Asian PE Recovery On “China Turning Point”



image002.jpgBy John Richardson

ASIAN polyethylene (PE) prices rose by $10-30/tonne for the week ending 9 November in response to reports of low inventories, according to ICIS.

A further improvement in the market is anticipated by one trader, as a result of the release of raft of positive Chinese economic data last Friday. This is based on the notion that the economy has reached a turning point.

Industrial production, fixed-asset investment, retail sales and electricity generation all strengthened more than expected month-on-month in October, following improvements in September. October inflation also fell by more than had been anticipated.

But economists worry that a surge in bank lending, which is behind the recovery, has added to China’s problems.

“Chinese banks are lending at such a brisk pace that by the end of next year they will have expanded their balance sheets in just five years by an amount equal to the combined balance sheets of the entire US commercial banking system, according to Fitch Ratings,” writes the New York Times.

“Yet China’s economy is only half the size of the US economy.

“Each extra dollar of lending since 2008 has produced less than half as much extra economic growth as before the global financial crisis. State-owned enterprises have finished urgent tasks like building enough steel mills to meet domestic demand and are now investing in fewer and fewer economically viable projects to sustain economic activity.

“As a result, the loan burden of China’s corporate sector is soaring relative to the country’s economic output, reaching 1.9 times economic output this year, after holding steady at about 1.2 times economic output in the years before the global financial crisis.

“Charlene Chu, the head of Chinese bank ratings at Fitch, predicted that such heavy Chinese lending could not continue indefinitely.

” ‘Rising leverage either will swamp borrowers’ ability to repay, or banks’ funding and capital needs will fall short of existing resources,’ she said.”

As fellow blogger Paul Hodges pointed out earlier this month, the rise in lending since May was politically-motivated, designed to shore-up support ahead of the leadership transition.

Congratulations to the PE traders who went long ahead of this week’s price recovery.

But given all the uncertainties over China’s economic future, which we discussed last week, we doubt very much that the positive sentiment will be sustained for more than a few weeks.

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