05 November 2012 12:30 [Source: ICIS news]
By John Richardson
Political and economic experts are queuing up to warn that unless the new leaders are successful in radically restructuring
A big difference between the transition in
Separation of powers in the
Thus, ever since the fall of the controversial party chief of Chongqing, Bo Xilai, in March of this year, which added to uncertainties ahead of the leadership handover, politics has dominated the investment mood of the domestic chemicals industry.
Plastic converters have, for instance, been unwilling to invest in new capacity.
And there are widespread reports of wealthy businessmen, including plastic processors, moving money offshore because of political concerns.
If the 18th Party Congress, which is due to last about a week, is viewed as a success, some polyolefins traders are betting on a price rebound.
But such a recovery would likely be driven only by sentiment.
A real improvement in demand isn’t expected to happen until the second quarter of 2013 at the earliest. By then, it is hoped that the new leadership will be firmly in place.
But the challenges the new leaders face could well take a lot longer than a few months to resolve.
They include reducing the role of state-owned enterprises (SOEs) in the economy, which has greatly increased since 2004.
"Under Hu and Wen, [the country’s current president and prime minister, respectively] the revenues of the SOEs have increased 15% to 25% each year, while household incomes have risen at a paltry 2-4% per year," wrote Dr John Lee, in the 3-4 November issue of The Australian newspaper.
"There are still an estimated 500m Chinese living on $2 a day or less," added Lee, who is a
Eighty percent of poverty reduction since 1979 took place in the first decade of reforms, when the private business and household sectors, rather than the state, were given the biggest share of opportunities, he said.
More than three-quarters of bank loans are estimated to flow to the country’s 150,000 SOEs, often at interest rates 70% below what the private sector pays.
Tax breaks and free land are also said to benefit the SOEs. Not having to pay for land represented a yuan (CNY) 4,000bn ($641bn) economic benefit in 2001-09, according to the Unirule, the Chinese think tank.
The SOES have become inefficient as a result of easy bank lending, claim several economists. Lee, for example, believes that one-third to one-half of fixed asset investments are offering zero or negative returns.
And because the SOEs have enjoyed such an easy economic ride, they often lack the innovation necessary for
But “vested interests” are believed to stand in the way of reform, as many SOE officials are politically well-connected.
If the influence of the state-owned companies persists, income inequality could remain a major handicap to growth in domestic consumption.
Over-reliance on the wrong kind of investment - in low-value industrial capacity and unneeded infrastructure - might also persist, adding to
Another major challenge is the after-effects of
The policy has already driven up labour costs and is said to have slowed-down the rate of urbanisation.
"Based on demographics, the labour force will continue to decline and should fall by 5.4% over the coming 10 years and by a further 11.2% in the 10 years to 2032. The implication is that non-inflation driven growth will slow dramatically," wrote Simon Hunt of UK-based macro-economics and copper consultancy, Simon Hunt Associates, in a September report.
"Whilst urbanisation growth will remain a significant contribution to growth it will be far less than in the last decade.
"Then the number of households that entered the urban sector rose by 50.6 million, but in the coming ten years it will drop to just 18.5 million."
The one-child policy has also led to a dangerous imbalance between females and males, due to selective abortions. There will be 30m more men than women in 2020, according to
This imbalance, along with the rise in income inequality, has raised concerns over social stability.
They also need to build a social safety net big-enough to provide for the country’s growing number of retirees and their families.
There are numerous other challenges, not least avoiding the temptation of quick-fix fiscal stimulus if 2013 GDP growth starts to weaken. An emergency injection of more government money into the economy is likely to lead to a further surge in unproductive fixed-asset investments.
But a dilemma is that despite the decline in the overall workforce, a minimum of 7% GDP growth per year is thought to be required in order to create enough work for the 7-8m of graduates entering the workforce each year.
At some stage in 2013 we should, hopefully, have a clearer idea about
Clarity won’t necessarily bring relief, however, as this could well mean that chemicals demand-growth estimates will have to be re-assessed and company strategies adapted.
($1 = CNY6.24)
Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
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