China’s “Irrelevant” Target

ChinaPolyolefinsDraft1AmsterdamMarch2014

By John Richardson

WHEN is a target for GDP growth almost irrelevant? Perhaps this year in China, when if history is any guide, even if China genuinely hits its 7.5% growth target, chemicals demand growth could considerably undershoot this number.

See the above chart for polyethylene (PE), and here is the explanation:

  • In 2009, when China’s credit binge was in full swing, polyethylene (PE) demand growth during that year and in 2010 went through the roof.
  • Then from April 2011 until around the end of 2012, Beijing reduced credit availability in order to bring consumer-price inflation under control – and also tried, unsuccessfully, to clamp down on the type of speculative practices we have detailed above.
  • “While traders have been influential within the Asian resin markets for a while, we can trace the shift to a predominantly trader-led resin market in terms of influence back to the early days of the post-stimulus period in 2009,” wrote HSBC, in a June 2012 report.
  • “Key points to bear in mind are that the big departure of apparent consumption from GDP growth only started in 2009, post-stimulus.
  • “This correlates with the spike in futures volumes of linear low-density PE on the Dalian Commodity Exchange and, anecdotally, with what one hears about Chinese traders using commodity imports as a source for financing.”
  • The bank concluded that PE, polyvinyl chloride (PVC), polypropylene (PP), polyethylene terephthalate (PET) and acrylonitrile butadiene styrene (ABS) demand growth had averaged just 2.7% from Q1 2011 until the end of Q2 2012. This compared with a 9.1% increase in GDP over the same period.

Perhaps on this occasion, the government will be successful in clamping down on the speculation that has added so much unsustainable “froth” to chemicals demand growth. It is giving every indication of a greater resolve. For example, in the same speech on Wednesday in which China’s Premier, Li Keqiang, announced the 7.5% GDP growth target, he also announced a widening of the band within which the value of the Yuan will fluctuate against the US dollar. The message to speculators, who have already been hammered by last week’s devaluation, seems clear:  Yuan appreciation is no longer a “one way bet”, and so gamble at your own risk.

Another important message might be sent out today if the first-ever default in China’s domestic bond market, involving  loss-making Chinese solar equipment producer Chaori Solar, is allowed to happen: The era of “risk free credit “ is over and so, again, gamble at your peril.

But we are still scratching our head at the 7.5% GDP growth target to the point of virtual baldness. It seems completely incompatible with effective economic reforms, unless, of course, the figure ends up being “man made”.

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