Forty Five Minutes On China



By John Richardson

CHINA’S GDP (gross domestic product) growth could fall to only 6.6 percent this year compared with 9.2 percent in 2011, warned Patrick Chovanec, an economist at the Tsinghua University’s School of Economics and Management in Beijing in this Reuters article.

Even this very-low rate of growth for China will only be achieved if construction continues at last year’s phenomenal pace, he added.

But the government has taken measures to slow the property sector down, with real estate prices falling in many Chinese cities, suggesting less construction activity in 2012.

Other economists are less pessimistic, predicting that 2012 GDP growth will fall in the 7.5-8 percent range.

Data released on Tuesday of this week supported what we have discussed before: How China’s economy has become dangerously unbalanced due to its reliance on investment – largely in real estate – and on exports for growth.

Real estate investment accounted for 13 percent of China’s GDP in 2011, according to government data, bigger than the 10 percent estimate that some economists had assumed.

Net exports subtracted from GDP growth in 2011 and will probably do so again this year.

The government is expected to further ease lending conditions through more reductions in the bank-reserve requirement – and it has raised the quantity of lending by state-owned banks.

This is unlikely to be anywhere close to enough to return growth to 2009-2011 levels, however, unless Beijing decides to:

*Cut interest rates.

*Relax restrictions on the property sector.

*Introduce more subsidies for purchasing consumer goods, similar to those for home appliances and autos which greatly boosted demand growth during 2009-2010.

*Increase value-added tax rebates for exporters on their imported raw materials, and at the very least halt if not the reverse the appreciation of the Yuan.

The first three of these steps would likely increase inflation back to socially disruptive and economically damaging levels. As fellow blogger Paul Hodges pointed out on Wednesday, food-price inflation rose to 9.1 per cent in December. Ninety six percent of China’s population earn less than $20/day according to the Asian Development Bank, meaning that the cost of food is a much-bigger proportion of incomes than in developed economies.

The final step might well trigger a trade war, as we have discussed before.

A further danger is that by relaxing restrictions on the property sector, thereby re-inflating the property bubble, local government land grabs may accelerate again, creating further social unrest.

China is already confronting significant social unrest from villagers angry at local government officials who have acquired agricultural land at knock-down prices and sold it on to property developers for big, personal profits. One local government official in Guangdong Province has been accused of illegally pocketing more than $63 million.

But local governments have become heavily dependent for their financing on land sales , and non-performing loans are rising as real estate values fall - providing a motive to re-inflate the property bubble.

The Chinese government is caught between a rock and a hard place, perhaps as never before. 

All the potential outcomes of whatever policy decisions are taken over the next 12 months challenge the assumption that China will remain a driver of global growth.

As we said, further stimulus will equal more inflation, and perhaps even a level of social unrest that once again challenges the legitimacy of the government – as in 1989.

A cautious, moderate easing of lending conditions, property sector restrictions etc is likely to be not enough to get the economy back on to its previous growth trajectory.

The cautious, moderate approach seems likely at the moment because of the inflation risk – and because of the change in China’s top political leadership due to take place later this year.

It took the blog 45 minutes to think through all of this by reading of a few news articles, and reflecting on what we have written before.

On the surface, therefore, we find it strange that chemicals analysts are now queuing up to claim that there will be a strong recovery in chemicals demand growth during 2012. 

Beneath the surface, we all should know the reason why….

Chemicals companies need to see through this.

One more investment bank joined the consensus this week with a new report, but we feel it would be impolitic and unfair to name the bank here.

The arguments made by the banks do not seem to take into account any of the complexities we have detailed above. They are based on assumptions such as:

*Ethylene equivalent demand growth was way below the historic relationship to GDP last year of 1.O x. C2 equivalent growth was about 0.5 percent in 2011 as against, as we said, GDP growth of 9.2 percent, because of tight credit and destocking. It has to therefore return to trend now that credit is being eased, leading to strong restocking.

*Beijing’s decision to slightly ease lending conditions, plus long-term “pro-growth” policies under the 12th Five-Year Plan (2011-2015) such as more social housing and better state healthcare provision, will boost consumer spending.

China’s government might be panicked into another big stimulus package, leading to a recovery in overall economic sentiment and therefore chemicals pricing and demand.

But this, as we said, would merely “kick the can down the road”, creating a big downside potential for growth later in 2012.

 

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