Trade Rhetoric Worsens As China Becomes Net PTA Exporter

Business, China, Company Strategy, Fibre Intermediates


By John Richardson

TIME Magazine made the “Chinese Worker” runner-up in its 2009 Person of the Year contest (by the way the winner was Ben Bernanke, the then chairman of the US Federal Reserve).

It was the hard graft of these workers, and lots of government spending, that Time said had enabled China to achieve its minimum target of 8% GDP growth, despite the Global Financial Crisis (GFC).  In 2009, China launched a Yuan4trn ($609bn) stimulus package that led to a huge new wave of investment in all sorts of manufacturing capacity, including chemicals plants.

The world sighed with relief because if it hadn’t been for all of this investment that kept China’s working population very busy, the GFC would have been a great deal worse than it actually was.

How times have changed. Last week, US Treasury Secretary Jack Lew warned about the damaging and distorting effect that excess Chinese capacity was having on world markets.

“Implementing policies to substantially reduce production in a range of sectors suffering from overcapacity, including steel and aluminium, is critical to the function and stability of international markets,” he said.

He is in an incredibly difficult position as of course are government officials and politicians in many countries. The reason is that too much supply is chasing too little demand. Jobs are under threat and when people can find work in the US in particular, income stagnation is a major issue.

But it isn’t going to be easy for China to do what Lew suggests.

Take the city of Dongguan in Guangdong province as an example, which now has a population of 8m people. Just 552,000 people lived in Dongguan in 1990. So if China suddenly closed down lots of factories in Dongguan, what we would it do with all the displaced workers?

Another problem for Dongguan is that is in a very developed part of China, and so it faces the added pressure of rising wage costs, now that China’s working-age population is in decline.

Guangdong province in general is, though, a hub for the higher-value manufacturing and service industries that China needs if it is going to escape its “middle income trap”. Workers in Dongguan have other options, provided they have the right skills.

This is not as much the case for workers in Songting, in the northern province of Hebei. Like many other cities in China’s “rust belt”, Songting is very reliant on one heavy industry- in its case steel. A loss making steel mill in Songting has, as a result, been reopened to ease local unemployment pressures.

In response to Lew’s comments, China’s finance minister Lou Jiwei made these very valid points: “China contributed over half of the global economic growth between 2009 and 2011 via infrastructure investment, which brought the accumulation of excessive capacity such as in coal and steel. Now [the West is] blaming us for overcapacity.”

This is all very worrying, as this is exactly the kind of rhetoric I warned about last week. Chemicals companies must build scenarios where ever-stronger rhetoric turns into many more trade barriers – even a global trade war.

Meanwhile, in the here and now, the chemicals industry confronts oversupply in many value chains resulting from Chinese investment that was at the time welcomed by so many people.

Take the chart above as a stark example of this. China has now become a net exporter of purified terephthalic acid (PTA). As recently as January-April 2009, China imported more than 2m tonnes of PTA.


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