February 16, 2010

China tightens credit; corn and soy futures drop

The People's Bank of China raised bank reserve requirements overnight by 50 basis points to 16% of total assets to counter what the government fears is inflationary pressures.

This is the second measure this month against the inflation threat in China. Two weeks ago, the Bank of China raised its mortgage rates two days after the central government warned banks against letting excessive speculation into the stock and real estate markets.

Reaction in American commodity markets was immediate. Soy futures dropped 14 cents per bushel in opening trading on the Chicago Board of Trade to US$9.28. The soy market is particularly sensitive to whatever happens in China, which buys about 60 percent of US exports. Heavy Chinese purchases last year propped soy prices above US$10 for most of 2009.

Corn futures were down as well Friday (Feb 12) morning, by 4 cents per bushel to US$3.59. Corn has fallen from around US$4.25 in early January on bearish supply and export news.