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China: How To Chart The Future

Business, China, Company Strategy, Economics, Oil & Gas, Polyolefins

By John Richardson

THE chart below should not be printed out and pinned on any chemicals company boardroom wall. If you accidentally press the “print” button, you must throw the print-out in the bin, without pause, just in case somebody happens to walk past the office printer and think it important or relevant.Unhelpfulchart

Here is why:

  • China’s headline GDP growth rates are largely fictitious. Even Li Keqiang has made this clear.
  • We instead need to keep looking at data points, such as loan growth,  electricity and fuel consumption. These continue to point to an economy that is slowing to a much greater extent than the headline GDP numbers indicate.
  • We should also look at other measures, such as the growth of investment in clean water technologies and technologies designed to tackle China’s chronic air pollution problems. The government has made it crystal clear that the era of “GDP growth supremacy” is over as it pursues a more sustainable growth model.

And so all the fuss about tomorrow’s announcement of China’s official GDP growth rate for Q3 – which the above chart refers to in that it shows analysts’ predictions of what the number will be – must be ignored if you work for a chemicals company.

The chart is useful, however, if you are a short-term stock market investor, a trader in oil or a gambler in the Dalian Commodity Exchange’s futures contract in linear low-density polyethylene (LLDPE) film.

If you think the official number will undershoot the estimates go short, of course; if you think the analysts are too bearish, then go long.

In the old days, this was also  a useful strategy for chemicals companies.

Here is why:

•Before the Great Rebalancing began,  you could “buy on the rumour” of the sustainability of China’s growth model and sit on your position for years, as the facts were hidden.

•The facts were hidden during 2008-2013 by a huge rise in credit.

•You didn’t have to worry at all if there was no substance behind rumours such as  “China will become a nation of BMW drivers”, as the surge in credit guaranteed fantastic increases in your chemicals and polymers sales year after year.

•Now, though, the gap between rumour and fact is usually measured in hours – for example, China’s September export boom.

So you must separate  the rumour from the fact if you want your business to prosper in the New Normal.

We think that charts, such as the one below, are of much more value – and should be  printed out and pinned on boardroom walls.

This chart, as you can see, shows the steep decline in the growth of bank lending, both official and shadow, in January-August of this year compared with the same period in 2014.

ChinaLending18Sept2014

In a later post, we will provide you with updated versions of these charts for January-September year-on-year.

Crucially, also, we will continue to monitor the sentiment out there, as the “snowball effect”  gathers momentum. There is no point in looking at loan growth data in isolation without considering  the strength in demand for lending.