By John Richardson
CHINA has always been a complex and challenging place to do business, but at least during the Supercycle, you were guaranteed of this one thing: Strong economic growth across just about the whole of this vast country. No longer.
First of all, let’s look at one of China’s continuing success stories – the eastern coastal province of Zhejiang (see the map above).
Whilst China’s official GDP growth fell to 7% in Q1 this year, a quarterly low not seen since the depths of the Global Financial Crisis, Zhejiang saw its economy expand by 8.2%.
This province of some 55 million people, which is already China’s fifth-richest province out of 31 provinces with a per capita GDP of $20,000, has built its success on hi-tech innovation.
In its capital city, Hangzhou, for example, a whole ecosystem of businesses have sprung-up around the hugely successful Chinese online business, Alibaba. Hangzhou one thrived on small and medium-sized enterprises that focused on exports, but now the route to its success appears to be venture-capital firms.
This growth model has been further boosted by central government economic reforms aimed at enabling China to escape the “middle income trap”. These reforms include better tax breaks for hi-tech firms, more funding for internet start-ups and a better e-commerce logistic network.
Hangzhou is not alone, of course, in benefiting from these reforms. The southern city of Shenzhen is another city with a booming services sector. And it, too, is located in one of China’s richer provinces – Guangdong. Guangdong, the ninth-richest province in China, has per capita GDP of $18,000 and a population around 106 million.
But you cannot just look at provinces such as Zhejiang and Guangdong. You also need to study provinces such as Heilongjiang in China’s far northeast (again the see the map above).
In Q1 of this year, Heilongjiang’s GDP actually contracted by 3.2%. What makes this statistic even worse is that the province was already only the twentieth-richest in China with a per capita GDP of $11,000.
This problem is common across China, as it is the poorest provinces that appear to be suffering the most from economic reforms. The reason is that because these provinces were poor in the first instance, they saw too much of the wrong kind of old investment: in real estate and in excess industrial capacity.
The chart below is therefore very useful in measuring the link between the scale of this bad investment, province by province, and the economic slowdown. In total, no less than 11 of China’s 31 provinces are thought to have suffered negative GDP growth in the first quarter of this year.
On balance, what does this mean for the overall economy, and so, of course, chemicals demand?
McKinsey neatly summarised the scale of the overall crisis in a February 2015 report:
China’s debt has quadrupled since 2007. Fuelled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007.
At 282 % of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable.
This all reminds us that, despite a booming services sector in China, the net effect of reforms will cause more immediate harm than good over the next few years. We could, as a result, see real GDP growth turn negative for the whole of China during this reform period