News Focus: New China stimulus will boost chemicals

04 April 2014 09:33 Source:ICIS Chemical Business

Government takes a variety of measures to boost growth including more rail and affordable housing construction

 

 More investment in rail for 2014

Copyright: Rex Features

China’s decision to launch a new economic stimulus package will boost chemicals demand as a result of new infrastructure investments in railways and affordable housing for low-income earners, according to industry sources.

The package was announced on Wednesday 2 April by the government’s State Council. But the clampdown on the availability of credit for speculation in chemicals and other sectors looks set to continue, the sources added.

The new programme of economic stimulus was in response to a first quarter (Q1) deceleration of growth, which was reflected in disappointing manufacturing, retail sales and fixed-asset investment data.

Concerns had been growing that if the slowdown continued, 2014 GDP (gross domestic product) might fall below 6.5%. “If growth falls below 6.5%, not enough jobs will be created for the 7m new people who graduate in China every year. If they don’t create enough jobs for the graduates, they will end up with social unrest,” said a Hong Kong-based source with a major polyolefins producer.

China’s Premier, Li Keqiang, said in a speech last month that the government wanted to create 10m jobs in 2014 while keeping the urban unemployment rate at below 4.6%. His comments were viewed as a firm indication of government policy because they were made during the country’s annual parliamentary meeting – the National People’s Congress. This led to speculation, which has proved to be well-founded, that a stimulus package was on the way.

According to media reports, the package includes an 18% increase in the total number of railway lines being built in 2014 compared with last year. The government will sell $24bn of US bonds this year to build the railways in the less-developed central and western regions. It also plans a $35bn fund dedicated to rail financing.

The package offers more investment on slum clearance and affordable housing for low-income earners.

And importantly for the chemicals industry, existing tax breaks for small businesses will be extended until the end of 2016. The tax threshold for small businesses will also be raised. Most of the buyers of chemicals in China are small and medium-sized businesses.

NEW CHINA STIMULUS

  • Response to Q1 deceleration of growth
  • 18% increase in rail construction over 2013
  • More spending on slum clearance and affordable housing
  • Tax breaks for small businesses extended ­­to end 2016
  • Tighter credit expected to continue 

Industry sources said that the stimulus measures would help boost chemicals and polymers demand, as a result of the extra spending on railways and housing.

“The package is also all in line with efforts to encourage more growth in western provinces,” said a second source with a polyolefins producer, who is based in Singapore.

“In a city such as Shanghai, growth in low value manufacturing is pretty much tapped out because of high labour and land costs, but this is definitely not the case as you move further inland – which is what plastic processors are doing with government support.

“When you think about it, in the corridor between Shanghai and the city of Chengdu in Sichuan province, there are 300-400m people, who, at the moment, don’t consume as much plastics as in the more developed areas. This is where the biggest manufacturing and consumption-growth opportunities lie.”

There was no mention in the stimulus package of easier credit conditions. Credit creation, especially via the highly speculative shadow-banking system, is expected to remain lower than last year, making life much harder for speculators in the chemicals and other sectors.

 

 Increased slum clearance and affordable housing planned

Copyright: Rex Features

The policy of allowing the Yuan to trade against the US dollar in a wider range - designed to root-out speculation - is also expected to stay in place.

China’s slower growth has contributed to very disappointing post-Lunar New Year petrochemicals demand as end-users, short of credit, have minimised their raw-material purchases.

The polyolefin industry sources stressed that the new package was carefully targeted at more sustainable areas of economic growth.

“It is clear that the government wants to get rid of overcapacity and so, if you look at the new package, it does not include any help for oversupplied industries that they want to restructure, such as steel and cement,” added the second source.

And as industrial restructuring accelerates, lower-value plastic processors in high labour cost regions such as Shanghai are likely to come under more pressure to consolidate. Many of these processors are said to have been forced to close down during the first three months of this year because of the tighter credit environment.

Industry sources, thus, warn that for the rest of this year, what might matter almost as much what you sell will be who you sell to. Keeping a close eye on the viability of customers will be vital in order to prevent account receivable problems, they said.

 

By John Richardson