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China cash squeeze hits commodity prices

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Just as funds' rebalancing act was expected to send crop prices even higher, along comes China to spoil the party.

China took markets by surprise on Thursday by raising the interest rate on its three-month bills, a move aimed at tightening liquidity in the world's third biggest economy. (And following a central bank alert on Wednesday over potential property market overheating.)

And if China is moving to fight inflation, and make money less freely available, what does that mean for its appetite for commodities, such a huge prop to prices last year across the menu?

Traders took a downbeat, but not dismal, view, sending a broad range of commodity prices lower. In Shanghai copper, fell from nearly limit up (+5%) to close 0.7% down, while steel rebar fell its 5% daily limit and aluminium faring only marginally better.

Oilseeds crushed

In agri-markets, soyoil slumped more than 2% on China's Dalian exchange.

Abroad, that put the wind up, in particular, Kuala Lumpur palm oil, a major rival to soyoil, and for which investors have been relying on Chinese demand to raise prices.

The benchmark March contract tumbled 2.0% from Wednesday's seven-month highs to 2,648 ringgit a tonne by 08:00 GMT.

In Chicago, March soyoil did better, down 1.3%, with their source, soybeans, off 1.6% at $10.41 ¾ a bushel for March delivery.

Some traders thought things could have been worse, given that China is the biggest buyer of US soybeans, and there Brazil, the second-ranked producer, is expected later to raise its forecast for its own crop above the current 64.7m-tonne estimate.

'Reluctant to sell'

Still, the prospect of fund-buying still holds some cachet, with many due to rebalance – altering commodity weightings to base levels, which is good news for 2009 laggards such as grains – in coming days.

"With the threat of index fund buying later this week and into next week bears will be reluctant to sell," Kevin Kjorsvik at broker Benson Quinn Commodities said.

There is also the prospect of a swathe of crop reports from the US Department of Agriculture next week, the coming of which tends to inspire more cautious trade.

Indeed, the loss in corn was limited to just under 1%, leaving the March contract at $4.17 ¾ a bushel.

March wheat eased 1.2% to $5.60 ¼ a bushel.


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