Stimulus Nonsense Raises Hopes

By John Richardson

EARNINGS estimates for South Korean petrochemical companies will have to be cut by 50 percent for the full year 2012, said an industry observer.

“It is quite clear that the first quarter was dreadful for the South Koreans and the second quarter will probably be even worse,” he added.

There was a brief flurry of excitement on Tuesday of this week, which no doubt made some short-term financial market speculators some money. This was the result of rumours of a big new economic stimulus package in China on the scale of the 4 trillion Yuan ($585bn) that was pumped into the economy from late 2008 onwards.

“The rumour was clearly a load of nonsense as the government is still struggling from the fall-out of that earlier stimulus package, including a steep increase in non-performing loans,” said the observer.

The rumour was confirmed as nonsense on Wednesday when Xinhua, the official news agency, published an article saying that the government had no plans for economic stimulus on the scale of 2008.

The article was also in line with the views of mainstream policymakers, quoted in other Chinese publications, who dismissed the possibility of any repeat of the post-Lehman Bros rescue act.

Another 4 trillion Yuan, or anywhere close to that figure, of additional stimulus would have been almost equivalent to scrapping the 12th Five-Year-Plan (2011-2015).

Did anyone really think that policy abandonment on this scale was possible in a year when China is undergoing a leadership transition?

China’s new leaders need social stability in order for them to be able to establish their authority.

Another gargantuan dose of stimulus would, once again, mainly benefit China’s rich minority because of the way the banking system works. This would increase income inequality, giving rise to social instability.

“It was a good story while it lasted and was a classic case of buy on the rumour and sell on the fact,” said the observer.

South Korean petrochemical stock prices rose by 5-10 percent when the rumour broke, but then declined again when it was rubbished, he added.

The South Korean industry is worth keeping a close eye on as it is one of the big losers in the current climate.

Its poor health, along with other Asian naphtha-based petrochemical industries, is an indication of just how bad demand is.

“The only producers making money right now are those in the Middle East, and even they have had to frequently reduce polyolefin and other prices to shift volumes,” said the observer.

There is, perhaps, some good news, however: A stimulus package does appear to be in the process of being introduced, even it is likely to be far smaller than the one launched in late 2008. 

It includes building more roads and airports, and more investment in advanced equipment manufacturing and energy conservation.

There is also talk of another cash-for–clunkers programme, where auto owners would be given incentives to swap their big cars for small cars. In addition, some reports suggest that home appliance subsidies, introduced with such a dramatic effect in 2009, might once again be on the cards.

But it is a moot point as to whether such a package will be good for the Chinese economy in the long term, as Michael Pettis, finance professor at Peking University’s Guanghua School of Management, argues in the article we linked to directly above. 

And equally debatable is whether the package will be sufficient to achieve the much-anticipated H2 recovery in petrochemical markets.

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