SHANGHAI, Jun. 26 (SMM) – The tightening liquidity has been fanning apprehension across global capital market. Nikki Index has been falling since late May, and Chinese stocks also saw sharp declines lately. Commodities markets were also dragged down. This was partially the result of the Fed’s decision to wind down QE and easing monetary policies adopted by major economies during the past couple of years.
China’s cash crunch has depressed market confidence, behind which is not only tight liquidity in interbank markets, but also the People’s Bank of China’s (PBOC) attitude to stand aside. In this context, it is still uncertain whether metals prices will fall further and investors are advised to take the chance to book profits during brief price rebound.
Despite the ailed economic conditions reflected in slumping metals markets, the PBOC tends to lead capital to flow to physical economy while maintaining money supply unchanged. Data from the PBOC revealed that China’s M2 was up 15.8% YoY to RMB 104.21 trillion by the end of May, with the growth slowing from the previous few years, but the total volume up more than RMB 40 trillion over RMB 62.56 trillion in early 2010.
The PBOC sent a signal that China’s economic growth should not depend on capital increase within financial sector alone, but on substantial development of industries. Nevertheless, several sectors in China have experienced severe overcapacity since 2008 when the RMB 4 trillion stimulus package was introduced, which left it an important issue whether industrial restructuring will exacerbate overcapacity.
Under such circumstance, the liquidity crunch alone in China will be enough to draw down base metals, not to mention other factors, such as QE and European debt crisis.