“The Worse Things Get…..”

 

ChinainflationAug2012.jpg

Chart sourced from: http://www.financialsense.com/

 

By John Richardson

“THE worse things get the better they are,” continues to be the mantra in financial and commodity markets these days.

For example, China’s inflation slowed to 1.8 percent in July compared with 2.2 percent in June. This is likely to spur expectations of more economic stimulus.

The logic is that 1.8 percent is well within the government’s annualised target of 4 percent, and represents a significant achievement compared with July 2011. During that month, inflation hit a three-year high of 6.5 percent.

But chemicals and polymer markets are telling us that lower inflation is not a government victory, but instead indicates the severity of the economic slowdown.

Cash-starved small and medium-sized enterprises face ever-weaker demand, both domestically and overseas, a polyolefin industry executive told us earlier this week.

“The negative sentiment has also extended to the final consumers,” a second industry executive told us yesterday.

“On a recent trip to China, I was really surprised by how sentiment had changed. People don’t want to spend money in the shops because they are worried about their jobs. They are also delaying purchases because they think prices are going to fall.”

This is, obviously, only one small sliver of anecdotal evidence, but in mid-July, Chen Dongqi, deputy chief of a central government economic think tank, told Reuters: “In particular we should prevent producer deflation from expanding to the consumer area in the second half of 2012.

“Once deflation happens in consumer prices, we would pay a big price for policy changes to solve the problem.”

The big question remains whether Beijing will be able to carry out sufficient economic stimulus in H2 to get the economy buzzing again, given that it is focused on the leadership transition. As we again discussed earlier this week, our first industry executive thinks not.

It might be that the job of getting the economy going again has been delegated to local authorities.

“Instead of the mammoth stimulus programme led by the central government when the global financial crisis erupted in 2008, local governments are this time taking charge, trying to accelerate spending and rally investors and banks to hop on the bandwagon,” wrote the Financial Times in this article earlier this week.

They used the example of Changsa, a city in central China, where a staggering $130bn is due to be spent on infrastructure projects – 150 percent of the city’s 2011 GDP.

The risk is that this will add to China’s bad-debt problems due to the construction of yet more “white elephant” infrastructure projects.

Other concerns include further environmental damage and greater opportunities for corruption. In June, the China Daily reported that the city of Shenyang, in northeast China, had just blown-up a nine-year-old sports stadium, which had cost $126m and was the largest in Asia when it was built.

“I don’t know how much of our GDP comes from this make-and-break game played by some local officials. But I do know it not only wastes resources and causes irreversible environmental damage. It is also inevitably provides a hotbed for rampant corruption,” wrote the newspaper’s reporter.

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