Less Bling, Please

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Source of picture: Luxepost.com 

 

By John Richardson

CHINA’S industrial output has had the weakest start to a year since 2009 and retail sales growth has slowed, according to this article from Bloomberg.

New local-currency loans for February were also lower than the estimates of 27 out of 28 analysts in a Bloomberg News survey.

China’s leaders are trying to undo the damage of 2012 by reducing liquidity in the financial system – hence, last month’s lower-than-expected new lending.

Industrial output is likely down because credit is tighter – and because demand has been weakened by rising inflationary pressures.

And as for weaker retail sales growth this, of course, also reflects higher inflation.

Standard Chartered estimates inflation will average 4% this year, above the government’s target of 3.5%. This suggests that more credit tightening is on the way, with an interest rate rise now expected in Q4 (we think possibly earlier).

Weaker retail sales growth is also probably the result of a dip in demand for luxury goods.

Luxury goods sales are down because China’s new leadership is anxious to show that it is serious about dealing with government officials showing-off their ill-gotten wealth.

One wonders how many sales-growth estimates have been based on the assumption that China’s elite would be able to carry on buying huge volumes of luxury handbags and Kweichow Moutai Co (600519) white spirit etc.

We think that that the clampdown on corruption – part of which is the pressure on government officials to cut back on “bling” – is here to stay.

Why? Because it will help make the majority of Chinese who still earn less than $10 a day a little happier.

Plus, it gives the new Politburo Standing Committee a chance to visibly take on the “vested interests” who are keen to maintain the old growth model, as these have been the people benefiting from graft whilst stocking-up on luxury goods.

Equally likely is that the air around major cities, such as Beijing and Shanghai, will be cleaned-up by closing-down highly-polluting chemicals and other factories (perhaps this is already also a factor in lower industrial output?) and limiting the growth in car ownership.

A healthier environment will help make China’s middle-income netizens more content.

The renewed battle against inflation, the corruption crackdown and efforts to deal with air pollution are just three of the many reasons why 2013 will play out very much like 2012: Another year where the commodity end of the chemicals industry will have to deal with demand growth lower than during the previous decade’s “economic miracle”.

But innovative chemicals companies are a different matter entirely. They could see growth rates at healthy multiples over increases in GDP as they help China deal with water shortages, wasteful use of energy and pollution.

Being part of China’s solution is infinitely better than being part of its problem.

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