Wile E Coyote And China

Business, China, Company Strategy, Economics, Europe, US

By John Richardson

THE blog, a bit like Wile E Coyote who always fails to catch Road Runner, has been amazed in recent weeks at certain people in the chemicals industry who, in public at least, fail to grasp the complexities confronting China’s economy in 2012. We wish that our experience would, at least for some of the time, triumph over hope.

It seems as if the attitude is that “last year was an exception and everything will therefore be back to normal in 2012.”

This is based on the assumption that the government will further relax credit conditions following its 50 basis-point cut in bank-reserve requirements in late 2011. A total of a further 200 basis points are forecast to be cut from reserve requirements by the end of this year, although economists expect interest rates will remain unchanged because of the danger of resurgent inflation.

The worst of possible outcomes also seems to have been been ruled out in the assumption that chemicals demand growth will rebound strongly in 2012  – i.e. a severe, new global recession driven by problems in Europe. 

Let’s firstly deal with the argument over the easing of credit.

Further reductions in reserve requirements would certainly be welcome, as would more targeted measures to help China’s struggling small and medium-sized enterprises (SMEs), which make up the bulk of the country’s chemicals and polymer buyers.

But a rebound in inflation to above the government’s target of an annualised increase of a maximum of 5%, remains a significant threat.

Interestingly, the country’s official purchasing manager’s pricing sub-index for December increased to 47.1 from 44.4 in November.

This was ignored by government officials, who preferred to instead focus on the fact that the index also showed that manufacturing activity narrowly avoided a contraction – rising to 50.3 in December from 49 in November (below 50 being a contraction).

The crucial question, though, is “at what cost?” Monetary easing has evidently already fed-through to producer pricing, thereby perhaps adversely influencing consumer pricing.

Controlling inflation remains a crucial task for Beijing in order to maintain social stability, particularly in a year when a leadership transition will take place.

Communist Party leaders, led by President Hu Jintao, are expected to retire by November in a once-in-a-decade leadership change that could, as Jeremy Page writes in the Wall Street Journal, “paralyse decision-making”.

The retiring leaders will be anxious to protect their own legacies – while making life relatively smooth for the new incumbents – by not taking any drastic decisions.

Hence, moderate credit easing could well be the order of the day, in order to avoid re-inflating the real-estate asset bubble that has been a significant source of social disquiet among China’s “sandwich generation”.

A “steady as she goes approach” might, as a result, be the approach for 2012. This would leave the task of tackling systemic longer-term challenges confronting China to the next generation of leaders.

These problems include huge local government debt, rising labour costs, and reducing the economy’s dependence on exports, which we will examine in a blog post tomorrow. 

 

The worst of possible outcomes

The steady as she goes approach assumes that either a collapse in the Eurozone can be avoided or short of a collapse, Europe’s own version of political paralysis is enough to drag the world into a severe recession.

Europe’s crisis is already having a severe effect on China.

Gordon Chang, the famous China sceptic, claims that China’s exports and imports were flat in November, when government stockpiling of cheaper commodities was discounted.

Electricity output growth, a key measure of overall economic activity, was at a ten-month low in November.

Only 34% of China’s economy was driven by internal consumption in 2010, which suggests that in the short term there is little that Beijing can do in the event of external trading conditions getting worse – other than blind panic.

This is where we should be really worried.

If the world enters a severe recession, China’s leaders might be forced to engage in an all-out trade war in order to protect manufacturing job, thus, hopefully, keeping a lid on social unrest.

Chang argues that the number of public demonstrations rose from 70,000 in 2005 to approximately 280,000 in 2010 – way above the official figures of 80,000-100,000.

The last thing the government needs is tens of millions of angry factory workers taking to the streets, in a year when it is trying to sell to the public the concept of a smooth transition of political leadership.

But, of course, as the Great Depression proved, protectionism doesn’t work.

If China were to, for example, competitively devalue the Yuan, increase export tax rebates for exporters, or go soft on new environmental regulations that have undermined the competitiveness of low-end manufacturers, the West would respond with trade barriers. This would make the macro-economic climate for China, and everyone else, even worse.

And so to assume that China will inevitably return to strong chemicals demand growth in 2012 is one heck of a big and harmful assumption.

PREVIOUS POST

America's New Political Era

30/12/2011

What follows is likely to be of little interest to those, like ourselves, who ar...

Learn more
NEXT POST

Resolving China's Bad Debts

04/01/2012

By John Richardson IS China facing a bad debt crisis as serious, or perhaps even...

Learn more
More posts
Vaccine nationalism and lack of debt relief remain major threats to petchem growth
27/01/2021

By John Richardson WE LIVE in a highly interconnected world as this statistic underlines: of the $18...

Read
China’s economic dominance carries many short and long-term risks for petrochemicals
19/01/2021

By John Richardson JUST 5% of US companies with revenues of more than $500m plan to relocate operati...

Read
Petrochemical companies must invest more in new methods of assessing demand
17/01/2021

By John Richardson INVESTORS must look beyond measures of GDP growth if they are going to understand...

Read
New China pandemic outbreak China single-biggest risk for global petchems in 2021
14/01/2021

By John Richardson CHINA FACES another test of its pandemic control capabilities because of new outb...

Read
The energy transition and how it will define tomorrow’s petrochemical Winners
12/01/2021

    By John Richardson MOST OF the time historical events move at a snail’s pace. The me...

Read
China polyethylene imports set to remain strong in 2021 despite big local capacity growth
09/01/2021

By John Richardson IT WAS a tremendous year. China’s 2020 polyethylene (PE) demand growth over 201...

Read
Collapsing battery costs point to ever-declining forecasts for oil demand
05/01/2021

By John Richardson THE END of the oil age is arriving. Sooner than many people think, demand for oil...

Read
Sustainability means reducing carbon emissions as well as plastic waste
22/12/2020

By John Richardson THIS IS VERY much a personal plea to our industry about what I see as the biggest...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more