By John Richardson
OFFICIALLY, China’s GDP grew by a healthy 4.8% in Q1 2022 on a year-on-year basis. This would put China more in less in line to hit its official annual growth target of 5.5%.
But as everyone has known for many years, the accuracy of China’s official GDP numbers must be questioned. And, anyway, Q1 does not capture the full impact of China’s latest coronavirus lockdowns and the Ukraine-Russia conflict.
Other more up-to-date government numbers, which may still underestimate the severity of what’s taking place, point to a bleaker picture.
“Retail sales shrank by 3.5% year-on-year in March (without adjusting for inflation), according to figures released on April 18th. Catering services fell by more than 16%. Unemployment in China’s 31 biggest cities is now 6%, higher than in 2020,” wrote The Economist in this article.
Even bleaker still, as I discussed in my 8 April, again quoting The Economist, were high-frequency data that tracked movements in big cities via smartphones and subway journeys. I wrote in the post:
The Economist quotes data from Baidu, a popular search engine and mapping tool. Based on Baidu’s tracking of smartphone movements, during the seven days to 3 April, the index was more than 48% below its level a year ago.
During the week ending 2 April, the number of metro journeys in eight big Chinese cities was nearly 34% below its level from a year ago – and 93% down in Shanghai, The Economist added.
Ting Lu, an analyst with Nomura, was quoted by The Economist as warning that the short history of this type of high-frequency data raised questions about its reliability.
The same analyst was quoted in the latest Economist article as saying that China may already be in recession.
A I discussed in my 14 April post, the stimulus tap has been well and truly turned back on through a big increase in official banking lending in March. That’s the good news in terms of a potential recovery later this year.
But as I highlighted on 14 April, there is no point in flooding the economy with stimulus if hundreds of millions of people, as is the case today, are unable to leave their homes to spend money.
Further, a shortage of internet delivery drivers and other Zero-COVID related logistics problems means a boom in online spending by bored lockdowners seems unlikely.
The longer it takes China to bring its lates coronavirus outbreak under control, the less likely it is that we will see a strong domestic consumer-led recovery in 2022. An export-led recovery seems out of the question because of the cost-of-living crisis in the West resulting from the Ukraine-Russia conflict.
And as The Economist in its latest article also points out, logistics challenges resulting from the Zero-COVID policy make spending on infrastructure projects – a tried-and-tested method of boosting the economy – very difficult.
Here is another problem, also highlighted by the latest Economist article: China’s local governments have been told to spend more money, even though some of the restrictions placed on their spending as part of the Common Prosperity reforms remain in place. One of the aims of Common Prosperity is to reduce alarmingly high levels of local government debt.
My very shaky base cases for PE demand growth and net imports
We must also consider the inflationary effect of the Ukraine-Russia conflict on China and the limits inflation may place on further government stimulus.
Still, though, I am just about clinging to a base case of positive China polyethylene (PE) demand growth in 2022, as the chart at the beginning of this section of today’s post illustrates.
Why am I rather shakily clinging to a base case of positive PE demand growth? Because of history. China has a great track record of turning its economy around after short periods of weaker growth.
But, as I’ve been arguing since early March, this time could be different. China may have lost control of events because of the scale and complexity of local and international challenges.
My worst-case outcome for demand would see a 2022 decline of 3% over last year, which would be the worst percentage decline since 2000.
I am likewise just about clinging to the base case assumption – detailed in the next chart – that China’s total net imports across all three grades will only fall by 14% this year versus 2021.
My base case for net imports sees average demand growth of 2%, in line with the first chart, and an average operating rate of 87% at local PE plants.
But do not rule out the downsides, which involve the negative growth assumptions again detailed in my first chart, and, in the case of the worst-case net import scenario, a higher average operating rate.
Once the Zero-COVID logistics problems are out of the way, China may choose to run its local plants at high operating rates to minimise imports because of high inflation and uncertain geopolitics.
The worst-case net import outcome for 2022 would see net imports fall by 29% over 2021.
Conclusion: the two big issues for PE exporters
The two big issues for the world’s major PE exporters in 2022 include, as always, the extent of China’s imports in 2022, given that on a net import basis, China accounts for more than 50% of total global net imports.
And, as I discussed in my 10 April post, the other big issue is the scale of Europe’s PE imports in 2022.
Europe’s imports could well be higher than had been expected because of petrochemical feedstock and energy shortages resulting from the Ukraine-Russia conflict. I shall return to this crucial theme in my post on 22 April.
If you would like the actual numbers behind the charts in today’s post, contact me at firstname.lastname@example.org.