China’s “Whack-A-Mole” To Accelerate

By John Richardson

whack-a-mole2Mono-ethylene glycol (MEG) is the latest petrochemicals product to be caught up in real estate-linked collateral trading, an industry observer recently told the blog.

“To some extent, MEG has been bought not for real demand, but instead as a financial instrument to fund property deals,” said the observer.

If a product such as MEG that is hard to store is being used to generate credit, this illustrates just how desperate real-estate speculators must have become as they  confront the government’s determined credit crackdown.

The crackdown, broadly speaking, is on two levels.

Level one is the reduction in the overall availability of new credit and level two is the “whack-a-mole” game, where officials are seeking to close the loopholes that property developers are using to get their hands on financing.  Hence, the investigation into claims of copper, iron ore and aluminium commodities fraud at Qingdao and reports that potentially bogus aromatic trades – possibly involving mixed xylenes (MX) –  are being investigated at Tianjin.

And here’s a thought: If hard-to-store products such as MEG and MX are the subject of suspect collateral trading, what is the extent of the problem in polymers that can even be stored in your garage or your house?

The only logical explanation we can find for the 25% increase in China’s apparent demand for polyethylene (imports, plus domestic production minus imports) is that this polymer has become heavily tied-up in collateral trading.

In general, also, this Reuters story indicates that Beijing might be forced to increase the pace at which its plays its particular version of the “whack-a-mole” game because  of yet another surge in short-term, speculative financing.

“Official [lending} data in June showed that lending and off-balance sheet products surged in June, but the surge was driven by increases in short-term loans and shadow banking products, after medium- and long-term loans declined in May,” wrote the wire  service.

“ ‘The pick-up was led primarily by short-term loans and bills, raising concerns about the use of the funds, the potential to support growth and the extent of the recovery,’ wrote Jian Chang and Serena Zhou of Barclays in a research note.”