By John Richardson
FEW PEOPLE HAVE made money out of shorting China. Time and time again, brief periods of weak economic growth have been followed by roaring, eye-wateringly big recoveries.
And in time-honoured tradition, as the above chart illustrates, Beijing is pump-priming the economy with lots of extra stimulus. As you can see from the rising blue line, representing official bank lending in March, a lot of extra cash is being pumped into the economy.
But here’s the thing: few people in the lockdown-affected cities – which are China’s richest and so are responsible for a big portion of petrochemicals consumption – will be able to spend extra money until the lockdowns ease.
You might argue that, as was the case in the West in 2020, people stuck at home – flush with more money because of government stimulus – will spend like crazy on-line.
But how much will they be able to buy given the closures of manufacturing capacity and the shortages of truck drivers and internet delivery workers resulting from the Zero-COVID policy lockdowns? Lack of supply may prevent a consumer-led economic boom.
So much therefore depends on how long it will take China to get on top of its latest coronavirus crisis. Nobody has the faintest clue on what further time will be needed. The longer the severe lockdowns continue, the less space will obviously remain in 2022 for a consumer-led recovery.
Here’s another thing: unlike in H2 2020, it seems unlikely that a boom in Chinese exports of manufactured goods will support recovery because of the cost-of-living crisis in the West resulting from the Ukraine-Russia conflict and supply chain shortages caused by the pandemic.
Will going short on China finally make senses then? Perhaps, yes, as this time does feel different. It seems to me that China may have lost of control of economic events for the first time for many years.
But, still, I have a nagging suspicion that voracious domestic consumer spending, once the lockdowns have eased, will take us by surprise again.
By the way, as far the Common Prosperity reforms are concerned, I strongly suspect that they will be put on the backburner. What this could mean for China’s longer-term economic health is a topic for another blog post.
As for the here and now, the only sensible approach is multiple and constantly revised scenarios for China’s petrochemicals demand growth and imports dependency.
Hence, the chart below showing three different scenarios for China’s net high-density polyethylene (HDPE) imports in 2022.
Scenario 1 is based on the actual data for January-February 2022. The data suggest this year’s demand will grow by 3% versus our ICIS Supply & Demand Database base case of 6%.mIf you then subtract local production from 3% year-on-year growth, you get to 2022 net imports of 5.9m tonnes from 2021’s actual 7.4m tonnes.
Local operating operated rates were assessed by ICIS at 81% in January-February 202, so I’ve used this rate for my first two scenarios. Domestic capacity in 2022 is due to increase by a whopping 23% following a 24% increase in 2021.
As I said, I also assume an 81% operating for the second scenario but assume flat demand growth This leaves net imports at 5.4m tonnes.
But what if the lockdowns were to drag on and on, into the second half of this year? Demand growth might fall to minus territory as it did in 2021. Assuming minus 3% demand growth for last year and a slightly higher operating rate of 83%, net imports would slip to just 4.6m tonnes – the third scenario.
In my next post, following on on my post on 10 April, I will provide you with scenarios on how HDPE net imports could be higher in 2022 than our base case in Europe, the opposite of China.
Your ability to read China correctly while diverting trade flows to other better markets, such as Europe, could well make the difference between your success or failure in 2022.
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