Home Blogs Asian Chemical Connections How China Will Narrow Its Income Gap

How China Will Narrow Its Income Gap

Business, China, Company Strategy, Economics, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins
By John Richardson on 01-Jul-2015


By John Richardson

THE above chart is part of China’s New Normal, and so helps us to understand the future of the country’s chemicals and polymers supply and demand balances.

As you can see, the gap between its richest and poorest provinces remains substantial despite some progress in narrowing this gap since 2002.

The success so far is partly the result of big investment in infrastructure. For example, China as a whole has no less than 10,000 kilometres of expressway and many of these expressways have been built in the poorer western and southern provinces.

“Furthermore, foreign direct investment has been lured into inland regions, and third-tier cities such as Leshan located in Sichuan province or Yulin in Shaanxi ,” wrote Deutsche Bank, in the report from which this chart was taken.

Foreign investment, and also investment by domestic companies, has helped to boost manufacturing in these provinces. Some of this domestic spending is the result of the relocation of manufacturing from eastern coastal provinces, where labour costs are now too high because the developed regions of China are now negotiating their way through a “middle income trap”.

But still, if you again look at the chart, the gap between per capita incomes in the rich eastern provinces versus the west and the south remains way too high – and the government is determined to fix this problem.

So this means billions of more dollars of spending roads, railways and bridges in the south and the west.

A lot of this money will poured be into the provinces on China’s borders, through which the land and maritime New Silk Roads will run (see the map below).


More low-value manufacturing will also be shifted to these provinces, which will be partly targeted at  export markets that will be cost much more cost-effectively penetrated as a result of the New Silk Roads.

And what’s the best way of raising per capita income? It is, of course, by creating jobs and many of those jobs in poorer provinces will be in basic manufacturing, such as making cheap plastic bags, films, buckets and pipes etc. from commodity grade polyolefins.

China could, of course, choose to import ever-greater quantities of these commodity grades of polyolefins from overseas suppliers, but this is not going to happen and here is why:

  1. It is better to have your own local supplies of resin. In that way, you reduce the risk of supply disruptions that would close-down processing plants and thus cause job losses. Such supply disruptions have to be a big risk for China’s inland provinces, which are of course a long way from major shipping lanes.
  2. China has vast coal reserve, and the demand for coal for power generation is going down for environmental reasons. So building lots of new coal-to-polyolefins plants is a great way of maintaining employment, as this gives coal miners another outlet for their coal.
  3. Yes, the availability of water might constrain these investments. But what if, assuming that water is a problem, the government is determined to fix this problem?
  4. The economic value add can also be huge here. If, say, coal only fetches $60/tonne in today’s domestic market, the alternative for a coal miner is to sell that coal into power generation where firstly, as I said, demand is declining. Also, power prices are regulated.
  5. But the pricing of polyolefins is a free market. You are therefore upgrading $60 a tonne coal to say high-density polyethylene (HDPE) injection grade. Last month, Northeast Asia HDPE injection-grade prices averaged $1,284/tonne.

This helps to explain why China’s polypropylene (PP) production increased by 19% in Q1 of this year over the same period in 2014. New PP capacity in China is mainly coal-based.

It is crucial that polyolefins producers globally factor this kind of thinking into their long-term scenario planning.