01 March 2013 09:12 [Source: ICB]
The key to growth in chemicals demand will be the success of efforts to narrow the gulf
The extraordinary growth in China's polyethylene (PE) demand since 2005 serves as a great example of just how far the overall economy has come.
The gap between rich and poor is still rising
Copyright: Rex Features
A lot has been made of how difficult the last two years have been because of the 2011 credit crunch and the slowdown in GDP growth in 2012. But consumption still rose by 900,000 tonnes over those two years.
The $64,000 question is what future growth will be like as the economy confronts a long list of problems, which we have discussed before, such as the loss of the demographic dividend as a result of the one-child policy and an over-dependence on investment.
Vital for chemicals and polymer demand will also be the extent to which China is successful in closing the big gap between the small elite at the top of society - the super-rich - and everyone else.
The richer China as a whole becomes, the greater the demand growth will be for finished goods made from chemicals and polymers.
At the moment, hundreds of millions of people in China struggle to afford the basic necessities of life.
The scale of the task was thrown into stark relief on 18 January, when the government's National Bureau of Statistics announced that the country's Gini coefficient - a measure of income inequality - was 0.474 in 2012. Perfect equality is zero and perfect inequality is one.
In the early 1990s, the World Bank placed the co-efficient at 0.35, indicating that China's manufacturing and investment-led growth over the last two decades has greatly increased income disparities.
China's 0.474 is worse than any Organisation for Economic Co-operation and Development (OECD) country, and compares with approximately 0.38 in the US.
Much more alarming are claims that the government has greatly underestimated inequality.
Many of the critics cited a report released last December by the Chinese Household Finance Centre at Chengdu's Southwestern University of Finance and Economics.
The report said that the coefficient was a shockingly high 0.61 in 2010.
Although, of course, the government figure is more up to date, the critics point out that inequality might well have become even worse since 2010, given the big economic stimulus package that was introduced by China in late 2008.
The package led to a surge in property prices, thus widening the gap between the very rich - the only people who can afford private-sector homes in big cities such as Beijing and Shanghai - and everybody else.
NEW REFORM PROGRAMME
The good news is that in early February, China's State Council announced guidelines on how to tackle the wealth gap. The State Council is the country's top administrative body and implements the policies of the ruling Politburo.
"The reform will focus on how to increase residents' income, narrow the income distribution disparity and regulate the distribution order," said the council in a statement published on the Xinhua newswire on 7 February. Highlights of the plan include:
The percentage of profits that central state-owned enterprises (SOEs) have to hand in to the government will increase by around 5 percentage points by 2015. Some of the extra funds will be spent on increased social security payments.
Reforms will be advanced to make bank interest rates more market-oriented. This will involve allowing loan and deposit interest rates to move in what the government calls a "properly wider range" in order to protect the interests of savers.
Rural migrant workers will find it easier to register as urban residents and so benefit from all basic public services in cities.
The government wants to reduce the number of people living below the poverty line of yuan (CNY) 2,300 ($366) in per capita annual net income, based on constant 2010 prices, by around 80m by 2015.
Farmers will be guaranteed proceeds from transferring their contracted land plots, and will collect higher revenues from gains in the value of the land.
The first three objectives in our summary of the State Council plan would involve reducing the overarching role that the SOEs play in the economy.
It has long been argued that the SOEs are allowed to keep a very high percentage of their profits.
An increase in the dividends that SOEs have to pay to the government would reduce their profits, encouraging greater competition from the private sector, argue many commentators.
The higher dividend would also help Beijing fund its rising welfare costs resulting from the one-child policy, they add.
For several decades, and particularly over the last 10 years as China has built-up its industrial capacity, the SOEs have benefited excessively from cheap and plentiful finance, cut-price land and discounted supplies of energy, say commentators.
The country's 150,000 SOEs, for instance, receive more than three-quarters of all formal bank loans, says Sydney University professor John Lee.
SUPPRESSING SAVINGS RATES
Savings rates are said to be kept at levels below what the market justifies, thus suppressing domestic consumption and enabling the state-owned banks to provide cheap lending to the SOEs.
Hence, a more market-based approach to setting interest rates could both boost domestic consumption and reduce inefficient investments by the SOEs.
China's Hukou residency system, which we discussed in February 2012, is designed to ensure that enough people remain in a particular region to keep the country sufficiently fed.
But it has created a two-tier society.
Tier one comprises urban residents eligible for unemployment benefits and pensions.
Tier two is made up of the hundreds of millions of former rural residents who have moved to the cities and towns in order to find work, but have not been able to officially change their residency status from rural to urban. These people are ineligible for welfare payments or free public education, as hukou status is hereditary.
So if China does reform the system, this would unlock more growth in consumption.
But can China afford widespread reform of Hokou, given rising welfare costs resulting from its one-child policy?
Equally, can it afford to cut the number of people living below the poverty line by as many as 80m people?
As for the final objective, SOEs and local governments have made a great deal of money out of obtaining the title to land at very low cost.
The land has been used to build factories and for real estate investments, which, in the case of local governments, has become a vital source of revenues. Land has been obtained cheaply because farmers lack full ownership of property, which would change if the government reform is successful.
Clearly, there are strong motives for both the SOEs and the local governments to resist this particular reform.
Resistance to the entire reform programme is expected to remain strong from all the "vested interests" in China that have done very well out of the existing economic system.
"If the State Council plan is properly implemented this would be tremendous news, but this is obviously a big if," said a Singapore-based business development manager at a global polyolefins producer.
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