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China’s consumption growth challenge

Business, China, Economics, Markets, Olefins
By John Richardson on 24-Sep-2009

“China, please please do what we did and spend what you might not be able to afford…”

Source of picture: The Daily Maily

Whether or not China’s pace of economic recovery will be maintained would have become an intensely boring topic of discussion if it wasn’t so important for all our livelihoods.

More data specific to polymers and chemicals has emerged as to just how staggering the rebound has been: Imports of un-compounded polyvinyl chloride (PVC) were up by 100% in the year to June compared with 2008, according to International Trader Publications Inc.

Benzene, vinyl-chloride monomer (VCM), methanol and propylene imports were up by 100-550-% during the same period, the publishing company added.

“During the last recession, when prices bottomed around December 2001-February 2002 period, there were also spikes in imports of some products into China,” said Jean Sudol, the company’s president.

“What was different then versus now is that fewer products were involved, the spikes were nothing like the magnitude we are seeing now, and the surge only lasted 1-3 months. This time it’s endured for 7-8 months.”

Evidence of weaker demand has emerged over the last few weeks.

At the risk of boring you yet again (if you are not too worried about your job), is this demand-decline partly the result of too-much of inventory re-building of chemicals, polymers and of semi – and finished-goods?

All will hopefully become a little clearer after the very-long Chinese national holidays from 1-8 October. It is hard to discern to what degree recent sales dips are due to business winding down ahead of this break, overstocking and bleaker economic prospects.

On the surface, a lot of the macro-economic numbers look terrific: Retail sales grew by 16.6% in the first half of this year and by 15.4% up until the end of August.

But scratch the surface and you find that retail sales include government purchases and shipments to shopkeepers before any sales to consumers are recorded.

“This makes them a very bad proxy for consumption,” writes Michael Pettis on his blog, China Financial Markets. Pettis is a professor at Peking University’s Guanghua School of Management.

Retail sales-growth was in excess of the expansion in GDP (gross domestic product) over the last six years, he adds.

“Consumption (real consumption and not the retail-sales numbers) has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year,” he argues

“Not surprisingly, this implies arithmetically that consumption is declining as a share of GDP.”

The China Economic Quarterly (CEQ), an online research publication, agrees that the retail sales numbers aren’t much use in tracking genuine consumption. Even government officials don’t attach much credence to them, it adds.

But, unlike the more-pessimistic Pettis, the CEQ believes it’s well within China’s capability to maintain GDP growth at 8-9% in 2010 (growth is expected to easily reach 8% in 2009).

The reason is that there is still plenty of money in China’s state-owned banks to support high levels of lending with equal oodles of cash around to maintain investment in public infrastructure.

As to asset bubbles which might lead to drastic government slowdown measures, the “hysteria is premature”, writes the publication in its third-quarter issue.

“Price-earnings ratios are well under half their truly speculative October 2007 peaks.

“Our detailed analysis (of the housing market) suggests that the pool of prospective upgrading -and investment buyers is so large that the market can continue to rally for another year or so.”

But it warns: “Continued growth at 8-9% in subsequent years will depend on whether the government uses the time it has bought through monetary stimulus to push through domestic market reforms.”

“We are pretty optimistic about financial sector liberalisation; less so about service-sector reform.”

China has finally created a bond market, meaning capital is being more accurately priced rather than always handed out virtually free to state-owned enterprises (SOEs).

A new stock market for small -and medium-sized enterprises will probably begin trading in Shenzhen in the fourth quarter this year.

These measures should help shift the economy away from dominance by the SOEs towards what in theory are more-efficient private companies.

Extra credit mechanisms are also being created to increase the availability of consumer finance.

“But we have yet to see much evidence of a serious effort to deregulate service sectors, notably distribution and logistics, that remain sink-holes of state-dominated inefficiency,” the publication adds.

Liberalisation and deregulation are crucial in re-balancing the economy away from exports and towards a genuine growth in consumption as a share of GDP.

“Don’t trust the government, any doctor or any lawyer,” I was once told by a drunken tour-guide in Greece before he started reciting poetry.

In this case we have to trust the Chinese government in the hope that it can do a better job than certain White House administrations.

You could argue that wouldn’t be particularly difficult.