China “Recovers”

ChinaPEDec42012.jpgBy John Richardson

ONE interpretation of the rise in the HSBC China Purchasing Managers Index to a 13-month high in November is that next year promises a strong recovery in the world’s most-important chemicals market.

“People have taken considerable cheer from not only the HSBC report, but also other data points that might be interpreted as indicating that the Chinese economy has finally bottomed out,” said a chemicals industry analyst.

“But I tend to think that the problems in China are far too deep-seated and structural for anybody other than someone with a very short-term perspective to gain any real confidence from the recent data.”

We agree.

It could be that the improved HSBC index reflects a politically-motivated surge in bank lending during May-September.

During that period, the Communist Party was eager to shore-up support ahead of last month’s leadership handover.

Now that the handover is obviously over, this might explain why bank lending declined by 14% in October. 

And so it is possible that the improved HSBC index reflects money that flowed into the economy prior to the October slowdown in lending.

Petrochemicals markets are showing no signs of renewed confidence.

This is likely to be partly because the back end of the year is traditionally quiet as producers and buyers wind-down their inventories in order to beautify their financial results.

But we tend to think that an important other reason is recognition that China is in an economic bind, although many people remain reluctant to publicly admit this.

“The mood remains very depressed out there. There has been no significant pick-up in demand,” said a market intelligence executive with a leading Middle East producer on the sidelines of last week’s Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai.

This is reflected in the key polyethylene (PE) market. While some Asian prices edged-up by $5-20/tonne for the week ending 30 November on restocking and attempts to repair margins, other prices declined by $10/tonne (see the above chart).

“Many buyers and suppliers remain concerned that downstream demand may not pick up significantly in the next few months,” wrote ICIS pricing in its 30 November Asian PE report.

We might get a clearer idea of the real state of China’s economy in January next year, when the May-September lending surge and the year-end slowdown effect have worked their way out of the system.

But even then, any short-term bounce will have to be put into the context of the big structural problems – not least China’s bad-debt problems, which is a subject we shall revisit in a series of posts over the next few days.

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