By John Richardson
CHINA’S petrochemical prices might rally in the second half of this year, along with local stock markets, in response to the delayed impact of the big surge in bank lending that took place in Q1.
James Gruber, author of the Asia Confidential newsletter, argues that a mild H2 recovery is possible because:
*Property investments have rebounded and infrastructure spending is still growing by around 20% – the same rate as most of the last 12 months.
*Monthly social financing (total financing including formal and informal lending) in the first quarter of 2013 was Rmb2.1 trillion, higher than the monthly average of any single quarter since the introduction of the data in 2002, as the chart below illustrates.
*Although this absolute number is high, it is nowhere near the rise in lending during 2009. As a result, there is no big risk inflation risk.
*Because China is a command economy, when the government increases lending it is able to make sure that the money ends up the hands of companies. But there is usually a six-month lag between higher lending and an improvement in growth. In 2009, for instance, as the second chart below shows, the huge stimulus package introduced early that year did not result in a surge in growth until the third quarter.
*The anti-corruption campaign, which is widely believed to be the reason for weaker retail sales growth, will be relaxed. Retail sales grew 12.6% year-on-year in March, down from the 15% recorded in the fourth quarter on last year.
* The latest export data have been quite encouraging, even if you strip out distortions. The biggest discrepancy appears to be the Hong Kong export data. Growth in Chinese exports to Hong Kong was 57% year-on-year in April and 93% in March. This is likely due to over-invoicing in order to circumvent capital controls and bring foreign capital into China. “The key point is, though, that if you strip out the Hong Kong figures, Chinese exports still grew 9% in the first quarter of 2013, up from 4% and 0% in the previous two quarters,” writes Gruber.
Gruber goes on to warn that nobody should assume that any rebound in growth will be sustainable. He is with us in believing that China faces a long-term struggle against bad debts and an over-inflated property bubble, as it also confronts the challenges of economic rebalancing.
But if you believe Gruber, and you are a chemicals producer or trader, this is an opportunity.
But be careful out there. Against this recovery theory is the notion that most of the extraordinarily high Q1 bank lending went to service bad loans and so much of the extra money will not end up boosting industrial output. This article from the China Daily, if you read between the lines, seems to support this view.
China’s cracker operators would surely, also, have ramped-up production by now if they felt that the first-quarter loan surge was going to deliver a big benefit to the economy. But Q1 ethylene production was up by just 2.9%.