Get Behind China

China, Company Strategy, Economics, Europe, Japan, US

Chinastructuralchangeschart.pngBy John Richardson

THE blog is often accused of being pessimistic. We are not. We are just realistic.

It was realistic last November to anticipate that China’s new leaders would be dedicated to major economic reform. In fact, this was clear even earlier than that – back in February 2012 when the World Bank produced its landmark report on China – that a fundamental shift in economic policy was taking place.

This excellent article from Reuters highlights, as we have thought for a long time, that Xi Jinping and Li Keqiang, are firmly committed to a major overhaul of China’s economy. They have cemented their power base and will present more details on a radical reform programme at the crucial third plenum of the 18th Central Committee of the Communist Party of China, which is expected to take place in October, adds Reuters.

Quick fixes are no longer possible. Chemicals traders and company executives expecting a return to the type of stimulus-fuelled growth we saw in 2009 are going to be disappointed.

But this should not be a reason for pessimism for anybody who is looking beyond the immediate value of their share options, or the money to be made on the next chemicals shipment to China.

If Xi and LI are successful the opportunities are enormous, as The Economist points out in this article.

These opportunities include a huge surge in the spending power of low-income workers, thanks to successful reform of the Hukou system that at present denies hundreds of millions of workers access to basic social services.

A surge in investment by innovative private firms, if bureaucratic hurdles can be reduced and the allocation of capital improved, is another great opportunity for the chemicals industry.

But, as the chart above illustrates, some essential reforms, such as higher utilities charges and a liberalised interest-rate regime designed to improve the allocation of capital, will have a negative short term effect on demand. Nobody should be surprised, therefore, if real GDP growth in China over the next few years falls to 4% or even lower.

Meanwhile, as this painful shift takes place, the mood music needs to change. Rather than asking China to “save the world” through returning to an economic model that no longer works, chemicals company CEOs and Western politicians and central bankers need to all get behind this make or break effort to transform China.

We worry right now, though, that the huge quantitative easing programmes unleashed first by the Federal Reserve and more recently by the Bank of Japan, will not be supportive of China’s efforts.

There could instead be a “race to the bottom” as currencies are competitively devalued, including the Yuan. China might end up boxed into a corner and thus forced to export deflation.

PREVIOUS POST

China Hints At Yuan Depreciation

17/05/2013

By John Richardson LABOUR markets are tight in China and so on the surface there...

Learn more
NEXT POST

Please Be Careful Out There

21/05/2013

By John Richardson Quite often, a chart is worth many thousands of words. The ab...

Learn more
More posts
BASF’s shocking Q2 results should have been no shock at all
09/07/2019

y John Richardson NOBODY should be surprised by the BASF results for Q1 2019 where, on a year-on-yea...

Read
Multiple trade disputes and the risks for the US PE industry
03/07/2019

By John Richardson FALLING out with a trading partner as big as China is problematic enough. But the...

Read
China PE overstocking at nearly a million tonnes as demand weakens, competition intensifies
02/07/2019

By John Richardson MEASURING petrochemicals and polymer inventory levels in China with any reasonabl...

Read
China petrochemicals recovery on G20 trade war progress will be shortlived
30/06/2019

By John Richardson China petrochemical and polymer price spreads over naphtha feedstock costs will r...

Read
President Trump’s Vietnam warning threatens more polyethylene disruptions
27/06/2019

Just to stress  that, as always, what follows are my own personal views and not those of ICIS By Jo...

Read
US LLDPE imports and the impact on European petrochemicals
26/06/2019

  By John Richardson EUROPEAN linear-low density polyethylene (LLDPE) markets have yet to feel ...

Read
Southeast Asia PE spreads further underline weak demand, but trade talks promise rebound
25/06/2019

By John Richardson THE GOOD news today is that the US and China have agreed to resume trade talks. P...

Read
Global polyethylene: Supply is not the problem, it is demand
24/06/2019

By John Richardson WHEN people talk about supply it is very often because it is much easier to quant...

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