By John Richardson
Linked to this belief about politics in China is that democracy in Europe and North America is almost a curse rather than a blessing, as it encourages an excessive focus on the short term need to win votes at the expense of decent long term policies.
This over simplistic view of China’s politicians is rapidly losing credibility because of a belated recognition of the facts on the ground, such as these:
- The economic damage caused by the 2008-2013 economic stimulus package, including vast oversupply in manufacturing and real estate, which has led to a major bad-debt crisis.
- An existential – and this is no misuse of the word – environmental crisis that is placing further strains on the economy. Here are just two of these specific strains: A.) The high cost of cleaning up this mess – estimated by the government to be at least $1 trillion over each of the next five years; B.) A “brain drain” as many highly educated middle class people leave China because of chronic air, water and soil pollution. These are the people China needs to keep if it is to escape its middle-income trap.
The truth is that China’s leaders have never been omnipotent. Neither should we now view them as uniquely incompetent. Instead they are just politicians, who, like their counterparts in the West, are trying to find a way through this crisis.
So now that I’ve hopefully successfully debunked three of the myths about China, what’s the next step for chemicals companies as they try to come up with sensible future analysis?
Firstly, they need to embrace ambiguity and thus accept that there could be any number of outcomes, none of which can possibly be a return to the old China that we are so familiar with.
Specifically, returning to the issue of politics, here two extreme outcomes:
- The Xi Jinping-led reforms work, thanks largely to an anticorruption drive aimed at getting rid of the vested interests that want a return to the “Old Normal” of stimulus-led growth. But this will mean five or more years of weaker economic growth. The reason for this is that all the data tells us, and has long told us, that successfully changing the country’s entire economic growth model will be a long and difficult process, often involving one step forward and two steps back.
- The anti-reformers win, resulting in a long-term economic decline.
All of us are of course hoping for the first outcome, but we must also plan for the second – along with preparing for lots of grey areas in between those two extremes.
Drilling down to specifics for the global chemicals business, here is one front-of-mind issue: How China will deal with its vast oversupply in some chemicals and polymers (see my above chart, illustrating the problem in polyvinyl chloride).
Outcomes here – again with lots of grey areas in between – include:
- Local governments successfully fighting to keep small and so inefficient PVC plants permanently open because they generate revenues that help them pay their bills now that revenue from land sales has collapsed. The plants also keep lots of people in downstream jobs.
- In the short term, even the reformers might back off from forcing some of these smaller PVC plants from closing down, even though these plants are often also very bad for the environment. The reason is that production, no matter how inefficient, equals jobs at a time when unemployment is likely to be on the rise in China. So prepare for more very low cost PVC exports, quite possibly subsidised by a weaker Yuan.
- What you also need to do with China’s PVC plants – along with the plants in all the other oversupplied sectors – is to draw yourself an accurate map of their locations. If a PVC plant is located in a poorer western province, there could be no struggle at all between the anti and pro-reformers over its future. Everyone may instead agree that plant has to stay open because the priority in the western provinces is still basic manufacturing jobs rather than greater economic efficiency and environmental protection. This regional division needs to also apply to how you assess new projects.
As I said, there is ambiguity everywhere and we need to first accept and get on with dealing with this fact. For more help, contact me on firstname.lastname@example.org