Commodities and China's Pressure to Restrict Lending

The recent decision by China to pressure its banks to cut back on lending has had a dampening effect on the commodity sector as doubts grow as to how much the giant emerging economy will spend on raw materials in 2010.

Much of the demand for commodities and the expected rise in commodity prices was based on China resuming its growth and spending trend, which assured demand for a large number of commodities would continue.

Now that it seems China is trying to cool off its economic growth because of concerns some of its sectors, like real estate, could be approaching bubble proportions, and so telling its banks to cut back on lending sends a signal they could be slowing down its numerous building projects and manufacturing growth in order to get a better look at how to proceed with its expansion plans.

This has caused a number of commodities to drop in price and increased unsurety as how to measure what the Chinese will do going forward.

While China isn't the only commodity play in town, it is by far the most important, and so how China goes, so will commodities go, in the near future.

It's hard to tell what China means in practical terms when it told its banks to cut back on lending, and until that clears up commodities will probably have a lot of swing in prices (even more than usual) until there is more clarity in the Chinese market.

That means price movements will be determined by other factors until that happens, and possibly even smaller bits of news could send commodity prices up or down more so than usual until the larger picture of China unfolds.

Until then it would be wise to remain very cautious on our commodity investments and look for signals from other sectors and countries. This could of course change very quickly if China suddenly orders large amounts of any one commodity, but we will have to keep a close watch on their decisions, as it will have a tremendous effect on how commodities perform in 2010.