China accesses state reserves to curb rising commodity prices

RIO DE JANEIRO, BRAZIL – China has decided to tap into its massive state-owned and secret reserves amid a campaign to curb rising commodity prices.

The country plans to expand pork stocks to strengthen control over the market, while officials are calling for faster construction of coal reserve infrastructure and considering setting a price cap due to soaring energy prices.

The latest measure targets basic metals: China plans to offer copper, aluminum, and zinc directly to end users to cool the rally, according to people familiar with the matter who declined to be identified.

Commodities are at their highest level in a decade, with copper and coal breaking records last month, as demand outstrips supply and global recovery gathers momentum.

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This reinforces the concern that manufacturers may have to pass on higher costs to consumers at some point, hindering the economy.

Officials have warned the Chinese futures market, notably speculators and investors who accumulate bets on one asset, and pressured some companies to reduce positions with bullish bets.

“Using state reserves creates a self-fulfilling psychological price spiral,” said Iris Pang, chief economist for Greater China at ING Bank. “That will curb speculators from long positions in commodity prices, which can really stabilize the market.”

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China does not disclose information on the volumes of its state reserves, but the government quietly stocks commodities as a way to protect itself from future price hikes.

Commodities can be released in emergencies, as in previous cases of selling pork to ease inflation fears due to shortages of the staple food.

There is a minimum amount of metals in the reserve stock that can be requested, said a person familiar with the matter. For copper, it is 500 tons, the supply will be monthly and run throughout the year, the source said. The relatively high cap for purchases suggests that the supply will be limited to larger companies.

A fax to the National Development and Reform Commission got no reply.

China has been evaluating the plan to sell about 500,000 tons of aluminum from state stocks since at least March.

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China remains concerned about rising commodity prices, as downstream producers would not resist narrow margins, according to ING’s Pang. “Price stability has always been one of the Chinese government’s priorities, and if prices don’t fall, I don’t expect these measures to cool the market to stop there,” said Howie Lee, an economist at Oversea-Chinese Banking.