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Shanghai And The Real Pessimists

By John Richardson on 03-Sep-2014

By John Richardson

shanghai_street_market7-06THE blog is used to being told “you are too pessimistic on China”, and is used to ignoring such comments, because they miss the point about what we have long being trying to convey. We challenge anybody to read yesterday’s post and reach the conclusion that we are pessimistic.

What is remarkable about our current trip to Shanghai is that people are instead telling us that we are guilty of being overly optimistic about China’s future!

The mood on the ground is very worrying. We have been told that:

  • Plastic processors, especially the smaller ones, are struggling to source financing because of the slowdown in credit growth.
  • Higher labour costs are putting them under further pressure as more low-value processing drifts away from China.
  • There is nothing new, of course, in either of the above points, but the scale of difficulties with credit and with costly labour feel as they have become worse over the last few months.
  • And here is another problem that we didn’t notice before: A dearth of experienced workers in the plastic processing sector is making it very hard for converters to move up the value chain to compensate for more expensive labour – to, for example, move from making cheap plastic garbage bags to making sophisticated multi-layer packaging films.

It was amusing when we raised the point of China’s official GDP growth numbers being largely a fiction at one meeting.

“Tell us something new. We have known that for years. What matters is the growth in credit and electricity consumption. These tools are the only useful ones in measuring chemicals and polymers demand growth,” we were told.

When we made our argument that in the long term China would be fine because of its visionary new set of leaders, people didn’t disagreed on our second point – that they were visionary.

But they worried that building a new Silk Road from western China to Europe, that we again discussed in our post yesterday, wasn’t going to work. Foreign manufacturers would rather up sticks and move overseas because of the uncertainties over whether inland logistics would be cost effective, we have been told.

“We have two-to-three years, I think, before our global manufacturing dominance is over. At the moment we have great supply chain efficiencies in lots industries in the eastern and southern provinces. But after two or three more years, other countries will have successfully copied us,” said one of our sources.

And the  people we have spoken to also worried that the reform agenda in general would be derailed by “vested interests”.

Returning to the more immediate term, nobody has so far so much as blinked when we have suggested that real GDP growth, as opposed to the government’s official numbers, might end up being negative over the next couple of years. They agree that the official data as a whole is understating the scale of the problems being created by the deflation of the  property bubble – especially in China’s third, fourth and fifth tier cities.