Finance

On April 27, the People's Bank of China, the county's central bank, announced an increase in its benchmark renminbi lending rate by 0.27 percentage points, signifying an effort to strengthen regulation of the macro economy.

Financial performance remained sound and stable in April, according to the central bank.

Money supply grew rapidly (see graph 1). A total of 68.4 billion yuan of cash was put into circulation, 25.6 billion yuan more than in the same period last year.

At the end of April, the outstanding renminbi and foreign currency loans of all financial institutions totaled 22.21 trillion yuan, increasing 14.8 percent over a year ago, 2.3 percentage points higher than the rate in the same period last year (see graph 2). During this month, 317.2 billion yuan of renminbi loans were added to the balance, 175 billion yuan more than the figure in the year-earlier period, hitting a record high. Of them, short-term loans grew 47.2 billion yuan, up 58.9 billion yuan year on year, while paper financing increased 89.2 billion yuan, 33.1 billion yuan more than in the year-earlier period. Newly increased consumption loans stood at 19.7 billion yuan, a year-on-year increase of 4.5 billion yuan.

The month-end outstanding renminbi and foreign currency deposits of all financial institutions totaled 32.28 trillion yuan, growing 18.5 percent over the year-earlier period, 2.4 percentage points higher than the rate in the same period last year. Of the total, deposits from households and non-financial corporations rose 16.8 percent and 19.1 percent, respectively, year on year.

Of the renminbi deposits, households and non-financial corporations contributed 15.3 trillion yuan and 9.9 trillion yuan, expanding 18.2 percent and 15.3 percent, respectively, compared with the same period last year.

Renminbi transactions in the inter-bank market amounted to 2.99 trillion yuan, or 136.1 billion yuan per day. It was 60 percent higher than the same period last year.

Corporate Commodity Prices

In April, corporate commodity prices monitored by the central bank inched up 0.3 percent over March and rose 1 percent over a year ago. Of the total, prices of capital goods were up 0.5 percent from the previous month and increased 1.6 percent compared with the same period last year, while those of consumer goods dropped 0.3 percent from March and were 0.3 percent lower than in the same period last year.

Prices of agricultural produce decreased 0.3 percent from the previous month, but went up 1.2 percent from a year ago (see graph 3).

Prices of energy rose 0.7 percent from March and were 11.8 percent higher than in the same period last year. Of the total, raw coal prices were 0.3 percent lower than in the previous month and dropped 1.1 percent year on year. Prices of crude oil inched up 0.8 percent compared with March but shot up 26.8 percent from a year ago, while prices of refined oil gained 2.7 percent from the previous month and ranged up 23.9 percent from a year ago.

Power prices saw a decline of 0.2 percent from March, but were 5 percent higher than in the same period last year.

Prices of plastics decreased 0.5 percent from the previous month, but went up 2.7 percent over the same period last year. Prices of major electric appliances inched up 0.1 percent over the previous month and were 0.1 percent higher year on year.

Metal Firms

Chinese metal firms are facing a cash squeeze as high prices for copper, zinc and aluminum are crimping profit margins and boosting financing costs, according to analysts and industrial leaders.

The cash crunch, hurting everyone from zinc smelters to air-conditioner makers, could force some operations to close down and may add to non-performing loans of Chinese commercial banks.

"We give buyers copper only when they pay cash," said an executive at Jiangxi Copper Co. Ltd., China's biggest copper producer. The company owns the largest operating copper mine in the country but also imports the ore.

The price of copper, used in wiring and construction, has risen more than 80 percent this year, while that of zinc, which is used to make stainless steel, has climbed 70 percent. The price of aluminum, an important metal for the building and packaging sectors, has risen more than 25 percent in 2006.

World metal prices have been bolstered by strong demand from China, where consumption of copper has been estimated to rise 14.5 percent this year. But traders are wary of "demand destruction," where high prices dampen demand and can also lead to supply substitutes.

"For a purchase of 100 tons of copper, firms previously needed 2 million yuan, now they need 8 million yuan. This will increase their financing costs," said Heng Kun, an analyst at Everbright Securities Ltd., adding that those firms need more bank loans.

"If a firm is in the middle of the production line, it can only shift part of the rising costs downstream," Heng said, referring to miners as the upstream firms and retailers as the downstream firms.

Copper traders say it is getting harder to get cash out of customers. "A customer bought 200 tons of copper and paid us through five letters of credit," a trader said. "Clients have fixed credit for each letter of credit. But banks are not willing to expand their quotas," he said.

An official for Gree Electric Appliance Co. Ltd., China's largest air conditioner producer, said the firm had not raised prices over the past year, although copper prices were higher. The firm is a copper tube user.

Aluminum fabricating plants are worried about payment defaults as high prices of the metal are pushing up costs for users. "We have halved credits to clients. If they ask for large credits, we prefer not to take that order," said a manager for an aluminum fabricating plant in Guangdong.

Chinese copper and zinc smelters are also struggling with the high prices of ore to feed their plants.

Smelters' demand for bank loans is rising, according to a zinc trader in Shanghai. With tight bank credit, some zinc smelters are borrowing from individual investors who then receive the metal as payment, he added.

Many small metal traders have suspended trading because of high financing costs, while others are building up bank loans.

Heng of Everbright Securities said high metal prices and tight credit could spur a consolidation in the industry as uncompetitive firms, including smelters and traders, collapse. "Banks should be alerted and not give large loans to small and medium-sized firms," he said.

Investors also see a risk to the country's lenders even as metal prices slip from record peaks. "If a lot of firms that have bank loans go bankrupt, banks would be affected," said a manager at China Cinda Asset Management Corp.