By John Richardson
PERTH (ICIS)--The maths don’t seem to work out, which, if you take a short term view of China’s economy, is excellent news.
Here is why:
- Li Keqiang, China’s Premier, has announced that China’s GDP target for 2014 is 7.5%.
- Total Social Financing (TSF) would have to expand at an annual rate of 12% in 2014 if GDP growth is going to hit 7.5%, according to the government-affiliated Chinese Academy of Sciences. (TSF is lending via both the official banks and the shadow-lending system).
- But in January, on a year-on-year basis – a much-better measure than month-on-month – TSF grew by just 1.6%.
The credit squeeze that is being reported in polyolefins, mono-ethylene glycol and polystyrene markets might, thus, be the result of a “one off” January. Trade financing could soon become cheaper, and more readily available, helping to improve what have so far been weak post-Lunar New Year markets.
But the Chinese Academy of Social Sciences has also said that 12% credit growth in 2014 would “cause massive macroeconomic risk, because non-performing loans would pile up faster and the goal of reducing the economy’s reliance on credit-fuelled expansion would recede even further into the distance. To have more sustained and quality growth, we’ve got to let the growth rate go down.”
Chemicals traders and producers interested in the long term should, perhaps, be careful of what they wish for.
And returning to the outlook for this year, Li, in the same speech on Wednesday 5 March, said: “We are at a critical juncture where our path upward is particularly steep. Deep-seated problems are surfacing; painful structural adjustments need to be made; the pace of economic growth is changing and downward pressure on the economy remains great.”
He was addressing the opening of China’s annual parliamentary meeting, the National People’s Congress (NPC).
What might this mean for chemicals markets in 2014 and beyond?
Perhaps the biggest of all the unknowns is how to separate sustainable demand growth in chemicals and polymers from the “froth” added to Chinese consumption in 2008-2013, assuming you think that credit growth will have to be lower than during those years.
Auto sales rose by an incredible 138% between 2008 and October 2013, according to a 22 October 2013 post by Paul Hodges on his ICIS blog, Chemicals & The Economy.
Will the increased focus on cleaning-up the environment also affect auto sales?
Volumes could be down if more restrictions are introduced on how many people can buy autos, and on when and where cars can be driven in China’s big cities and towns.
China’s Premier underlined this increased focus when he said that the government would “declare war” on pollution, in the same speech to the NPC.
In the US, each new automobile is worth $3,539 of chemicals and polymers sales, according to the American Chemistry Council (ACC) – and so it is probably fair to assume a similar figure for China. This involves a wide range of products including antifreeze, plastic dashboards, bumpers and windows, as well as upholstery fibres, tyres and coatings.
The government also looks as if it is determined to reduce speculation.
For example, since last week, China’s central bank, the People’s Bank of China (PBOC), has been intervening heavily in currency markets in order to drive-down the value of the yuan against the US dollar, wrote the New York Times in a 28 February article.
Beijing’s aim is to punish individual speculators and companies who have made fantastic returns from moving dollars into China, often illegally. They have converted the dollars first into yuan and then back into the greenback in order to make money out of the appreciation of the local currency.
This has made it harder for the government to control asset bubbles in, for example, the real-estate sector.
“From 2005 until last week’s intervention, the yuan had seen an almost uninterrupted increase in its value against the dollar. In other words, it represented a ‘one-way bet’ for speculators,” said a Beijing-based source with a Western bank.
Speculators have also made big profits from interest-rate arbitrage. Overseas borrowing costs have been ultra-low since 2008, because of Western central bank monetary easing, whereas in China they are a lot higher.
In 2013 alone, $150bn was moved into China in this way, said UBS. This was out of what the country’s foreign exchange regulator estimates was a total of $244bn of inward capital flows.
Here is how this affects chemicals:
- Investors have used trade-finance deals to bypass tight Chinese government controls over the flows of foreign money into the country. Letters of credit (LC) have been opened with overseas bank for importing chemicals or polymers cargoes. A trader might not have wanted a chemicals cargo for its underlying value. Instead, he may have wanted the credit raised by the LC to gamble on another commodity, such a real estate, play the interest-rate arbitrage game and gain from yuan appreciation – or any combination of the above.
- Companies struggling with oversupply in manufacturing sectors such as steel and some chemicals have also used what some people claim have been completely fictitious trade financing in order to speculate on interest rates and the yuan etc – in other words, chemicals cargoes that haven’t even existed. “They have used trade-finance speculation, in its various forms, to paper over gaping holes in their balance sheets,” added the source with the Western bank.
The band within which the yuan will be allowed to fluctuate in value against the US dollar will be widened, Li said in the same speech to the NPC. This is viewed as a way of signalling to speculators that the currency is no longer a “one way” bet – meaning that they can just easily lose money, as well as make money, out of gambling on the yuan.
History might offer some clarity about what all the above means for 2014.
In 2009, when China’s credit binge was in full swing, polyethylene (PE) demand growth during that year and in 2010 went through the roof.
Then from April 2011 until around the end of 2012, Beijing reduced credit availability in order to bring consumer-price inflation under control – and also tried, unsuccessfully, to clamp down on the type of speculative practices we have detailed above.
“While traders have been influential within the Asian resin markets for a while, we can trace the shift to a predominantly trader-led resin market in terms of influence back to the early days of the post-stimulus period in 2009,” wrote HSBC, in a June 2012 report.
“Key points to bear in mind are that the big departure of apparent consumption from GDP growth only started in 2009, post-stimulus.
“This correlates with the spike in futures volumes of linear low-density PE on the Dalian Commodity Exchange and, anecdotally, with what one hears about Chinese traders using commodity imports as a source for financing.”
The bank concluded that PE, polyvinyl chloride (PVC), polypropylene (PP), polyethylene terephthalate (PET) and acrylonitrile butadiene styrene (ABS) demand growth had averaged just 2.7% from Q1 2011 until the end of Q2 2012, compared with a 9.1% increase in GDP.
This obviously means that, even if the government achieves its 7.5% GDP growth target for 2014, it could still be the case that chemicals demand growth is well below this number.