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End Of China’s Latest Credit Bubble: Implications For Chemicals Demand

Business, China
By John Richardson on 23-Apr-2017


By John Richardson

THE effect on the global economy of China’s slowdown as it enters its next credit cycle is something I discussed on Friday. We next need to think about the implications for demand growth for all the things made from chemicals and polymers in China.

To help you think through this issue – and to prepare scenarios – the above chart is very useful. It is an updated version of one that I’ve included in the blog on several occasions before. The chart shows that China’s annual disposable income for city-dwellers averaged just $5,061 last year, whilst in rural areas it averaged only $1,861.

Despite all the misleading talk about China rapidly becoming a middle class country by Western standards, this latest official government data once again underlines just how far China is, in terms of disposable income, from achieving this status. These levels of disposable income would represent extreme poverty in the West.

These income levels are however not reflected in the data on consumption growth in key chemicals and polymers end-use markets such as autos since 2009. So the conclusion is obvious: The rapid growth we have seen in autos sales etc. is down to the credit bubble and not income growth.

Lending since 2009 has been incredibly easy to obtain, and very cheap. Household wealth for those lucky or clever enough to be already on the property ladder, and to have bought multiple properties, has also gone through the roof.

Fellow blogger Paul Hodges last week gave statistical weight to this conclusion in a post where he detailed how:

  • Q1 2017 Total Social Financing (TSF) averaged Yuan2.4 trillion/month, 2.2 times the Q1 2008 monthly average. TSF is the total amount of lending available in the economy from both state-owned and private, or shadow, lenders.
  • First quarter monthly auto sales were at 1.9m. This was twice the monthly average in Q1 2008.

So, take away some of the froth from the Chinese economy as credit conditions are tightened and what does this mean for China’s chemicals and polymers demand growth during the rest of this year and into 2018?

Growth may not collapse – it might still, in fact, be healthy – but it could be lower than some chemicals companies have budgeted for.

What if, though, China suffers a financial crisis? China’s debt exposure is worse than that the US and the UK during the Global Financial Crisis and so it would be wrong to rule out the possibility of a financial crisis in China.