The second of our series of blog posts on China's economic challenges over the next 12-18 months focuses on deflation.
By John Richardson
DEFLATION has now become a major concern for the Chinese economy following the release of official data earlier this week that showed a 2.1 percent decline in producer prices in June compared with the same month last year. Month-on-month, producer prices fell 0.7 percent.
And June consumer prices were 0.6 percent lower over May, the largest month-on-month decline in two years.
"This reflects what our customers in China have been telling us for several months now," said a source with a global PE (see our foot note on current PE pricing trends).
"While they have seen their costs increase as a result of higher wages and, until recently, more expensive fuel costs, they have been losing pricing power because demand is weak as plastic-product markets are oversupplied."
This article in the New York Times points out that deflation:
*Makes it much harder for businesses to sell enough goods to repay loans that they took out, usually on the expectation of rising prices, potentially making worse the bad-debt crisis we discussed yesterday.
*Falling prices also discourage investment, which has also slowed sharply over the last few months, and give consumers an incentive to delay purchases until prices fall further.
Deflation has raised the hope that the Chinese government might launch further economic stimulus.
But Wen Jiabao reiterated at the weekend that controls on the property market will stay in place, and could even be stepped up. The government cannot afford to allow the gap between the super-rich, and the rest of China, to continue to widen.
In addition, a big new stimulus package could easily result in a return to inflation. The big worry is a resumption of food-price inflation in a country that remains very poor by Western standards.
In an excellent post earlier this week, fellow blogger Paul Hodges makes some very valid points about the long-term implications of rising China auto exports.
More immediately, as China's auto and other manufacturers struggle with deflation, the temptation will be to increasingly export their surpluses at aggressively low prices. This could result in an increase in international trade tensions.
Another article in the New York Times (see above chart) says that China's auto exports rose by 21 percent in the first five months of this year over the same period in 2011. May year-on-year exports rose 43 percnet.
Asian PE Prices
Last week, we said that Asian PE prices could be on the rise. This was confirmed by ICIS, which assessed pricing for the week ending 6 July at $10-60/tonne higher. (polypropylene prices were also $20-50/tonne higher).
"I doubt if this will last as this is mainly a result of stronger inter-trade buying," added the source with the global PE producer.
And, indeed, yesterday the important gauge of short-term sentiment, the Dalian Commodity Exchange's futures contract in linear low-density PE (LLDPE) fell by 1.05 percent.
The blog, sadly, remains of the view that PE demand growth in China will likely be in minus territory this year. What applies to PE applies to many other chemicals and polymers.