Germany and China have benefited massively from the growth in world trade since 1980. As the Wall Street Journal chart shows, 47% of Germany’s GDP comes from exports. And China has a 37% dependence. US exports are just 13% of GDP, so it is more self-sufficient.
Both countries have punched above their weight in terms of chemical demand as a result. Germany has been a major auto exporter, a key use for all types of chemicals. Whilst China, as the manufacturing capital of the world, has become a major chemical importer and producer.
But now, with world trade likely “to record its largest decline in 80 years” according to the World Bank, the economies of both countries are struggling. However, their policy responses have been quite different:
• The German government, faced with a 17% drop in exports, has decided to sit out the storm. It is subsidising payrolls, as companies move to short-time working, and supported auto sales, but has refused to introduce more general stimulus programmes to boost the economy.
• China has instead pumped enormous sums of money into its economy, to support GDP. But with exports down 26%, much of this stimulus has gone into building inventories and to finance stock market speculation.
Now China’s Banking Regulatory Commission has called for this “explosive lending” to stop, and called on banks to “make sure that loans flow into the real economy”.
Unrestrained lending got the world into the current crisis, when Western banks lent recklessly to borrowers who could never repay. Now China is at risk of repeating the same mistake. It creates a real danger, as the Commission states, of a sudden slowdown when bank lending is cut back.
If firms then liquidate their inventory, this could have a major deflationary impact on chemical demand worldwide, particularly if it happens to coincide with a slide in crude oil prices from today’s peaks.