By John Richardson
CHINA produced more cement in 2011 and 2012 than the US produced in the whole of the 20th century. Yes, that’s right, China produced more cement in just two years than the States produced in 100 years.
Statistics such as this leave the blog scratching its head as to how anybody could have thought that this kind of investment growth was sustainable.
And as the same Financial Times editorial also points out:
- Total credit to GDP grew from 140% in 2008 to more than 250% at the end of June, with much of the increase in mortgage loans.
For us, also, these are the really essential numbers:
- In 2007, $1 of credit added 83 cents to GDP, according to official government estimates.
- By 2013, $1 was only adding 17 cents.
- Each dollar of debt will add just 10 cents to growth during 2014.
These are, as we said, government estimates and so might well be on the conservative side.
It is not unreasonable to therefore assume that we have already reached the point where each dollar of lending is actually subtracting from GDP growth. If we haven’t already arrived at this point, we must surely be very close to this happening.
This makes it obvious that rebalancing has to accelerate – and it has to accelerate right now. The good news is that this is exactly what China’s leaders are doing.
Arguing that a major economic stimulus package is just around the corner must, as a result, surely be wrong. And yet some analysts continue to make this argument.
If Xi Jinping and Li Keqiang “blinked”, all that they would achieve would be to make China’s economic problems worse – very probably much worse. And so they will not, they simply cannot, blink.
For the chemicals industry, this means:
- Lower growth for the rest of this year, and into 2015, as more air is taken out of the investment bubble, particularly the real estate bubble. Claims that the real estate market will recover in H2 are no longer credible.
- This will not be a mild moderation in growth as the construction, sale and outfitting of apartments accounted for 23% of China’s gross domestic product in 2013, according to Moody’s Analytics. That was up from 10% in 2006.
- In key markets such as polyethylene, surprisingly strong imports in H1 might well have been connected with shadow banking and real estate. So the risk is that these volumes will emerge from inventories later this year.
- China will become more aggressive in petrochemicals and other manufacturing export markets as it seeks to compensate for lower growth at home. The government has introduced new incentives for exporters.
- A very good example of the above is polyvinyl chloride (PVC), which is, of course, heavily dependent on the construction sector for its growth. As our chart above shows, exports totalled 726,000 tonnes in January-July of this year compared with 514,000 tonnes for the same period in 2013. Meanwhile, imports of PVC also fell.
The opportunities for the chemicals industry in China remain fantastic as a new growth model emerges.
These include helping China clean up its air, water and soil as it also climbs up the manufacturing value chain.
But we worry that chemicals companies have lost valuable time in planning for this transformation because they have been listening to the wrong kind of analysis.