By John Richardson
ANXIETY seems to be growing in the chemical industry over China's plan to migrate its economy away from export dependence towards greater domestic consumption.
The sense of nervousness picked up in several conversations with company executives over the past few weeks indicates how much is at stake for an industry that has hugely benefited from the Chinese growth model. The model has involved importing lots of raw materials, including chemicals and polymers, for re-export as finished goods.
To put this into an overall macro-economic context, China has now comfortably surpassed Japan to become the world's second largest economy, according to the online research publication, the China Economic Quarterly (CEQ).
The Chinese economy, now worth $5,800bn, has tripled in size in just six years with per capita incomes rising from $1,500 to $4,300 over the same period.
In an extraordinarily blunt article published in the China Daily in December, economist Yu Yongding said that painful structural reforms were essential if China was to get anywhere close to maintaining this stunning pace of growth.
Problems he highlighted, which have also been pointed out by other economists, include capital investment that accounts for more than 50% of GDP. Nearly a quarter of this investment has gone into real estate, he claimed.
"There are simply too many luxurious condominiums, magnificent government office buildings and soaring sky-scrapers," he wrote.
What was amazing was both the tone of the article, the fact that it was published in an official newspaper - and also because Yu was formerly a member of the monetary committee of the People's Bank of China.
Wasteful investment in too-much industrial capacity, as a result of soft loans to state-owned enterprises (SOEs) from state-owned banks, have been singled-out as another issue by other economists.
Misallocation of capital looked as if it had slowed down prior to the global economic crisis.
But once the massive economic stimulus package was launched to deal with the crisis in late 2008, the state-owned lenders were left with loan reserves burning a hole in their books.
"Because the banks were suddenly flush with capital and were told to go out and lend by the central government, the most established and therefore easiest route to get rid of this money was through lending to the SOEs," said a Beijing-based financial analyst.
"The SOEs in turn found the easiest way to dispose of this money was into new industrial capacity."
The financial analyst believes that this has left China more dependent on exports than before the economic crisis, evidence of which is a rise in China's current-account surplus as a proportion of global GDP.
Fixing the odds in favour of China's highly competitive export industries has had other consequences, according to critics of the China growth model. They include low wages and lack of full-time employment contracts and social benefit provision for rural migrant workers; high levels of pollution due to lax environmental standards; and lack of financing for private businesses because the state-owned banks lend primarily to the SOEs.
These factors have all held back growth in private wealth. Expansion in private incomes and tackling income inequality are essential for boosting domestic consumption.
Yu believes that a combination of a political culture of "sycophancy and cynicism" and a lack of "innovation and creation" in Chinese industry, make structural reforms exceptionally difficult. He argues that even though China churned out 17m cars last year, the country has a very small number of its own brands.
The CEQ takes a much more optimistic view and says that to start with, many foreign commentators have oversimplified things when they talk about the shift to greater domestic consumption.
"China's investment needs remain enormous, and its capacity to pick up global export market share, especially in higher-end goods, remains significant," wrote the online service in its fourth quarter 2010 report.
"Investment and exports will not disappear soon as drivers of growth."
Policy makers have also got much more serious about pushing through structural changes, a sign of which was a recent change in rules governing dividend payments by SOEs, the CEQ added.
Over the past four years the 120 biggest SOE groups paid 6% of their profits in dividends to the government, but most of these dividends were recycled back as capital injections and subsidies, it said.
The government plans to raise payout requirements to 10-15%, and extend the payment policy to all 1,600 centrally-controlled SOEs, creating the chance that some of this money will be funnelled into social service spending.
But official growth estimates, released during 2010's October Communist Party plenum point to the scale of economic disruption.
Officials were quoted as expecting lower GDP growth under the 12th Five-Year Plan (2011-2015) compared with to average of 11% per year under the 11th plan, which has just come to an end.
And this is the huge issue for the chemicals industry. Beijing expects export growth to average around 10% per year during the new five-year plan compared with 27% in the five years before the global economic crisis.
How quickly will domestic growth replace this slower expansion in exports?