China Overlooked Lending Data Down 64% As Economic Slowdown Continues

China, Company Strategy, Economics, Environment, Oil & Gas, Olefins, Polyolefins

By John Richardson

FAR too little attention is still being paid to China’s lending data even though this has long been the key measure of whether its economy is accelerating or slowing down.

In January 2014, lending in China started to slow down as China’s recently appointed president, Xi Jinping, exerted his authority. At that stage, he was pressing ahead with economic reforms, a major element of which was reducing financial risk from excessive leverage.

But it wasn’t until September of that year when the consensus view was reached that China was slowing down when, in fact, the slowdown had, as I said, been under way since January. It was from September of 2014 that we of course saw the collapse of commodity prices, including oil prices, partly because of the acceptance that China’s economy was cooling down.

Xi and his Princeling pre-reformers then temporarily lost control of events as the Populists, led by Prime Minister Li Keqiang, regained control. This led to the strong rebound in economic growth in 2016 and 2017. Short term stimulus policies at the expense of essential long-term economic reforms took priority.

Last October’s 19th National Party Congress was another critical turning point. Xi regained control of policy. He has become the most powerful Chinese leader for several generations.

History is now repeating itself. Most commentators, though, continue to overlook the lending data.

Take a look at the above chart, which is an update of the chart I’ve been running since the start of this year. It shows shadow bank lending, which is lending via the highly speculative and so very risky private banks. Shadow lending was down by 64% in RMB terms in January-April of this year over the same period in 2017. In dollar terms, this represents a $274bn decline.

As fellow blogger Paul Hodges and Hong King-based investment bank Daniël de Blocq van Scheltinga note in this FT BeyondBrics blog post, some of this decline in lending has been compensated for by a rise in official lending, via the state-owned banks.

But they add that total social financing (TSF) was also down by 14% year-on-year in January-April 2018 – $110bn lower. TSF is lending via both the shadow and state-owned banks. In other words, the total availability of credit is substantially down so far this year.

Economic data confirms impact of reduced lending  

Most commentators are staring into the rear-view mirror because they haven’t been tracking the lending numbers. They are thus only now pointing to other economic data that confirm the impact of slower lending growth.

For example, property sales growth fell to 1% in the first four months of the year compared with 8% cent growth during the same period last year. In April real estate sales dropped by 4% from a year earlier.

April also saw fixed asset investment grow at the slowest since 1999, whilst the pace of retail sales softened to a four-month low.

China’s polyolefins markets have been telling us since the end of the Lunar New Year Holidays (LNY) on 21 February that a slowdown is under way:

  • Most market players had expected polyethylene (PE) and polypropylene (PP) pricing to bounce back very quickly after the holidays. This was based on the theory of stronger demand as China’s vast manufacturing capacity resumed work, and because oil prices were rising.
  • Instead, though, pricing has been flat, has declined or has only edged up during every trading week since 21 February. This is reflected in the decline in integrated Asian polyolefins spreads – the gap between naphtha feedstock costs, PE and PP prices and co-product credits.

The period immediately after the LNY is normally a peak season for polyolefins consumption. But what has held demand and pricing back has been the lack of availability of credit amongst the smaller plastic processors because of the slowdown in lending growth.

Moderately lower GDP growth or something much worse

Hopefully, this will be a very well managed and so moderate economic slowdown. A moderate slowdown would represent official 2018 GDP growth close to 6.5% – the government’s target. Whilst this would be sharply down from last year’s actual official GDP growth of 6.9%, 6.5% would still be extremely healthy.

For the polyolefins producers, would they even notice the difference? Whilst demand and pricing has been disappointing since the end of the LNY, the full year 2018 may turn out to be very good, even if official GDP growth does fall to 6.5% (with unofficial growth likely to be significantly lower).

Two strong positive factors for the year as a whole are:

  1. China’s heavy restrictions on imports of scrap or recycled plastics since January 2018 (note it is wrong to call this a ban. It is still possible to import scrap plastic into China, provided contamination levels are less than 0.5% per tonne). We estimate that these restrictions could boost China’s PE consumption by 600,000 tonnes above our base case for 2018. This would raise this year’s consumption to around 30.4m tonnes. Meanwhile, PP consumption could be 300,000 tonnes higher at 27.8m tonnes.
  2. The booming mobile internet economy also promises to continue to buoy polyolefins growth. China’s internet sales totalled more than $1 trillion in 2017, a 32% increase on 2016. All of these sales need packaging, and a lot of that packaging is made from PE.

But do not rule out the chance of a global economic recession. The increasingly unpredictable behaviour of the White House continues to threaten a trade war with China, and with other major US trading partners.

Meanwhile, keep a close eye on Chinese lending data. Will Xi reverse course if economic conditions significantly deteriorate through allowing shadow lending and TSF to take off again? I think not, as he is determined to complete essential economic reforms.

PREVIOUS POST

Polyethylene Margins Face Collapse On Overcapacity

23/05/2018

By John Richardson THE consensus view is that whilst global polyethylene (PE) ma...

Learn more
NEXT POST

China Innovation Success Versus Failure: Electric Vehicles As Case Study

28/05/2018

By John Richardson WHAT is the best route to innovation? Pure capitalism with a ...

Learn more
More posts
The polymers industry, climate change and a call to action
13/01/2020

By John Richardson MUCH OF the debate about plastics and the environment is, I fear, missing the big...

Read
Why President Trump, unlike with Iran, will find it harder to shift course on China
10/01/2020

As always, these are my personal views only and do not represent the views of ICIS. Thank you  ...

Read
US and Iran conflict in a world of declining growth and fragile supply chains
08/01/2020

By John Richardson THINK of the Fukushima disaster in 2011 and multiply its impact on global supply ...

Read
Iran and the US: Assessing the risks for petrochemicals and the global economy
06/01/2020

As always, these are my personal views only and don’t reflect the views of ICIS By John Richar...

Read
China benzene and its derivatives could see negative growth in 2019
20/12/2019

        By John Richardson NOW let’s put this all together. My LinkedIn post o...

Read
US/China trade deal achieves little as China pushes hard towards petrochemicals self-sufficiency
16/12/2019

By John Richardson PRESIDENT Trump has promised a “tremendous amount of business” for US farmers...

Read
Global polyethylene in 2020: Margins will reach historic lows as new growth model emerges
08/12/2019

Here is a first of a series of outlook articles for 2020 where I focus on the risks ahead for the gl...

Read
Long term downcycle will transform global petrochemicals, creating new Winners and Losers
06/12/2019

By John Richardson THIS IS not a normal downcycle. Please get over that idea however many people, bo...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more