MORE stimulus is on the way, is the consensus view of analysts following yesterday’s release of another disappointing China Purchasing Manager’s Index (PMI) – the Caixn/Markit preliminary PMI for September, which was at its lowest level since March 2009.
This again feels like the film Groundhog Day, where the character played by the great actor Bill Murray is fated to relive the same day over and over again until he finds true love. Remember the constant theme of 2014 when every time Beijing reduced credit growth, analysts were convinced that all the government had to do was “blink” to return China to the Old Normal?
But Beijing didn’t blink then, and will not and simply cannot blink by enough to make any significant difference to GDP growth. Here are just two of the reasons why this is impossible.
Firstly, by Q1 2013, each $1 of credit was adding just 17 cents to Chinese GDP down from 29 cents the previous year and 83 cents in 2007, according to official government figures. So it is reasonable to assume that each $1 of credit issued today is already at, or close to, generating negative GDP growth.
And secondly, China’s debt service bill is now running at around 17% of 2015 GDP, or $1.7 trillion, which is almost equal to India’s total GDP.
So here are just five points of guidance for chemicals companies:
- Accept that as economic reforms accelerate real GDP, as opposed to the fictional official government numbers, will fall into the low single digits.
- Some of the worst affected provinces will be the “rust belt” provinces in northern China, which depend on the hugely oversupplied industries that are struggling the most with deflation, and with tougher new environmental regulations. Remember that China’s literally existential environmental crisis is the second big reason why reforms simply have to be accelerated.
- Also badly affected will be any province, city or town that has been over-reliant on the real-estate bubble for its growth.
- Some provinces, cities and towns will do better if their local economies are more service-based, and/or home to some of the higher-value industries such as smartphone manufacturing that Beijing is supporting. But on a net basis, it will be simply wrong to assume that there will not be a big “demand growth gap” – i.e. several years before the old growth model is fully replaced by the new growth model.
- Growth in chemicals demand over the next few years will thus be patchy, will be inconsistent, in some periods will turn negative. And again on a net basis, chemicals growth will be nothing like as strong as we saw in 2008-2013.
If it feels like you have been trapped in Groundhog Day because you believed all the nonsense about China being able to blink, remember that the film’s main character Phil Connors kept practising and practising until he got the day right.