By John Richardson
THE chart below serves as an excellent illustration of the big shift in consensus thinking about China’s overall economy, as it shows that:
- PE imports surged in January on the belief that China would “blink” – and they remained, on the whole, strong until October.
- The resilience in imports persisted despite evidence of rising local producer inventories from May onwards. Again, this underlines how most people thought that Beijing would blink. It also points to the use of PE in collateral trading – i.e. as a means of raising finance for speculation in the shadow-banking sector.
And this next chart illustrates that as a result of the new economic realities finally sinking in, growth in imports moderated to 5% in January-November last year. This compared with an 8% increase in the January-October period.
Sure, there will be plenty of people who will still argue that the fall in imports is mainly a consequence of the decline in oil prices and the usual end-of-year run-down in inventories.
But you have to obviously ask yourself why oil prices have fallen.
New crude supply has been been building up for years. The bigger story behind the drop in oil is instead the demand shock and the single biggest reason for the demand shock can be summed up in one word: China.
Thus, we can predict that during 2015:
- PE import growth will continue to moderate as China’s economy further decelerates (this will reflect another decline in overall GDP growth in 2015).
- The other big factor behind the further moderation in import growth will, of course, be local production. China ran its new PE capacity very hard in 2014 for long term strategic reasons, despite a weakening economy. This is explains the 10% rise in domestic production in January-November, which you can also see from the second chart above. This trend will continue.
- And as credit continues to tighten even further, and as China continues to play its “whack-a-mole game”, the use of PE in collateral trading is becoming a thing of the past.