With inflation hitting a two-year high in September, China’s economic policymakers are taking steps where ever they can to stall the rise in prices, particularly of food and property. Securities regulators are now pushing for curbs on commodity futures trading in the hope of damping down excessive speculation (the ever-present bugaboo when commodity prices rise). The Shanghai Futures Exchange is raising its margin requirements on natural rubber contracts to 11% from 8% while the Zhengzhou Commodity Exchange has already raised margins for rice, wheat, rapeseed oil and sugar to 8% from 3% or 4%. Rice and rubber futures hit record prices this week. along with those of cotton.
The new margin requirements follow the central bank’s surprise rise in benchmark interest rates earlier this month, and a raft of measures over months and months to let down the property price bubble inflated by the liquidity the government pumped into the economy in the wake of the global financial crisis. We would expect central controls on commodities trading if the self-regulation of the exchanges fails to drive down prices.
Filed under Economy, Markets
A new twist in the saga of what China is doing with its still mostly dollars foreign exchange reserves: Brian Jackson, senior strategist at Royal Bank of Canada, reckons that it is using them to stockpile commodities such as copper and iron ore as the voices in Beijing fearing the ever rising cost of Washington’s financial bailout will only push inflation higher and the dollar lower get more strident. “Increased spending on commodities represents a reallocation of China’s sovereign wealth away from the accumulation of financial assets,” Jackson said in a May 15 research note (here via Bloomberg ).
April’s imports of iron ore and copper were at record levels last month, not given the slowdown in growth what would be expected from underlying industrial demand, though Prime Minister Wen Jiabao said in March that China would take advantage of globally low commodity prices to stockpile natural resources. But long before that Wen had expressed his concerns about the dollar’s fall in value and its impact on the value of China’s foreign reserves (see “China’s Dollar Dilemma“). If Jackson is right, then the commodities stockpiling may be a more strategic than opportunistic move than it first appeared.
A rare piece of good news for China’s beleaguered steelmakers: BHP Billiton is walking away from its bid for Rio Tinto. Aluminum Corp. of China, Chinalco and other Chinese steelmakers were among the most outspoken about fears that the combination of two of the largest natural resources companies would have too much control over iron ore prices. As we noted in Chinalco Gets Australia’s Limited Nod For Rio Tinto Stake, the Chinese steelmaker went as far as taking a stake in Rio Tinto to ensure it would have a place at the negotiating table.
BHP said the reason for dropping the bid was that asset sales that antitrust regulators in Europe would likely require would have to be done at fire-sale prices and that financing would have been difficult to secure in the current global financial crisis. Further, servicing the high level of debt that would have been involved would have been risky at a time of tight credit and diminished cash flows following the collapse in world commodity prices.
One sign of the impact of the crisis on the all-share bid is that its value had fallen from $140 billion when it was made a year ago to $66 billion now.