FocusAll eyes on China’s economic recovery story

22 September 2009 05:52  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Whether China can maintain its pace of economic recovery would be an intensely boring topic by now if it wasn’t for its importance to the global petrochemicals industry.

More data specific to polymers and chemicals have emerged, illuminating just how staggering the rebound in demand has been in the world’s most important petrochemicals market.

China’s imports of polyvinyl chloride (PVC) doubled in the year to June compared with 2008, according to International Trader Publications Inc (ITP), a provider of trade information on polymers and chemicals.

The country's benzene, vinyl chloride monomer (VCM), methanol and propylene imports, meanwhile, soared 100-550% over the same period, the publishing company added.

During the last economic recession, imports spiked in the period December 2001-February 2002, said Jean Sudol, president of ITP. This followed the perception that petrochemical prices had bottomed out.

“What was different then versus now is that fewer products were involved. The spikes were nothing like the magnitude we are seeing now, and the surge only lasted one to three months. This time, it’s endured for seven to eight months,” Sudol said.

Evidence of weaker demand has emerged over the last few weeks.

Is this demand decline partly the result of too much inventory rebuilding of chemicals, polymers and of semi-finished and finished goods?

All will hopefully become a little clearer after the very long Chinese national holidays from 1-8 October. It is hard to discern to what degree recent sales dips are due to business winding down ahead of the holiday break, overstocking and bleaker economic prospects.

On the surface, a lot of the macroeconomic numbers look terrific.

China’s retail sales grew 16.6% in the first half of this year and were up 15.4% until the end of August.

But retail sales include government purchases and shipments to shopkeepers before any sales to actual consumers are recorded.

“This makes them a very bad proxy for consumption,” writes Michael Pettis on his blog, China Financial Markets. Pettis is a professor at Peking University’s Guanghua School of Management.

The China Economic Quarterly (CEQ), an online research publication, agreed that the retail sales numbers were not much use in tracking genuine consumption. Even government officials failed to attach much credence to them, it added.

Unlike the more pessimistic Pettis, CEQ believes it was well within China’s capability to maintain GDP growth at 8-9% in 2010 (growth is expected to easily reach 8% in 2009).

China has huge government reserves left to pay for high levels of bank lending and big public-infrastructure projects.

As to asset bubbles, which could lead to a shift in the government’s expansionary fiscal and monetary policy measures, the “hysteria is premature”, wrote CEQ in its third-quarter issue.

“Price-earnings ratios are well under half their truly speculative October 2007 peaks.”

“Our detailed analysis (of the housing market) suggests that the pool of prospective upgrading and investment buyers is so large that the market can continue to rally for another year or so,” the CEQ report read.

But it warned: “Continued growth at 8-9% in subsequent years will depend on whether the government uses the time it has bought through monetary stimulus to push through domestic market reforms.

“We are pretty optimistic about financial sector liberalisation; less so about service-sector reform.”

Liberalisation and deregulation are crucial for shifting the economy away from exports towards stronger domestic consumption growth.

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