China’s Two-Speed Recovery

By John Richardson

CHINA appears to be in the midst of a two-speed recovery as a result of stronger domestic growth, while the export environment remains very bleak.

“Our polyethylene (PE) sales to converters who sell into the domestic market have picked up very well in Q4,” said a source with a global polyolefins producer.

But he added that sales to export-focused processors were at what he called “recession levels”.

(We discussed on Monday how another global producer was also enjoying strong fourth-quarter sales in what is normally a quiet time of the year as exporters wind-down inventories ahead of the end of the financial year. Buyers in China are also usually fairly cautions in December as they have half an eye on the Chinese New Year, which falls on 10 February in 2013).

The weakness of exports of finished goods was underlined by this article in The Economist, which said: “The recovery remains stronger in heavy than in light industry. It is also stronger in China’s central and western regions than on the coast, where exporters tend to cluster.

“At the Canton Fair, China’s largest trade fair, held in the southern city of Guangzhou last month, export orders were 17.5% lower than a year earlier.

“Official figures show that exports to the European Union have fallen by an astonishing 18% over the past year. Europe’s chronic failure to resolve its crisis continues to cast a pall on China’s prospects.”

The EU, as we discussed yesterday, isn’t going to recovery anytime soon and the 2013 economic prospects for the US hang in the balance, as a result of the fiscal cliff.

The positive side of the story, as the chart below from The Economist illustrates, is that industrial production grew by over 10% in the 12 months to November, its first double-digit increase since March.

Electricity output also grew by 7.9% over the same period.

 

Industry3.pngBut, sadly, it’s necessary to pour more rain on the parade: Forward indicators in the final HSBC/Markit Economics Purchasing Managers’ Index for November were less encouraging than those for October.

Further good news, though, as we again discussed on Monday, and fellow blogger Paul Hodges highlighted in this post, is that China’s new leaders are making all the right noises. If the confidence of China’s small and medium-sized enterprises can be further improved, the recovery might just gather some momentum in 2013.

But what are the odds of a US sub-prime style financial-sector crisis in China next year? Perhaps a more likely scenario is that tackling the problem will be deferred in order to give China’s new leaders more time to settle in.

This latest article, from The Wall Street Journal, is further evidence of the scale of problem.

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