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China: Again, Please Listen To Us: “No Change In Direction”

Business, China, Company Strategy, Economics, Polyolefins
By John Richardson on 28-Jan-2015


By John Richardson

China’s Premier, Li Keqiang, could not have been clearer in comments that he made on Monday during a meeting with some of the country’s top corporate leaders.

He told business leaders that the government aimed to create at least 10 million jobs in 2015, reported the China Daily – a state-owned newspaper.

“Stress tests show the possibility of a large amount of unemployment, which could lead to social instability if the economy cools down too fast,” he said.

And he conceded that whilst it was difficult for China to remain unchanged in its fiscal and monetary policy in the face of quantitative easing by the EU and Japan etc., “it is important to do so, since we must give the market stable expectations”.

During the same meeting, his comments were further underlined in thick black bold ink by Wu Xiaoling, deputy director of the Financial and Economic Committee of the National People’s Congress.

“The Chinese capital market is not lacking liquidity. What it lacks is a channel where money can be guided into the right places,” she said.

She also urged the government to be careful in the wording of its Work Report, so as not to give the impression that China is about to either cut or increase bank reserve requirements and interest rates. (Monday’s meeting was part of a consultation process that is taking place before the final Work Report – China’s economic and social development plan for 2015 – is announced at the National People’s Congress in March).

And then on Tuesday, Mao Weiming, vice-minister at the Ministry of Industry and Technology, made this telling comment, which was widely quoted in other news reports, including this report in the Financial Times: “As the economy enters the ‘new normal’, the industry sector faces increased downward pressures, unreasonable structures and weak innovation capability.”

He was speaking at a press conference during which the government announced that full-year industrial profits in China grew by just 3.3% in 2014, the slowest pace of growth since the 2008 global financial crisis.

What does this tell us? These are three key conclusions:

  1. Employment creation remains a top priority. The government will not hesitate to, in effect, export deflation to the rest of the world if its job-creation target is under threat. I worry that this will happen in 2015 because of misguided quantitative easing policies. If China faces losing its share of export markets as a result of a weaker Euro and Yen, it could devalue the Yuan and/or introduce other policies to support its manufacturers. The scale of the deflation threat from China is huge because of the extent of its overcapacity across many industries, including petrochemicals. This was, of course, illustrated by the slow growth in industrial profits in 2014. Creating employment also involves further moves up the industrial value chain. As Wu Xiaoling pointed out, Beijing will make sure that bank lending is increasingly channelled to the right kind of companies in order to deal with the” weak  innovation capability” identified by  Mao Weiming. There is also the investment in China’s New Silk Road to consider. Much of this investment is aimed at gaining better access for higher-value Chinese manufacturers to Western markets.
  2. At the same time, though, As Wu also stressed, money will be increasingly diverted away from the wrong places.  Lower value manufacturers will continue to shut down due to credit shortages, as will the distribution, trading and even manufacturing companies that have been in the business of speculation, rather than adding any real value to China’s economy. Beijing will continue to play its “whack-a-mole” game as it pursues these speculators.
  3. There will no reversion to old-style economic stimulus. Those who still hope that this will happen in 2015 are going to be in for another big disappointment.

None of this is new, of course. All that the government has done over the last two days is further underline a direction that has been very clear since late 2013 –  and became even clearer throughout 2014.

Let’s now apply this to one sector of the petrochemicals industry – polyethylene (PE). The latest data reflects China’s change in economic direction.

The above chart, which includes the data for the full years 2012, 2013 and  2014, shows us that:

  • Import growth has slowed-down quite dramatically. Between 2012 and 2013, imports increased by 11.8%, whereas in 2013-2014 they only rose by 3.3%.
  • This is the result of a slowing economy and rising self-sufficiency in PE, as China tries to add more value to its economy through boosting higher-value manufacturing, whilst also creating new employment.
  • Rising self-sufficiency is reflected in domestic production, which rose by 10.1% in 2014 over the previous year. This follows a 12.5% rise in 2012-2013.

You would be foolhardy to think that this trend will not continue during what is an especially worrying time for the PE. As I shall detail in a later post, a lot more new PE supply is set to arrive in the market over the next few months – most notably from the Middle East. How on earth is it all going to find a home?

The same pattern of falling imports and rising self-sufficiency is also clear in the full-year 2014 data for many other petrochemicals, which I will again detail in later posts.