Commodities markets are set to be hit by the Chinese government’s move to tighten liquidity levels.

The People’s Bank of China (PBC: the country’s central bank) suggested this week that it would limit its lending in an effort to stem the growth of credit, which grew more than twice as fast as GDP last year.

The move sparked fears of a credit crunch in China, which have been compounded by the news that the US Treasury plans to ease its fiscal stimulus in the coming years.

Over the past couple of years, commodities prices have been deflated in part due to a slump in demand from China. Beijing has been attempting to rebalance its economy from being investment-led to domestic consumption-led, a policy which has been accelerated since the change in leadership last year.

“The new leaders are more serious about rebalancing the economy towards consumption in the domestic market,” Qinwei Wang, China economist at Capital Economics tells GTR.

Demand for industrial commodities such as steel and aluminium, which have been especially hit by the Chinese policy, is set to remain low, with prices following suit.

Countries in which China’s investment has been most keenly felt are likely to be the biggest victims of the change in tack. Resource-rich Latin America, Sub-Saharan Africa and Australia are all likely to experience a fall in foreign direct investment (FDI) from China.

Credit in China has been growing at 22% a year. Concerns have been rising this year over the explosion of the non-banking lending – or shadow banking – market, which is unregulated and lacks transparency. JP Morgan estimates that the Chinese shadow banking sector is worth anything up to US$6tn.

There are concerns over the amount of credit in the property market, which the government fears could lead to a bubble similar to that experienced in the west if left alone. Also a source of concern is wealth management products issued by commercial banks and trust investments, which grew by US$200bn in Q1.

But while markets were spooked by the PBC’s move, there’s a feeling that the Chinese government is acting now to avoid a bigger crash further down the line.

“The liquidity conditions will remain tighter than banks and markets want, but that’s probably necessary for the longer term to prevent a more severe correction,” Matthew Strong, partner at insurance broker and risk management company JLT Speciality tells GTR. “While they’re keeping a tighter control on liquidity, they’ll make sure there’s a sufficient amount in the system so that growth continues at the required rates. With China it’s always going to be a managed process. They have far tighter control over these things than other parts of the world, where it has the risk of spiralling out of control far quicker.”

China has a five-year plan, during which it hopes to grow its economy by around 8%. While this latest development may restrict growth in 2013 to 7%, if the government avoids further scares then there’s every chance of a rebound in 2014, according to Wang of Capital Economics.

The sense that the shift will be effectively managed is perhaps best illustrated by the fact that as fears of a crunch were raised, China Development Bank, the mainland’s policy lender, announced a US$100mn investment in a potash mine in the Republic of Congo.