China’s PBOC’s Christmas rate rise to weigh on commods at open

By Nick Trevethan

SINGAPORE, Dec 26 (BestGrowthStock) – The surprise timing of the
People’s Bank of China (PBOC) increase in benchmark lending
and deposit interest rates is likely to weigh on commodity
markets when trading starts on Monday.

On Christmas Day, the PBOC raised rates by 25 basis
points, the second rate rise in just over two months, part of
a series of measures designed to combat inflation which hit a
28-month high of 5.1 percent in November. [ID:nTOE6BO014]

The opportunity to cash in on prices at or near their
highest in years before the year end could mean the correction
this time may be greater than the losses following the last
interest rate hike in October.

While the market expected China to raise rates, some
investors had thought it was too late to move in 2010, and for
that reason China’s commodity markets may test their downside
limits on Monday.

“This certainly doesn’t spell the end of the commodities
boom or the strong China story. It’s a smart move that may
have caught the market off guard,” Mark Pervan, senior
commodities analyst at ANZ said.

“This may give some impetus for some profit taking before
the end of the year, and an opportunity to buy on dips.”

U.S. oil (CLc1: ) ended last week around a two-year high,
above $91 per barrel while soybeans (Sc1: ) surged to a 27-month
high, and copper flirted with record peaks.

Some analysts said after a lower open, markets could
rebound and even hit new highs. Because the rate hike was
modest and overall the real deposit rates are still in the
negative territory. Money supply was not tightened strictly
enough, Gu Jianjun at Jinyuan Futures said.

Western markets, such as corn (Cc1: ) and soy futures on the
Chicago Board of Trade, may be particularly choppy, as the
kneejerk reaction to the rate move is accentuated by
holiday-thinned volume.

When China last raised interest rates in mid-October, it
sent the dollar higher, dragged gold down by more than 2
percent, oil fell 4 percent, copper lost almost 2.5 percent,
and losses of 2.7 percent in wheat and 2 percent in corn.

But that, and other policy tightening choppy did little to
slow commodities’ march higher.

China is the world’s top consumer of a host of commodity
products, including copper, iron ore, coal, cotton and soy and
is the second largest consumer of corn, gold and crude oil.

The Reuters-Jefferies CRB index , which tracks 19
commodities, fell almost 2 percent.

Assessing the effect on some markets will be complicated
by the Christmas holidays which see British-based markets such
as the London Metal Exchange and London-based agricultural
contracts, including softs, on NYSE Liffe closed on Monday and
Tuesday, while markets in China and the United States reopen
on Monday. [ID:nLDE6BL0QU]

“It is a little bit of a surprise, but the move should be
welcomed by the market. The central bank has increased the
interest rates before the end of 2010, which means the
possibility of increasing interest rates in the beginning of
2011 will be smaller,” said He Yifeng, analyst at Hongyuan
Securities in Beijing.

“I don’t think the central bank will increase interest
rates before March.”

After the initial reaction, analysts said the move may
prove to be positive, reaffirming November’s message that
China’s leaders are acting to stem inflation and control
prices if needed.

That along with China’s plans to go to the world to stock
up on commodities, especially grains, makes for a bullish
outlook for 2011, analysts said.

“It will be bearish for agricultural prices, which have
rebounded recently. But we believe the impact will be
short-lived and not hit the bullish trend, especially of the
soy market, which will be supported by the drought in the
South America. Right now its also the peak consuming season in
China,” said Wang Ping, analyst with Dongwu Futures.

China has run down many of its agricultural stockpiles
this year to stop strong demand driving up prices. Many
markets, especially corn (0#DCC:: ), sugar (0#CSR:: ) and
cotton(0#CCF:: ) surged to record highs.

Given limited farmland and rising consumption, analysts
believe the government’s goal of self-sufficiency in grains —
rice, wheat and corn — may force China to import other farm
products which compete for acreage, such as soy, cotton and
(Additional reporting by Niu Shuping and Zheng Xiaolu; editing
by Robert Birsel)

China’s PBOC’s Christmas rate rise to weigh on commods at open