“Known Unknowns” And China

Business, China, Company Strategy, Economics

By John Richardson

IF the blog had a dollar for every time we had read reports about Chinese growth being constantly buoyed by rising domestic income levels and increasing urbanisation, we would probably be as rich as a mid-level executive in a state-owned enterprise (in other words, very rich – way beyond such an executive’s “official” income).

The reports – some of them penned by those who focus on analysing the chemicals industry – are too simplistic because they do not evaluate potential negative outcomes from the “known unknowns”, to quote Donald Rumsfeld.

The known unknowns include whether China will achieve the transformation in its economic growth model being targeted under the country’s 12th Five-Year Plan (2011-2015). If the latest plan fails all bets are off. Just about nothing can be guaranteed, including social and political stability.

And even if the plan is effectively implemented, a “demand growth gap” that we referred to last year is inevitable as the economy adjusts to its new growth model.

Will the plan survive the 2012-2013 leadership transition? Scores of Communist Party, government, army and legislative senior leaders, including President Hu Jintao and Prime Minister Wen Jiabao, will retire and be replaced by a younger generation from late this year into 2013.

”The Five-Year-Plan is relevant to a certain extent; it is important,” said Cheng Li, director of research at the Brookings Institution’s John L Thornton China Center, in this article in the New York Times.

”But compared to the leadership transition, the plan becomes so totally trivial because any major personnel changes will completely change the policies or agenda.”

And regardless of whether the new leadership adheres to the plan, the vested interests that have done well from the existing system are likely to strongly resist change.

Local government officials are likely to fight hard for the continued right to appropriate agricultural land at knock-down prices, a major recent source of social unrest.

The officials will also need to petition Beijing to stick with its “investment-led growth model” – i.e. further easy bank lending pumped-into building bridges, roads, railways, airports and real estate.

The reason is that if a property-price collapse does occur, as is now a very real possibility following last year’s anti-inflationary measures, the opportunities for making big personal profits from land sales will disappear. A big hole will also open-up in local authority financing as loans start to turn bad at an alarming rate, creating a major bad-debt crisis.

A further consequence of letting the property bubble deflate is an angry constituency of urban residents caught in negative equity, who bought into the boom late-on.

Pumping more air into the bubble, however, risks a rise in social unrest as the land grabs continue. Young, professional people who do not qualify for social housing will also remain priced-out of owning their own homes.

The state-owned enterprises (SOEs) are also corrupt – another potential source of public resentment.

Between 16,000 to 18,000 government officials and executives from state-owned enterprises (SOEs) stole $123bn of public funds between the mid 1990s and 2008, says The Economist, quoting data from the People’s Bank of China. This estimate doesn’t, of course, account for what are likely to be “boom years” for corruption: 2009-2010 when lending by the state-owned banks was raised to the equivalent of one-third of GDP, making proper due diligence on all of these loans impossible.

The SOEs received 85 percent of lending in 2009-2010, leaving the private sector relatively under–provided. And as lending was tightened last year, it was the private sector that suffered the most, as the SOEs were able to corner what credit was still available because of their strong connections to the state-owned banks.

If I were living in China, and I’d just lost my job because of the export slowdown, or had seen land that my family had farmed for generations stolen by a local government official, I would be mightily angry.

PREVIOUS POST

Petchems And The Non-Profit Motive

02/02/2012

By John Richardson AS the US contemplates raising its ethylene capacity by up to...

Learn more
NEXT POST

India demand slides for PVC and PS

06/02/2012

By Malini Hariharan The last year has been rough for Indian polyvinyl chloride (...

Learn more
More posts
US/China trade deal achieves little as China pushes hard towards petrochemicals self-sufficiency
16/12/2019

By John Richardson PRESIDENT Trump has promised a “tremendous amount of business” for US farmers...

Read
Global polyethylene in 2020: Margins will reach historic lows as new growth model emerges
08/12/2019

Here is a first of a series of outlook articles for 2020 where I focus on the risks ahead for the gl...

Read
Long term downcycle will transform global petrochemicals, creating new Winners and Losers
06/12/2019

By John Richardson THIS IS not a normal downcycle. Please get over that idea however many people, bo...

Read
Asian PE and PP margins at lowest levels in at least five years and will go lower……
04/12/2019

By John Richardson NOT since at least the beginning of 2014 have Northeast and Southeast Asian polye...

Read
Asian polypropylene market heads for major 2020 downturn
02/12/2019

By John Richardson THE ASIAN polypropylene (PP) market hasn’t been as bad as the region’s polyet...

Read
China new vehicle sales: A long term decline and what this means for petrochemicals
29/11/2019

By John Richardson THE MAINSTREAM view is that there is nothing fundamental about the decline in new...

Read
Asian copolymer polyproplyene used as a sink for growing oversupply of ethylene
27/11/2019

By John Richardson A SURE sign that the Asian ethylene-to-polyethylene (PE) markets are distressed c...

Read
Asian polyethylene shutdowns? Once again, good luck with that idea
25/11/2019

By John Richardson I was new to the game as I had only been analysing the petrochemicals business fo...

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