One “blink” and we will be back to normal in China, or at least almost normal, remains the default position of most economists and financial and commodity market analysts.
This view rests on the assumption that if most of China’s industrial indicators continue to point in the wrong direction, Beijing will be forced to re-stimulate the economy in order to achieve 2014 GDP growth of at least 7%.
While this would still be China’s lowest GDP growth since 1990, based on World Bank data, China’s economy is far bigger than then. In 1990, its GDP totalled around $390bn compared with a Chinese government estimate of $9.18trn for 2013. This kind of data always has the power to take anyone’s breath away.
The People’s Bank of China (PBOC) is attempting to rein-in rampant credit growth
Another view is that recent bad economic data is mainly down to seasonal factors. Therefore, despite ongoing government reforms, the inexorable rise of Chinese consumer spending will soon reassert itself – leading to a return to positive economic data.
The biggest seasonal factor that is often being cited is the dip in economic activity ahead of the 2014 Lunar New Year, along with the slow return of workers from the countryside to China’s manufacturing heartlands now that the New Year holidays are over.
WHERE IS PE DEMAND?
But what is worrying some sources in China’s key polyethylene (PE) market is that they think that demand should be stronger, given tight supply across Asia.
Six Japanese crackers are undergoing turnarounds in February-June 2014, compared with just two during the same period last year. And China’s Shanghai SECCO Petrochemical plans to shut down its 600,000 tonnes/year of PE capacity in Shanghai on 10 March for annual maintenance.
PTT Global Chemical is also set to carry out maintenance work at its high-density PE (HDPE) plant in Thailand in February.
Asian PE prices fell by $10-40/tonne on bearish sentiment, according to the ICIS assessment for the week ending 14 February.
This is in line with weaker data elsewhere, including lower iron ore, steel and cement prices and declining growth in a key economic barometer – electricity consumption.
The weaker data is partly being attributed to government efforts to rein-back credit growth, especially via the dangerously over-leveraged shadow-banking system. China’s central bank, the People’s Bank of China (PBOC), is leading these efforts through, for instance, higher interbank interest rates.
“Some of my customers are struggling to open letters of credit (LCs). I am also hearing that Japanese traders are being much more careful about who they supply LCs to because of the increased risk of corporate failure,” said a source with a global PE producer.
It would be very wrong to draw any long-term conclusions from such a small amount of market intelligence.
But for the sake of prudent corporate planning, it could be worth at least trying to estimate how far 2014 GDP growth might fall if the government doesn’t “blink” in the face of persistently weaker data.
CREDIT AND MONETARY POLICY
Key to this assessment might be China’s dependence on credit as a source of economic growth.
“If the PBOC loosens monetary policy to push down borrowing rates, it will have to achieve total social financing – a broad measure of liquidity – of more than Rmb19 trillion ($3.14 trn) to support GDP growth of 7.5%, wrote the Chinese Academy of Science in an 11 February China Daily article. (The academy, a leading Asian think tank, is affiliated to China’s top administrative authority – the State Council – and the China Daily is a state-run newspaper).
“But that amount of total social financing would represent 12% year-on-year expansion, much faster than last year’s gain of 9%,” the article continued. “An increase of that scale will cause massive macroeconomic risk, because non-performing loans will pile up faster and the goal of reducing the economy’s reliance on credit-fuelled expansion will recede even further into the distance. To have more sustained and quality growth, we’ve got to let the growth rate go down.”
In others words, you have to pump ever-more air into the bubble just to keep it at the same level of inflation – i.e. the same level of growth. But if China doesn’t at least stop pumping more into the bubble, it is going to face big economic problems.
Then add another piece to the jigsaw puzzle: The FT’s Beyondbrics blog, in a 13 February post, estimates that credit growth could be as low as just 5% in 2014.
That would compare with the 12% rise in credit that the Chinese Academy of Sciences thinks is necessary to achieve 7.5% GDP growth.
You now begin to understand why Societe General has defined a Chinese hard landing as GDP growth of just 2% at its lowest point, which, it warns, would knock 1.5 percentage points off global growth.