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Dalian Reflects China-EU Risks

Business, China, Company Strategy, Economics, Europe, Polyolefins

By John Richardson

AT first glance it might seem strange that the Dalian Commodity Exchange’s linear low-density polyethylene (LLDPE) futures contract has fluctuated so dramatically on news emanating from the Eurozone.

The May 2012 contract – the one most actively traded at the moment and therefore the one most closely watched by the market – fell by 1.3 per cent last Thursday as a result of the Euro crisis.

On Monday this week, however, it rebounded by 5 per cent from last Friday’s closing price, forcing suspension of trading on the exchange as this was the maximum amount of fluctuation in one day allowed under the exchange’s rules. The blog can only assume that the rebound was the result of euphoria over Mario Monti’s appointment as Italy’s premier-designate following the resignation of Silvio Berlusconi.

Dalian investors are hardly known for their wisdom and long-term perspective, given that they are mainly “day traders” who dip in and out on every piece of gossip and innuendo.

This time, though, first impressions are misleading. This is not just about making or losing a fast buck as there is a strong connection between the PE resin market in China and what’s happening in the Eurozone.

The wider 27 nations that make up the whole of the EU are China’s biggest export market.

In July this year, China became the EU’s biggest trading partner (both imports and exports) for the first time, surpassing the US. The EU trade deficit with China stood at a whopping Euros12.2bn for that month.

As we discuss in Chapter 6 of our e-book, Boom Gloom and the New Normal, China has become far-too dependent on exports as a means of economic growth. In the ten years since it joined the World Trade Organisation, China’s domestic consumption as a share of GDP (gross domestic product) has halved to just 35 per cent.

So the Eurozone crisis matters a great deal to China’s PE business, as lots of the resin imported into China ends up being re-exported as finished goods to the EU.

And as we have discussed before on the blog, the Dalian is closely watched as a barometer for the broader polyolefins business. Physical trading in polypropylene (PP), for example, ground to a virtual halt last Friday following Thursday’s 1.3 per cent dip on the Dalian, a Singapore-based trader told the blog.

Was yesterday’s 5 per cent rebound really justified?

No, it sadly wasn’t. The Eurozone is highly likely to break-up with nothing short of disastrous consequences for China and the global economy.