China’s Leaders Are Boxed In



By John Richardson

IT seems inevitable that petrochemical markets will respond positively to the Chinese government’s decision to reduce bank-reserve requirements by 50 basis points.

There will quite likely be a relief rally in the Dalian Commodity Exchange’s futures contract in linear-low density polyethylene (LLDPE) and a recovery in physical prices.

But lost demand is lost demand. Even if China were to further lower reserve requirements, and cut interest rates, which is being predicted for Q1, the country’s biggest export market – Europe – confronts the likely break-up of the Euro zone.

And the risk is that if China relaxes liquidity by too much, inflation will remain above the annualised target of 4 per cent. Its non-performing loans crisis would also very probably become even more severe.

If it fails to relax credit further, however, and if it refuses to relax restrictions specific to the real estate sector, property prices will continue to fall. A lot more angry people could take to the streets to protest against the fall in their value of their homes.

It is all about balancing risk for the government as it seeks, as always, to stay in power.

The credit restrictions are essential as Wen Jiabao tries to narrow the widening gap between the rich and poor. Another angry constituency is the “sandwich generation”, which has been priced-out of private accommodation.

No matter where the government turns, it finds itself boxed in by its policy decisions.

It is boxed in as evidence mounts that credit tightening and global economic problems have substantially slowed-down the growth of the economy, perhaps beyond what had been planned.

GDP (gross domestic product) growth estimates are being revised down for the remainder of this year and for 2012. Seaport cargo volumes, domestic freight volumes, electricity output, passenger trips and housing construction are also down.

The latest purchasing managers index also shows that manufacturing is contracting across the country.

Another key economic indicator is PE demand, which as this chart from Global Trade Information Services, shows was flat between January-October this year. This compares with 53 per cent growth in 2008-2010.

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The problems facing China are complex and could take years to resolve. The chemicals industry cannot depend on China to compensate for declines of demand in the West. Anyway, this notion was always a fallacy.

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