FocusChina’s consumption may not budge despite subsidies

31 March 2009 07:32  [Source: ICIS news]

By Bohan Loh

SINGAPORE (ICIS news)--China’s subsidies to boost consumption in the rural areas indirectly benefit the petrochemical industry as production of select consumer electronics will grow on hopes that domestic demand will pick up, industry sources said on Tuesday.

But these subsidies may not serve as incentives enough for the country’s rural population to start spending, throwing into question the immediate economic benefit of the government’s move, they said.

The country’s Ministry of Finance has introduced a scheme that will make homes appliances such as television sets, washing machines, mobile phones, refrigerators and motorcycles more affordable to its 800m rural residents.

It was a way of stimulating China’s humongous domestic economy at the grassroots amid the slump in global demand, analysts said.

“The Chinese government is doing what it has to do to stimulate domestic consumption. (But) it is all about consumer confidence,” said Song Seng Wun, regional economist for Malaysian brokerage firm CIMB-GK.

“Whether (or not) this is going to work, we’re not sure yet,” he added.

Under the scheme, the government will cover 13% of the cost of the appliances.

 “I think the policy will drive some demand for major chemicals such as plastics to an extent - in a short period. But it is difficult to say whether it will boost long-term demand,” said Lu Zhen, chemical analyst at Guosen Securities.

Sentiment has recently improved in the raw material markets such as acrylonitrile butadiene styrene (ABS) and polystyrene (PS).

“I have purchased more cargoes than before in recent weeks and I am still looking to buy more as my customers are asking for more,” said a China-based ABS trader. He said he intends to reserve inventories in anticipation of higher prices.

Spot prices of ABS in China rose 9% to CNY11,900-12,500/tonne ($1,740-1,827/tonne) DEL (delivered) last week on keen buying interest and a dearth in supplies from South Korea and Taiwan, according to global chemical intelligence service, ICIS pricing.

GP (general purpose) PS also jumped about 12% in China to CNY8,700-9,200/tonne DEL last week.

ABS is extensively used in both the electronics and automobile industries while PS is widely used in the domestic appliances and electronic goods sector.

But the home appliance subsidy scheme only has had limited impact on the local electronics and electrical application sectors, with only big companies benefiting from it, said a plastics processor in Shunde city, a major home appliance production base in Guangdong province in southern China.

Local consumption in Tianjin city in northern China has not shown signs of improving, a source at the Tianjin Plastics Industry Association said.

“Dwindling local and exports demand has hit the electronics, IT, automobile and packaging application sectors in the Tianjin area,” the source said

While China has a strong domestic economy, exports had been is main engine of growth just like the rest of Asia. It was the second biggest exporter in the world, next to Germany in 2008, said an economist. But demand has been severely hit as its major trading partners - the US and Europe - fell deep into recession.

China's GDP growth is expected to slow to 7.0% this year from 9.0% in 2008, according to the Asian Development Bank.

"Exports make up about 40% of China's GDP. The government must help the electronics producer digest the excess capacity that is in the market right now," said Wang Aochao, a Shanghai-based analyst with brokerage UOB Kay Hian.

($1 = CNY6.84)

With additional reporting from Judith Wang, Clive Ong and Chow Bee Lin

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By: Bohan Loh
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