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No Relief For China SMEs

Business, China, Company Strategy, Polyolefins
By John Richardson on 07-Aug-2012

ChinapowerproductionJune2012FTAlphaville.pngBy John Richardson

THE consensus view is that China’s economy bottomed out in H1 and will see a recovery in GDP growth during the second half.

Much hope has been attached to more government stimulus delivering a short-term boost to growth, even if there are concerns over the long-term damage that further investment-driven GDP could cause.

But will the polymer industry benefit from this recovery, given that inventories continue to clog-up the system? We think not.

Some very revealing comments from a senior industry executive also point to how small and medium-sized enterprises (SMEs) in China continue to struggle. The SMEs make up the bulk of the country’s resin buyers.

Industrial production as a whole is also declining, as the chart above on electricity production and consumption from this post on the FT Alphaville blog indicates.

The polymer industry executive sees no prospect of a recovery among the SMEs before the end of 2012 because of the increased caution of banks worried about rising bad debts.

The risk of worsening bad debts arises from a very weak trading environment, resulting in numerous SMEs going bust.

A classic vicious circle seems to have developed: As SME bankruptcies increase, bank lending is further curtailed making further bankruptcies likely.

This suggests that even though China’s central bank pledged on Sunday to intensify policy fine-tuning in an effort to help the real economy, the SMEs will continue to struggle.

And, interestingly, the industry executive also believes that, despite the hype, renewed economic stimulus is very modest because politicians are too busy focusing on the once-in-a-decade leadership transition, which begins from October.

“China’s economy feels as if it is actually shrinking and the situation is now worse than during the financial crisis,” he said.

“The SMEs have less money than they had in late 2008. The reason is that the banks are not prepared to lend money to the SMEs because they are worried about rising bad debts and the effect on their share prices.

“In the past, when the government had more control over the banks, they could order them to lend to anybody.

“The big companies still have easy access to money. But our smaller customers are running at operating rates of below 60 percent compared with 90-100 percent in 2010.

“The leadership will do very little before the handover of power and the sooner the handover happens, the better. Once the new leaders are in place, I think the economy will get better.

“Once they are in place they should use their big cash reserves to get consumer spending going again.

“Only a few months ago we were talking about inflation being a problem and now it is deflation. The Chinese leadership should be able to tolerate a little bit of inflation.”