China Raises Deposit Reserve Requirement Ratio Again to Curb Inflation, Base Metals Remain Attractive

China’s central bank said on November 10th that it will raise the deposit reserve requirement ratio (RRR) by 50 basis points from November 16th, its fourth increase this year, in order to rein in inflation. After the adjustment, the RRR for the four big state-owned banks will stand at 18%.

Inflation Pressure Exacerbates
According to the data released on Thursday, China’s Consumer Prices Index (CPI) in October increased by 4.4% YoY, and the growth rate was 0.8% higher than that in September; the Products Prices Index (PPI) was up 5.0 % YoY, with the growth 0.7% higher than that in September. China’s CPI data was much higher than the government-set inflation target of 3% for the year. Several days ago, the National Development and Reform Commission (NDRC) acknowledged the inflation data was likely to exceed the target ceiling set for 2010 for the first time,indicating an accelerated inflation pressure. In addition, China’s central bank raised the deposit reserve requirement ratio yesterday evening for the fourth time in 2010, in order to curb the inflation pressure. China’s efforts in interest rate hike and deposit reserve ratio increase have indicated that the government is considering exiting from the loose monetary policy which has lasted for nearly 2 past years, weighing on market sentiment. However, market liquidity are expected to remain sufficient, given the US Federal Reserve’s new quantitative easing policy, and only limited adjustment in monetary policies by China’ government, as well as inflows of hot money from expectations of Chinese yuan’s appreciation.

Base Metals Remain Attractive for Investors to Combat Inflation
Base metals prices have experienced corrections for several days following the expectations of the RRR increase, and significant declines in banking shares yesterday generally reflected market response to such an expectation. After China released a series of major economic data for October, base metals prices increased rapidly after brief declines. It is suggested that base metals remain attractive for investors to combat inflation amid growing inflationary pressure. In this context, base metals prices are expected to rise further in the near term, and SMM predicts LME copper prices will likely break the record high of USD 8,940/mt, and then climb above the USD 9,000/mt mark.

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