By John Richardson
FIRST of all they were brilliant, almost omnipotent, and so China represented a constant “long” option: Just shove more and more money in that direction and you were guaranteed to enjoy fantastic returns.
The handful of middle-aged men who run China were then suddenly uniquely incompetent, meaning you simply had to short the heck out of China.
Sensible analysis of China continues to be drowned-out by all the noise that has only one real, underlying value: Making money for financial and commodities-market investors. We continue to see this this exact same pattern distort the behaviour of the global oil market.
For an awful long time, of course – from in fact 2001 until 2013 – you couldn’t lose, even if you were a manufacturer of chemicals or anything else, from only listening to the noise. This was a guaranteed way of making loads and loads of money.
This meant that reports from investment banks claiming that, for example, a 20-year ethylene Supercycle had begun thanks to China, were often good enough. And here was an added bonus: You could download these reports for free off the web.
Reports like these also helped to shape the thinking of much of the information that did cost you money – either through the wages you paid to your internal research team, or the fees you paid to external analysts.
Now, though, all of us have to go back to the drawing board and challenge every single assumption that many of us have long held about China. This is going to be a long, hard slog of fresh thinking and completely different data crunching if we are going to make a success of the future.
The great news is that there is still plenty of “free stuff” out there. But this will only help us start and not finish the process. Take, for example, this article in the China Daily by Wang Bao’an, from China’s National Bureau of Statistics, in which he points out that:
- Electricity consumption has been very closely correlated with GDP growth in China for many years, and so as power consumption has fallen, so has growth. This is because of the Chinese economy’s reliance on heavy industries such as steel, aluminium and chemicals, which are all big consumers of power.
- Freight volumes are another a pretty good measure of the strength of the economy. So the fall in these volumes helps us again track growth.
- But as China develops its “New Normal”, electricity consumption will become an ever-more blunt tool for measuring growth. There are two main reasons for this, which are 1.) The rise of service industries, which require less electricity than the old heavy industries, and 2.) An increasing focus on reducing emissions, and on new green industrial development. This will again make power consumption a less reliable measure.
- Freight volumes will also become a poorer and poorer way of measuring growth. This will be firstly because a large amount of freight capacity has been taken up by moving “black” commodities, such as coal, iron ore and some chemicals, that China will not need in the future in anything like the amounts to which we have become accustomed. But if other industries, such as services, are replacing this lost growth then a drop in freight volumes won’t necessarily in the future mean a weaker economy.
- And secondly, freight movements will decline because manufacturing workers will be closer to the sources of raw materials. Instead of moving, say, coal thousands of kilometres from western to eastern China, it will be increasingly used in western China itself. This will be through transferring lots more basic manufacturing jobs to western China. My example here is a big rise in plastic processing in these poorer western provinces, which will be fed by more coal-based local polyolefins plants. So again, a fall in freight volumes might actually eventually mean a rise in GDP as western China catches up with eastern China.
But Wang doesn’t mention another potential complexity around freight volumes, which is this: Might a rise in freight volumes in the more developed provinces of China still represent better GDP growth? This would be the result of richer people with high-speed broadband connectivity buying more and more goods online, which will have to be moved by rail, road or air. I see the growth of China’s “search engine Internet economy” as a huge opportunity for the chemicals industry over the next two decades.
There is one more thing that we can discern from Wang’s superb article, and it is this: That this will be a patient, long and difficult reform process. The tone of his article clearly tells us that there are no short cuts to the “New Normal”.