising labor costs will cause commodity prices in China to surge over the long term. The PBOC is paying high attention to economic situation at present and will introduce loose monetary measures once the economy slips considerably. Hence, the PBOC is just waiting for the right time to take actions. 

As markets earlier anticipated China's CPI growth in January would continue to fall, stocks and commodity markets as well as risky assets met great resistance following the release of the CPI data. The rising inflation data dispelled market expectation about a cut in the RRR and loosening credit policy for the near future, so base metals on the SHFE suffered profit-taking and fluctuated narrowly.