April 27, 2009

The Chinese government's efforts to protect domestic producers through increased state buying has had the desired impact of supporting prices, but that has led to a surge in the import of most commodities.

The fear of a domestic supply glut has left officials scrambling for alternative solutions which won't compromise the hard-earned price stability.

While state intervention has temporarily boosted prices, analysts say the policies now run the risk of delaying a firm recovery, particularly in metals, as smelters restart production, worsening the supply overhang.

Traders fear the government may now deploy import taxes to turn back the supply tide.

"It is quite preposterous that China should be a net importer of aluminum, zinc and lead, and we expect that in the next few weeks there will be announcements aiming to restrict imports of these commodities, principally aluminum," said Michael Jansen, metals analyst for JP Morgan.

But others speculated Beijing would resort to non-tariff methods first, before enacting new fiscal measures as a last resort.

"There's certainly concern that the government will increase import taxes, but with the current wave of concerns on protectionism, they might use other methods," said Jerry Chen, of Star Futures in Shanghai.

In recent weeks, Chen said, the government has chosen to slow customs clearance of aluminum shipments rather than slap a tariff on them.

"If you delay a shipment by even a week, it could become too expensive for importers," he said.

In trying to prop up commodity prices, the government's chief weapon has been purchases by federal and provincial agencies for stockpiling.

In key agricultural commodities, like soy and rapeseed, the price is openly targeted well above market levels: RMB3,700 a tonne for soy and RMB4,400/tonne for rapeseed.

Traders have undercut these prices so successfully that the Ministry of Commerce asked them Friday to slow the flow of cheaper imports.

"Importers should closely watch the market... to avoid losses caused by excessive imports," the ministry warned in a statement on its Web site.

Analysts said the government's purchases of local oilseeds have inadvertently subsidized foreign farmers.

Trying to fine-tune its aid to farmers, the government now says it will help corn processing plants to boost their production.

Analysts say the government may also be considering an increase in the export tax rebate for corn starch, or introducing sliding tariffs, which means much higher taxes for imports above quota.