With data over the weekend showing inflation running at a 28-month high above 5 percent, most market watchers expect Beijing to continue to tighten policy, including raising interest rates. mBut instead of recoiling, investors piled into markets on Monday, particularly base metals and rubber, driving copper to record highs in London and rubber to all-time peaks in Tokyo.
The re-assessment suggests investors are choosing to interpret China's monetary tightening as supporting, rather than undermining, demand: doing enough to cool inflation without cutting into demand from the real economy.
The following scenarios look at what might happen and the potential impact on commodity markets.
CHINA RAISES RRR AGAIN
The PBOC has already tightened banks' balance sheets six times this year by raising their required reserve ratios (RRR). This makes it harder for them to lend but leaves other sources of money supply untouched, such as revenues from China's trade surplus or the savings squirreled away by ordinary citizens.
The increases in reserve ratios have had little impact on commodity prices this year after the initial shiver following each tightening move.
Many investors have chosen to see such measures as shoring up economic stability rather than worrying about the short-term fall in liquidity and the potential impact on demand.
After the 50-basis point move on Friday, copper futures rallied back above $9,000 on the London Metal Exchange to flirt with record highs.
The increase in reserve ratios also cut the likelihood of a rise in interest rates, some analysts said, although the market is still expecting something before the end of the year.
CHINA RAISES INTEREST RATES AGAIN
The People's Bank of China (PBOC) surprised the world with an interest rate hike in October, its first since December 2007. But it did not close the gap between interest rates and inflation and it did not stop a rally in China's commodity futures markets.
Having played one ace, the PBOC seems be wary of using another before it needs to, in case speculators flock back to the market, sensing a lull.
But most investors are asking "when" rather than "whether" interest rates will rise again. That expectation means a rise is mostly priced in and if the PBOC does act, the impact was expected to be fleeting.
"I don't think rising rates should be seen as a negative. Generally, high inflation and high commodity prices go hand in hand, so maybe we are looking at this from the wrong angle," a copper trader in Shanghai said.
Beneath the froth of liquidity, China's fundamental demand for most commodities is expected to stay strong, which would help support underlying prices.
While higher RRR restrict bank lending, they have little impact on deposits, whereas higher rates restrict bank lending while encouraging more deposits.
China has negative real interest rates, so investors tend to shun putting money in the bank only to see its buying power erode each month.
So the rise in RRR encourages consumption, but alongside Beijing's other moves in commodity markets to reduce liquidity, could limit speculation.
CHINA ALLOWS THE YUAN TO APPRECIATE MORE QUICKLY
One option open to China to restrain price growth in key inputs including oil, grains, iron ore and copper could be to allow the yuan to appreciate more quickly.
That would boost China's buying power and cut the amount of inflation the country imports in the form of commodities and potentially cut the flow of hot money into the nation. Increased buying power could lead to higher Chinese imports.
"China's only real solution seems to be a yuan rise. They seem to be looking at more subtle means to keep inflation under control. They seem to be using fiscal tools, one of which may to allow the yuan to appreciate to maintain domestic prices of imported commodities," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.
Such a move would send shockwaves through international markets and commodities jumping.
In June, when Beijing said it would allow the yuan to trade more freely, copper prices leapt 5 percent on the first trading day after the announcement.
Since then, the yuan rose from 6.83 versus the dollar to 6.62, at the same time Shanghai copper struck its highest since mid-2008. Currently the yuan is trading a little weaker, at 6.66 to the dollar.
Besides markets like copper, a stronger yuan would also encourage Chinese purchases of corn and soy. China, the world's second-largest corn consumer, has imported the largest volume of the grain in years as tight supply pushed up domestic prices.
CHINA DOES NO MORE TIGHTENING BUT KEEPS THE FEAR ALIVE
The threat of a rate rise was an effective deterrent to commodity investment just a month or two ago. Talk of an impending interest rate rise sent commodity futures tumbling to their daily limits on Nov 12. But similar speculation last week had no impact whatsoever.
Chinese exchanges have increased margins to reduce speculators' ability to leverage, as they have to keep more cash in reserve against their positions in the futures market. But to date the impact has been limited.
There is also speculation the Shanghai Futures Exchange would increase lot sizes to make it harder for small speculators to access the market. Artikel From Router http://in.reuters.com/article/idINIndia-53521020101213?pageNumber=3 For the latest updates PRESS CTR + D or visit Stock Market news Today
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