21 November 2011 00:00 [Source: ICB]
China's property boom is over - now comes the bust
Copyright: Rex Features
As the eurozone faces disintegration and the US continues to struggle with low growth and high unemployment, China remains one of the great hopes.
"When you talk about a downturn in China, you are referring to GDP growth of 8-9% per year rather than 10% or more. This is hardly a catastrophe," said a public relations executive with a leading European petrochemical producer.
There is a growing school of thought, however, that China is in much deeper trouble, because its economy is inextricably tied to events in the West. Breaking the country's addiction to exports will not be smooth and easy.
"It seems increasingly clear that China's economic policy took a wrong turn 10 years ago when it joined the World Trade Organization [WTO]," says Paul Hodges, chairman of UK-based consultancy International eChem, on the ICIS Chemicals & the Economy Blog.
From 2001 onwards, China transformed itself into the manufacturing workshop of the world as it took advantage of low tariffs under WTO membership, he notes. But that year also marked the point when Western baby boomers began to leave the peak consumption age group of 25-54.
Low interest rates artificially propped up Western demand. And China invested some $500bn (€365bn) in US housing agencies Fannie Mae and Freddie Mac to keep the party going. "This was a form of vendor finance to support the export drive," Hodges says. "Unless the US housing market stages a recovery, which looks increasingly unlikely, write-downs are inevitable."
When the global financial crisis struck in the fourth quarter of 2008, China faced the prospect of mass unemployment and social unrest as export orders dried up.
The solution was the biggest lending binge in economic history for a country of China's size. Bank lending doubled to $1.4bn (€1.0bn) in 2009, a third of GDP, and was maintained at this level in 2010. The government spent $580bn to subsidise consumers buying autos and electrical goods.
Inevitably, this brought forward chemical demand. Hodges estimates that apparent demand for polyethylene (PE), which comprises imports and local production, grew by 53% between 2008 and 2010.
Since late last year, the government has been trying to solve the problems created by this epic stimulus. Through October, bank lending is down 29% this year versus the same period in 2009. Interest rates have been raised, along with bank reserve requirements.
The speculators who buoyed chemicals and polymers demand in 2009-2010 - those who could borrow money easily and flip between gambling on cargoes of chemicals, other commodities and real estate - are now going bust by the legion. This is a deliberate government policy to reduce overall inflation and bring real estate prices down to more affordable levels for the majority of the population.
The collateral damage of credit tightening includes lower polymer demand growth. PE, polypropylene (PP), polyvinyl chloride (PVC), polystyrene (PS) and acrylonitrile butadiene styrene (ABS) growth will on average be flat this year, says a Singapore-based chemical analyst.
Far more seriously, the lending binge has made possible a major debt crisis. Global credit ratings agency Fitch is concerned that 30% of China's loans could turn bad.
"It means that $2.5 trillion of loans might not be paid, and yet 2010 GDP was only $5.9 trillion," says Hodges. "Even if we halve Fitch's estimate, this would still mean loans worth 21% of GDP would not be repaid. This is a big 'haircut' even by eurozone standards."
Property prices in China's major cities have started to decline, as sales volumes also dip and developers go bust. Shanghai witnessed a demonstration by disgruntled, underwater homeowners on October 22.
What if the downward price spiral, as downward price spirals have a habit of doing, accelerates out of control? What happens then to China's non-performing loans problem? Perhaps, as has been the case before in China, its economic problems will eventually be tackled so the industry can return to double-digit annual growth for everything from PE to paraxylene (PX).
In the meantime, chemical companies that remain bullish on China are likely to be forced to counter the logic of the doubters - point by point. Broad-brush statements about continued urbanization and the rise of China's middle classes should no longer suffice to satisfy investors.
More importantly, what if China goes the same way as the West?
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