china - starting to tighten credit/copper down

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    China's Central Bank Says It Will `Tweak' Policy (Update2)
    March 25 (Bloomberg) -- China's central bank said further measures may be needed to slow credit growth after it tightened monetary policy by raising some interest rates.

    ``The central bank will continue to tweak policy,'' the People's Bank of China said in a quarterly monetary policy statement on its Web site. The bank will ``control credit creation to support economic growth while keeping inflation at bay.''

    The bank yesterday raised the rediscount rate at which it lends for up to 60 days by 0.27 percentage point to 3.24 percent. It decided to leave its one-year lending rate, previously the bank's main tool for monetary policy, at 5.31 percent. Commercial banks aren't allowed to charge more than 1.7 times that rate.

    Chinese bonds rose after the decision as some investors had expected tougher measures to control inflation and prevent excessive investment in industries such as steel, cement and aluminum. A sharp rise in borrowing costs may swell bad loans, estimated at 1.92 trillion yuan ($232 billion) at the end of 2003, a fifth of total lending.

    The rate increase was ``not as severe as people expected,'' said Zou Yun, a bond analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. ``Now investors realize their cashflow won't be affected, they started buying bonds again.''

    Bonds Rose

    The index of government bonds traded on the Shanghai Stock Exchange posted its biggest gain since Dec. 11. The index rose 0.3 percent to 97.63 in Shanghai. The benchmark seven-year bond maturing in 2010 rose 0.3 percent to 98.29, driving yields 5 basis points lower to 3.8 percent.

    Steps taken to date are cooling inflation, though fixed- asset investment, which includes spending on factories, roads and railways, shows no signs of slowing, the central bank said.

    Inflation slowed in February for the first time in eight months as government action to improve grain distribution helped lower food prices. Fixed-asset investment, which accounts for almost half of China's economy, jumped 53 percent in the first two months of this year after growing 27 percent in 2003.

    ``There are still problems in the economy that have not been effectively resolved,'' the central bank said.

    China's M2 money supply grew 19.4 percent in the past two months, exceeding the central bank's 17 percent target for this year.

    Blind Expansion

    Raising the rate on the central bank's own lending brings China into line with global practices and will have some impact on money supply. In the U.S., a rediscount rate is applied when a bank that's a member of the Federal Reserve System uses a customer's pledged collateral for a loan from the Fed.

    Companies and banks borrowed a combined 4.44 trillion yuan through discount and rediscount business last year, almost double the amount in 2002, according to the central bank. That's about a quarter of total outstanding loans of 17 trillion yuan last year.

    China's central bank also raised the interest rates it charges banks for unsecured loans of up to one year by 0.63 percentage point. That raised the rate for a 20-day loan to 3.33 percent from 2.7 percent.

    ``Banks will pass the extra cost onto their corporate customers,'' said Li Huiyong, an analyst at Shenyin Wanguo Research & Consulting Co. in Shanghai. ``It will help cool down companies' enthusiasm for loans to expand blindly.''

    China's top planning agency this week criticized local governments for proceeding with ``blind'' and ``wasteful'' investments.

    The central bank last night also increased the amount of money some banks have to set aside as reserves to 7.5 percent from 7 percent, a move that will limit their ability to increase lending.

    Regional Banks

    The change, effective April 25, applies only to banks whose capital adequacy ratios are ``below a certain level,'' the central bank said, without saying what that level is. Banks are advised to have capital equal to a minimum 8 percent of their risk-weighed assets under international guidelines.

    The central bank said the higher reserve ratio won't apply to the big four state banks -- Industrial & Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China, nor to urban and rural credit co-operatives. The big four account for about 70 percent of total lending.

    Listed commercial banks such as Shanghai Pudong Development Bank Co. and China Minsheng Banking Corp. have capital adequacy ratios above the 8 percent threshold and won't be affected.

    ``This is the central bank's way of curbing credit creating and reducing the country's asset bubble,'' said Chris Leung, an economist at DBS Bank Hong Kong Ltd. ``It's mainly the regional banks that will be affected.''

    The People's Bank of China raised the reserve ratio for all banks to 7 percent from 6 percent in September, removing an estimated 150 billion yuan from circulation.


    Copper Futures Fall After China Seeks to Slow Credit Growth
    March 25 (Bloomberg) -- Copper futures in New York fell for a second day amid concern that measures to tighten credit in China will slow demand by the world's top buyer.

    China's central bank yesterday raised its rediscount rate and may have to ``tweak policy'' further to slow credit growth, the People's Bank of China said on its Web site. China's copper demand rose 20 percent last year, according to Phelps Dodge Corp., a copper producer, helping to send futures up 49 percent in 2003, the biggest annual gain in nine years.

    ``There's been a lot of news out of China about the overheated economy and China's government trying to temper demand a bit,'' said James Koppel, a managing director at SG Corporate & Investment Banking, a division of France's Societe Generale SA. ``That's starting to play a little bit of a role.''

    Copper for May delivery fell 1.1 cents, or 0.8 percent, to $1.3435 a pound on the Comex division of the New York Mercantile Exchange. Prices have dropped 4.2 percent from an eight-year high of $1.403 on March 2.

    On the London Metal Exchange, copper for delivery in three months fell $66 to $2,906 a metric ton ($1.318 a pound).

    Prices may fall in the second half as use in China slows, said Simon Hunt, a director of U.K. consulting company Simon Hunt Strategic Services.

    ``I don't expect them to be significantly above where they are today,'' Hunt said. ``Maybe we will see another 10 percent'' gain, he said.

    Copper has climbed 29 percent this year as demand surged in China and the U.S. while production lagged. Inventories this year have dropped 52 percent in warehouses approved by the London exchange and 21 percent in Comex-approved warehouses.



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