INSIGHT: China economic growth expectations reset

28 June 2013 15:29  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--Volatility is once again taking hold of the global markets with huge swings across stocks, bonds, currencies and commodities.

While a number of factors are roiling markets, the big story is China – specifically a potential shift in monetary policy and the impact that would have on credit availability and economic growth.

A liquidity squeeze that sent China interbank lending rates rocketing to record highs on 19-20 June spooked investors.

The central bank’s reluctance to intervene and inject funds into the system until 21 June, and its subsequent statements on the need for more efficient capital allocation, signals that it means business when it comes to reining in excessive speculation that comes from loose monetary policies.

The China central bank’s shift in tone coincided with US Federal Reserve chairman Ben Bernanke outlining prospects for tapering down the Fed’s massive quantitative easing (QE) program that has been buying up $85bn in government and mortgage debt every month.

The shift in stance of the central banks of the number one and two world economies towards tighter money has understandably caused equity and bond prices to plunge.

In Asia’s petrochemical sector, players are beset by uncertainty on the policy shift’s impact.

Tighter credit would hamper trading activity, along with raising the prospects for a lower rate of economic growth in China – even lower than previously lowered expectations.

Indeed, a number of investment banks lined up to slash their China GDP growth forecasts for 2013 to below China’s official target of 7.5%.

Goldman Sachs, Barclays, HSBC and China International Capital Corp all lowered their GDP targets.

Goldman now sees 2013 GDP growth at 7.4% and 2014 GDP growth at 7.8% – down from 7.8% and 8.4%, respectively. It said the tightening of the interbank lending market sends a “strong policy signal” that credit growth will be more constrained.

Even before the latest liquidity crisis, US-based chemical company CEOs at the American Chemistry Council (ACC) annual meeting in June voiced their opinion that growth in China appeared well below official growth rates of 7-8%.

For those looking to the stock market as a leading indicator of economic activity, the Shanghai Stock Exchange Composite Index paints a grim picture. Stock prices have plunged almost back to 2008-2009 crisis levels and are off 43% from their post-crisis highs.

And while US, Europe and Japan stock markets have at least bounced off their recent lows, China’s equity market has yet to find a bottom.

As global chemical companies close out their June quarters and prepare for earnings season, the impact from China will be a key question on conference calls as analysts gauge profit expectations.

Interestingly, the global slide in asset prices from the prospects of a weaker China economy has not had much impact on crude oil – one barometer of global industrial activity. Brent crude continues to hover at around $100/bbl with US West Texas Intermediate (WTI) at $95/bbl.

The high oil price may mitigate chemical price declines in the short term. But if China’s economic growth slows much further, crude oil may be the next asset class to see a sharp fall. Chemicals would follow.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Joseph Chang
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