Take Away The China “Froth” And What’s Left?

By John Richardson

THE denial that we discussed last week is still very much in evidence. For example, we heard the argument over the last few days that China’s economic slowdown would involve only “a couple of bad quarters” and then China, and Asia-Pacific markets in general, would be back to normal.

The following two charts above explain the confusion, we think.

The first chart below, from the American Chemistry Council, shows the tremendous recovery in Asia-Pacific chemicals production post-Global Financial Crisis (GFC).

ACCAsiaPacificChemicalsProductionMarch2014

A quick glance at this chart could result in the conclusion that emerging markets are booming on the back of rising income levels, as millions more people move to the cities and become “middle class”.

But this is only a small part of the story since 2008.

What this chart doesn’t detail is how much of this growth has been down to China in the post-GFC period.

For example, in the case of polypropylene (PP), Chinese consumption rose from 5.4m tonnes to 10.6m tonnes in the six years between 2001 and 2007, according to ICIS Consulting.

But between 2007-2013 PP growth really took off. By the end of last year, consumption had risen to 18m tonnes, again according to ICIS Consulting.

The next biggest PP consumer in Asia in 2013 was India with consumption at around 3m tonnes.

You see the same pattern across many other chemicals and polymers.

And the ACC chart doesn’t detail how much of China’s post-GFC has been down to the increased availability of credit.

The second chart below, however, shows the impact of the credit explosion. Again using PP as an example, you can see the tremendous surge in demand growth in 2009-2010, at the height of China’s economic stimulus, and how growth then fell away as stimulus was withdrawn.

ChinaPPMarch2014

The crucial question, therefore, that every chemicals company needs to answer is this: When you take away the “froth” that’s been added to Chinese growth by excessive credit creation, what growth will be left behind?

Claims that the “froth” will, somehow, not be taken away are becoming increasingly less credible, as the evidence builds of determined reform efforts.

For example, growth in electricity consumption dipped during the first two months of this year. This follows the news of lower lending growth. Electricity consumption and lending growth are the two most-important measures of real, underlying economic growth.

China may have also seen its Bear Stearns moment with the $400m default of Zhejiang Xingrun Real Estate Co.

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