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China: Planning For What Once Seemed Almost Impossible

Business, China, Company Strategy, Economics, Olefins, Polyolefins, US
By John Richardson on 20-Nov-2016


By John Richardson

FIVE years ago, the probability you would have attached to the third Scenario above – China’s polypropylene (PP) imports falling to just 300,000 tonnes – would no doubt have been close to zero.

In 2011 the consensus view was that there was nothing wrong with the Chinese economy that a bit more economic stimulus could not fix.

Equally, in 2011 if you had suggested that Britain would vote to leave the European Union, and that someone with the policy agenda of Donald Trump would win the White House your ideas would have been dismissed out of hand.

Here we are today, though, in the type of world that my co-author Paul Hodges and I warned was in danger of happening in our 2011 book, Boom Gloom & The New Normal.

It was clear from as early as 2011 that there was something wrong with China’s stimulus-led growth, as it was already building vast overcapacity in manufacturing and real estate.

There were strong indications that overcapacity would extend to chemicals and polymers as China moved aggressively towards self-sufficiency in many of our industry’s value chains.

What was also transparent were the emerging challenges of an ageing population that would result in China confronting the “middle income trap” earlier than would have been the case had it not been for the One Child Policy.

And in that year, you could just about taste the pollution in the air of many of China’s major cities, leading to this important question: “How much longer can this carry on?”

The critical turning point for China was November 2013 – when the warning signs turned from amber to red.

Unless Western mainstream politicians recognised that demographics drove demand, we worried that populist politicians would fill the policy vacuum. The mainstream still barely even talks about the Babyboomers, and so we have ended up with Brexit and Donald Trump set to enter the White House.

Scenario 3 would happen like this:

  • China suffers a financial sector-led crisis as it deflates its real-estate bubble. Meanwhile, it struggles to build a new, sustainable economic growth model.
  • Compounding China’s problems are a global trade war and investor flight from emerging markets as Donald Trump governs the way that he campaigned.
  • China’s PP demand growth as a result collapses as local production is also maximised to protect jobs.

What probability should we now give to China’s PP imports falling to 300,000 tonnes by 2020? Ten percent, 30% or more than 50%?

For those interested in the detailed thinking behind my Scenarios please contact me at john.richardson@icis.com. I can also discuss how ICIS Consulting can help support your business in these very uncertain times.