Commodity prices fly as China puts off tighter credit

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China lit a new fire under commodity prices on Monday after the government surprised markets by deciding against another credit-tightening move that could slow economic growth.

But is this just delaying the day of reckoning?

Copper, sugar, cotton, silver and corn led the Thomson Reuters/Jefferies CRB index of 19 major commodities up 1.6% to 319.87, its highest close since October 2008.

The index (charted at left) had hit a 2010 high of 319.11 on Nov. 9, then tumbled 7.4% in six sessions -- a drop attributed to fears that a Chinese decision to tighten credit was imminent.

On Dec. 3 the country’s Politburo pledged to move toward a “prudent” monetary policy amid a sharp increase in inflation.

But on Monday China’s central bank opted against raising lending rates. On Friday authorities took a more modest step to slow the economy by raising bank reserve requirements for the third time in a month, which is supposed to have the effect of limiting lending.

The government’s decision to hold the line on interest rates -- a much more effective tool in controlling growth -- was a boost for commodity bulls who are betting that robust Chinese demand for raw materials will continue in 2011.

“That took a lot of the unknown out of the market,” said Bob Haberkorn, a senior market strategist at commodities trader Lind-Waldock in Chicago.

A weaker dollar also helped underpin commodities by making them cheaper for foreign buyers.

Copper futures rose 9.5 cents to a record high of $4.20 a pound. Silver shot up $1.02 to $29.60 an ounce, nearing the 30-year high of $29.75 reached Dec. 7. Crude oil made another run for $90 a barrel, though it fell short.

Yet it isn’t clear that the markets’ sense of relief will be long-lasting. By putting off raising rates Chinese authorities could be forced into more draconian moves to slow the economy early next year.

But Carl Weinberg, chief economist at High Frequency Economics, argues that China’s inflation problem is largely centered in food prices. Overall food price inflation jumped a stunning 11.7% in November from a year earlier, he noted in a report on Monday. Raising interest rates wouldn’t do much, if anything, to push down food costs, Weinberg said. People can put off buying a car but they can’t put off eating.

“We still believe that the solution to China’s food shortages -- which the government worries about for good reason -- is an increase in imports of foodstuffs,” he said.

There are signs that that already is underway, Weinberg said. He noted that China’s soybean imports doubled in November from a year earlier.

Buying more food from the rest of the world, including the U.S., would be one way to help cut China’s massive trade surplus. And given the country’s huge holdings of foreign reserves, we know its money is good.

-- Tom Petruno