China tightens lending: Saudi may pump more oil
on January 25, 2011

SHIBOR Jan11.pngRecent days have seen some signs that the tectonic plates under current chemical and polymer markets may be starting to shift.
The most important has been the rapid rise in inter-bank lending rates in Shanghai. As the chart shows from Petromatrix, these have begun to rocket. A year ago, the rate at which banks could borrow from each other (SHIBOR, Shanghai InterBank Offered Rate), was 1.74%. Last night, it closed at 7.94%.
Inter-bank lending is core to liquidity in financial markets, as we all learnt during the early part of the Crisis in 2007-8. It allows the major banks to balance their books at the end of each day, as demanded by regulators. So a sudden jump like this, if maintained, will slow lending very quickly.
It suggests that the central bank has finally decided to tackle the rampant speculation underway in property markets. Last week, it also announced tough bank lending targets for the rest of Q1. China Daily reports the target could be 40% lower at just RMB 1.5trn ($225bn), versus 2.6trn in 2010.
Separately, it seems Saudi Arabia is finally starting to worry about the possibility of demand destruction taking place, with oil at today’s high prices. Oil Minister, Ali Naimi, whilst maintaining his “optimistic” view on oil markets, indicated yesterday that some OPEC countries might increase output if oil hit the $100/bbl level.
The problem with moves like these is that they are usually too little, too late. Certainly, in the case of China, the time to rein in speculation was a year ago, when bank lending had already doubled versus the 2009 level. Equally, with oil prices now at $90/bbl, the damage has already been done.

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