China’s New Stimulus Package: What It Means For Chemicals

By John Richardson

CHINA’S petrochemicals markets are likely to enjoy a confidence rally as a result of yesterday’s announcement of a mini economic stimulus package.

The details of the stimulus package include:

  • More railway construction.  The State Council released plans on Wednesday to sell $24 billion US of bonds this year to build railways in the less-developed central and western regions. It also plans a $35-billion fund dedicated to rail financing.
  • More investment on slum clearance and affordable housing for low-income earners.
  • And crucially for the chemicals industry, existing tax breaks for small businesses will be extended until the end of 2016. The tax threshold for small businesses will also be raised. Most of the buyers of chemicals in China are small and medium-sized industries.

The composition of the package was clearly flagged up by a China Daily editorial published earlier this week.

It is targeted at what the government sees as sustainable areas of economic growth and, thus, involves no new money for oversupplied industries such as steel and aluminium. Restructuring in these sectors will continue.

And the package also provides no relief for all the speculators who have made money out of interest rate arbitrage, Yuan appreciation and the real-estate sector. As we discussed yesterday, some speculators have even built biaxally oriented polypropylene (BOPP) film lines in order to get their hands on the cash-flow to invest in real estate. These businesses will still be allowed to go to the wall.

Low value plastic converters in high land and labour cost cities, such as Shanghai, will also remain under pressure.

The focus on affordable housing underlines how the government’s priority is now the 80% of people who earn less than $20 a day. Many of these people live in in the less-developed northern and western provinces, where the biggest opportunity for chemicals demand growth lies.

There has been talk that this stimulus package is similar to that which was released in July 2013.

We think this misses the vital context that the package occurred at time when total social financing (lending via both the state-owned banks and the shadow lenders) was growing out of control.

As we said, there will be no further support for the speculators – China wants to get rid of these guys.

Thus, the tight credit environment for these unfavoured speculators, and the unfavoured industries, will remain  place.

This means that the low growth in total social financing that we saw over the first two months of this year will continue.

Whilst there might be comparatively more money available from the state-owned banks through official lending channels, total social financing growth will remain subdued as a result of the  crackdown on the highly speculative shadow-banking sector. (Total social financing is a measure of credit creation via both the official, state-owned banks and the shadow lenders)

The task for chemicals companies, therefore, remains working out what demand growth will be in 2014 and beyond, now that all the “froth” is being taken out of consumption.

“Who you sell to”, at least in the short term, might also matter as much as what you sell.

And companies need to look hard at their spread of resources across China – because of the increased growth opportunities in the northern and western provinces.

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