China Monthly: China lending decline hits growth

Restrictions on the availability of credit are impacting economic growth, and there are no signs of a change of government policy

It has been a year that some chemicals producers and traders are likely to want to forget.

“We really expected volumes to be much stronger, especially in Q3 during China’s peak manufacturing season. But the peak season has been a big disappointment,” said one Singapore-based aromatics trader.

Lending from China’s banks is heavily restricted Copyright: Rex Features

And a source with a global polyolefins producer described how, whilst his company’s H1 growth in China was “OK, but not spectacular”, business conditions had become much weaker since early July. Why 2014 has so far been pretty disappointing can be summarised in just one word: Credit.

Aromatics, fibre intermediates and polyolefin industry players had expected that at some point this year, the Chinese government would launch a big new round of economic stimulus – primarily involving a return to the type of credit growth seen in 2009-2013. These are very smart people. They knew, of course, that given the scale of China’s overcapacity and debt problems, another across-the-board big surge in lending could well be bad for the country in the longer term.

Sitting on your gains
But in the case of several traders, they were still hoping for another round of short term gains from a strong rally in their markets.

“I was ready to go long again as I had thought that, for this year at least, China’s government wouldn’t be prepared to let growth collapse by keeping a tight control on lending. I was wrong,” said a Hong Kong-based polyolefins trader.

Some of the lending statistics that have taken many industry players by surprise include:

■ China’s official bank lending was up by just 5% in January-August of this year compared with the same period in 2013, according to analysis by UK-based chemicals consultancy International eChem of People’s Bank of China data .

■ Lending via the shadow, or private, lending system was down by 20% year on year in Q2, according to the same analysis.

■ This compares with the 12% growth in the availability of total lending for the full year 2014 that a government think-tank, the Chinese Academy of Social Sciences, said in January would be essential if China’s economic growth was to be maintained at the 2013 level.

Tighter credit helps to explain an alarming flood of data emerging from China over the last few months.

For example, real estate sales were down by 13.4% in August.

House prices had fallen for the previous five months, with the effects spreading to related industries.

The output of washing machines was, for instance, down by 7.5% year on year until August. This, of course, means lower demand growth for polymers, such as polypropylene (PP) and acrylonitrile-butadiene-styrene (ABS), which are used to make washing machines.

Electricity output registered its first annual decline in more than four years in August.

And industrial production growth slowed to 6.9%, again in August, its lowest level of increase since December 2008, during the global financial crisis.

Of equal concern was that in Q3, demand for lending registered a sharp decline, according to a survey of 3,100 banks carried out by PBOC. The PBOC’s index, which measures demand for loans, slipped to 66.6 in Q3 from a reading of 71.5 in the second quarter.

“Growth in loan demand from both the manufacturing and non-manufacturing sectors has fallen to its slowest pace in two years, according to the bank survey,” said Capital Economics in a research note on the PBOC survey.

“Although the slowdown has been broad-based, loan demand remains strongest among small firms.”

The same PBOC survey also registered a sharp decline in business confidence among 5,900 businesses that were polled.

Anecdotally, also, attitudes to risk and lending seem to have changed, based on conversations with a few Shanghai residents in early September.

“I can only see the credit situation getting tight next year and growth slowing down even further. This means I am not going to expand my business,” said the owner of a mobile phone accessories shop, who went from operating two stores in 2005 to five this year.

“The boom was fantastic while it lasted, but I think a lot of us realised it couldn’t last forever as it was based on bubbles in real estate, etc.”

And an expatriate energy consultant added: “The value of my condo has gone up 200% in eight years and so I intend to sit tight and wait for the right time to sell. I certainly won’t be investing in any more real estate as I don’t have any need to do so, especially as the market is softening.”

What about next year?
Chemicals companies will be busy at the moment preparing their budgets for next year, if they haven’t done so already.

Should they be conservative or aggressive in their assumptions?

If the words of Li Keqiang, China’s prime minster, are taken at their face value, a conservative approach would therefore make the most sense.

“Li Keqiang failed to offer global business leaders any fresh solutions to the Chinese economy’s slowing,” wrote the South China Morning Post in a 10 September report on Li’s opening speech at this year’s World Economic Forum in Tianjin, China.

“He disappointed his international audience by failing to offer any new ideas for dealing with a deepening property market slowdown or tackling funding bottlenecks for businesses.

“Many participants left the conference room halfway through the opening ceremony, something rarely seen when a top government leader representing the world’s second-largest economy speaks at a high-profile forum.”

This is in line with comments made both by Li and China’s president, Xi Jinping, throughout this year.

Both of China’s top leaders have consistently refused to promise any more big stimulus on the lines of that which took place in 2009-2013. And, in fact, as early as July 2013, shortly after he became prime minister, Li was quoted by official state media as warning that economic reforms would even feel like “cutting one’s own wrist”.

Just how conservative should chemicals companies therefore be when drawing up their targets for next year?

Remarkably, there is one school of thought that believes that China might well suffer negative real GDP (gross domestic product) growth next year – that’s if it hasn’t already reached this point.

This is based on the argument that China’s official GDP numbers, which suggest another strong year in 2014, are largely fictitious.

Simon Hunt , a UK-based metals consultant and China expert, has estimated the difference between China’s real GDP, versus the official numbers, going back to 1991.

The chart below shows nominal GDP and a GDP deflator.

Nominal GDP is total output before adjusting for inflation, and the GDP deflator adjusts for inflation.

The chart also shows official GDP growth and real GDP growth, once this deflator has been taken into account.

The real GDP line shows that China saw negative GDP growth in 1998-1999 (the Asian Financial Crisis) and 2009 (the Global Financial Crisis).

And so, given the weakness in recent data on lending growth, real estate prices and electricity consumption, China, as we said might already be in recession.

It is the type of “on the ground” data, which is viewed as much more reliable than the official GDP numbers that are often drawn up with a political motive in mind.

The good news is that, if the chart from Simon Hunt is accurate, chemicals companies will not be entirely unfamiliar with negative real growth in China.

This would be little consolation, though, for what looks set to be a very difficult 2015 – especially if people have gotten their forecasts wrong.