China manufacturing slowdown weighs on Asia petchems demand

05 March 2014 05:54 Source:ICIS News

Focus story by Nurluqman Suratman

ChinaSINGAPORE (ICIS)--China’s industries are slowing down as overseas demand has remained weak, dampening the overall consumption of petrochemicals in Asia, analysts said on Wednesday.

The country is the region’s biggest economy, as well as its largest importer of petrochemicals.

In February, manufacturing activities China slackened, with the purchasing managers’ index (PMI) for the month falling to an eight-month low of 50.2 – barely above the 50 threshold that indicates expansion – as new orders and new export orders weakened.

China has kept a 7.5% growth target for the third year in 2014, representing a slight deceleration from the 7.7% expansion recorded last year. It hopes to contain consumer price inflation at 3.5% – the same target for 2013 – although the actual average in 2013 was lower at 2.6%.

The decline in China’s official PMI for February has added to concerns of slowing growth “as the [Chinese] government tries to sustain economic growth above Premier Li Keqiang’s bottom line of 7% while reining in credit, boosting jobs and curbing social unrest,” Singapore-based UOB Economic-Treasury Research said in a note to clients.

Dwindling demand from China will have negative ramifications on other Asian economies, including Japan and South Korea that count the world’s second biggest economy as a major export market for petrochemicals.

Last month, South Korea’s petrochemical exports fell 6.8% year on year, despite a 1.6% growth in the country’s overall shipments abroad, official data showed.

Meanwhile, Japan’s exports of chemicals in January grew 14.5% year on year, slowing from the 19.9% growth seen in December 2013. Its overall trade deficit with China surged in February to a record yen (Y) 1,040bn yen as imports grew 34% while exports rose 13%.

Investment bank HSBC’s final February PMI for China was a contraction, with the reading falling further below 50 at 48.5, down from 49.5 in January.

“Signs [have] become clear that risks to GDP growth are tilting to the downside. This calls for policy fine-tuning measures to stabilise market expectations and steady the pace of growth in the coming quarters,” said Hongbin Qu, chief economist for China & co-head of Asian Economic Research at HSBC.

A slowdown in China’s manufacturing activities in recent months is a reflection of reduced global demand and stronger currency, as well as rising wages and other production costs, according to Canada-based Scotiabank in a research note.

In some sectors, other countries such as Indonesia and Vietnam have taken over China’s lowest cost producer status, it said.

“At the same time, policymakers are enacting a number of reforms aimed at reining in excessive credit growth, reducing over-investment in a number of industrial sectors, and implementing much tighter pollution controls in a number of China’s large industrial cities,” Scotiabank said.

At the 12th National People’s Congress that kicked off policy discussions on 5 March, Chinese Premier Li said that pro-active fiscal and monetary policies will be adopted to ensure China will continue its economic expansion.

Meanwhile, manufacturing PMIs published by HSBC and Markit on 3 March showed that northeast Asian economies tracked the manufacturing weakness in China, with South Korea’s PMI falling to 49.8 in February from 50.9 in the previous month, and Taiwan’s PMI dropping to 54.7 from 55.5.

For Japan, the seasonally-adjusted February PMI done by Markit and the Japan Materials Management Association (JMMA) was at 55.5, down from January’s near eight-year high of 56.6.

The same downward trend was seen for some countries in southeast Asia. HSBC’s PMI for Indonesia fell to 50.5 from 51.0, while that for Vietnam slipped to 51.0 from 52.1 over the same period.

“The [global] manufacturing sector is downshifting from very rapid growth late last year,” said David Hensley, director of global economics coordination at investment bank JP Morgan.

“The global PMI has not quite registered the shift due to weather-related distortions in the US survey, which bounced in February. However, excluding the US, the global PMI is trending lower. The March reading should give a clearer signal of underlying momentum,” Hensley said.

For China, however, the prospects for manufacturing still look good, said Singapore-based DBS Group Research in a research note.

“While China lost local market share in the EU and the US in the past two years it has not lost any market share globally, it said.

“Looking forward, we are encouraged by the fact that China has moved up the value-added chain well before neighbouring countries forced their way into low value-added segments. Manufacturing is not just about exports. It is also about producing for locals, and China is a huge market by itself,” DBS Group said.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By Nurluqman Suratman