By John Richardson
A LOT HAS been made of the high savings rates built-up in China since the zero-COVID lockdowns began. Now that the lockdowns have been abruptly ended, a common assumption is that the high savings rates will lead to a surge in consumer spending and therefore chemicals and polymers pricing and demand.
Because large parts of the economy were shut down during zero-COVID, re-opening means an improvement in economic activity from a very low base – once the exit wave of Omicron cases is under control. But the recovery will, in my view, be weak because of the state of tye economy post-pandemic and the end of the real-estate bubble.
“Dickensian” inequality and the impact on growth
Bear with me as the following background is important if we are to understand the consequences of the pandemic in China.
“Changes in the labour market are leading to a rapid increase in the number of workers entering the less secure informal economy, while employment in the formal manufacturing sector, once the foundation of China’s employment, is falling,” wrote the US-based Center for Strategic and International Studies in a May 2022 study.
“Moreover, continued inequality in access to education and healthcare means that many employees lack the capabilities needed to excel in the high-skilled, high-wage jobs that are appearing as China’s economy seeks to reach high-income status. Automation is also increasing in China and could further reduce employment opportunities for a sizeable portion of the workforce in the years ahead,” the study.
The study also highlighted the negative impact of China’s Hukou household registration system that leaves migrant workers without full access to healthcare, education, pension and unemployment benefits.
“The consequences are that a large segment of the population is living in relatively precarious conditions. In 2014, only an estimated 16% of rural migrants working in cities were covered by pension benefits, only 18% had urban health insurance, and only 10% had unemployment insurance,” the study added.
The end-result was a Gini co-efficient in China of 0.4, indicating a highly unequal society, said the authors. The closer the score is to 0, the more equal a society and vice versa. Germany, Japan and the US had better Gini co-efficients, the study added.
“So what? These problems have been around for a long time. What relevance does this have to the extent of a 2023 recovery?’ you might ask.
This is relevant as economic inequality appears to have been made even worse by the handling of the pandemic.
“For large swaths of the country’s 1.4bn people, the pandemic shattered the fragile balance that once supported the back-and-forth movement of people from rural areas to large cities. Zero-COVID’s vast web of intersecting restrictions hammered low-income families,” wrote the Financial Times in a 3 January article.
The newspaper added that young people in rural areas had been forced by the lockdowns to study online, often using patchy internet connections. They had also been been separated from their parents for long periods during the many lockdowns. This had left educational paths to social mobility in the balance.
We must also consider relatively weak healthcare provision in rural areas as the exit wave plays out.
“In one of the world’s most unequal economies, China’s centralised healthcare system drives money and resources towards urban hospitals at the expense of rural ones, a disparity that has become all the more intense as cases surge,” wrote the AFP in a 6 January article.
“Urban areas have nearly twice as many beds in medical institutions per capita than rural areas, according to China’s 2021 national statistics. The lack of doctors is more profound. For every 1,000 people, there are only two licensed doctors in rural areas compared to 4.25 in urban areas; Beijing has seven,” wrote the GRID news service in an 8 April 2022 article.
Young people in both rural and urban areas also face record-high youth unemployment. In August last year, the official youth unemployment rate was at one of its highest-ever levels. One in five urban youngsters were out of a job.
The economic problems of China’s youth led Yu Jie, a China expert with the Chatham House think-tank, to tell the FT in the same article mentioned earlier: “It is really the younger Chinese generation who will have the most painful memories of the pandemic.”
The handling of the pandemic by Beijing had broken what Yu said was the social contract between the government and the population. This involved guaranteed strong economic growth and plenty of jobs. She therefore saw no post-lockdown recovery resulting from pent-up demand because of an “exhausted” middle class.
“We’re going to enter a very long phase of stagnation of the Chinese economy… For me, that’s the biggest uncertainty,” Yu said, adding that inequality appeared to be “very Dickensian”.
Modelling China’s polyethylene inequality
If you regularly follow my blog, you would know that I’ve been warning about the risks presented by China’s regional economic inequality since 2014. Some 1bn of China’s 1.4bn people live away from the rich coastal provinces.
We can chart the extent of rural/urban inequality by using polyethylene (PE) consumption as a proxy for personal wealth. The more chemicals and polymers in general you consume, the richer you tend to be.
The IMF provides estimates of China’s per capita income levels, in dollars, for each of the 31 mainland provinces.
I calculated the 2021 ratios, or percentages, for provincial per capita incomes over the national average per capita income for 2021. I then assumed the same ratios applied last year, as the 2022 data for per capita income by province wasn’t available.
For example, Beijing’s richest province had a 2021 per capita income which was 227% of the average national per Income of $12,551. At the other extreme, China’s poorest province, Gansu, had a per capita income of just 51% of the national average.
I estimate that China’s PE demand in 2022 was some 37.6m tonnes, an average 1% lower than in 2021 across the three grades (also see my later section on scenarios for PE demand in 2023 for further details).
Turn this 37.6m tonnes into kilogrammes (kgs) of consumption and divide by China’s population of around 1.4bn in 2022 and you get nationwide average per capita consumption of 26kgs. Multiply 26kgs by the ratios of provincial per capita income over the national average and you get the map below.
The darker the shades of blue the higher is provincial consumption while lighter shades show lower levels. Most of the darker-shaded provinces are clustered around China’s coast. As you move inland, the colours fade.
And as I’ve highlighted before, and you can see from the map, we can divide China into four economic zones. There are the rich southern and eastern coastal provinces, China’s rust belt in the northeast, the up-and-coming provinces adjacent to the rich southern and eastern coastal provinces and the poor far west.
Now let’s display the numbers behind the map.
I then took the 2022 populations by province, again provided by the IMF, multiplied the populations by the per capita consumption levels and converted kgs into millions of tonnes. This resulted in the chart below.
Just 35% of the mainland population in 2022, living in China’s ten richest provinces, accounted for 49% of total PE demand – 18.5m tonnes. This compared with the 65% share of the population residing in the remaining 21 mainland provinces that consumed 19.1m tonnes – 51% of the total.
Absolutely, of course, these are just rough approximations. The correlation between income levels and consumption of chemicals and polymers is not 100%. Between 15-20% of China’s PE demand goes into exports, depending on who you talk to.
I nevertheless see the above data as good enough, a fair indication of the direction of historical travel. The PE numbers underline the extent of China’s great economic divide.
New home sales to fall “by a further 25%” in 2023
Regular readers of the blog would also be aware that I’ve been highlighting the risks from an implosion of China’s property bubble, again since 2014. The implosion happened last year, as I warned would be the case in January 2022.
The 16-point real estate rescue package, launched in November last year, has led to the mistaken belief, in my view, that real estate spending will return the heady levels of 2009-2021. Combine this with the assumed spending boost from the end of zero-COVID and a widespread opinion is that China’s economy will see a strong recovery from around Q2 this year.
But as Ann Stevenson-Yang, co-founder of J Capital Research, said in this 3 January 2022 interview with The Market: “During the long years of the real estate boom, you had all those secondary effects. For example, because property was rising in price, local governments wanted to buy more land and develop more property.
“So, they bought land-use rights from people and that money in people’s pockets boosted consumer spending. Lots of new investment products saw explosive growth from the money that essentially came from real estate sales to the government,” she added.
“There is too much real estate in China, and it’s overpriced. There’s not much you can do about that other than to gradually absorb the losses, which means decades of flat growth or even reversal of past gains,” said Yang
Some 70% of household wealth is thought to be tied-up in a property sector worth around 30% of GDP.
Symptoms of the end of the property bubble were declining automobile and appliance sales, said Yang.
“New home sales dropped 31% in December from a year earlier. Citigroup Inc analysts expect sales to fall another 25% in 2023 as the recovery will be constrained by reduced supply, and buyers’ expectations,” wrote Bloomberg in a 6 January article.
As I highlighted in 2022, confidence in the property market has been dented. The “put option” – that Beijing would never allow home and land prices to fall – no longer applies.
Extreme real estate oversupply also means we won’t see a repeat of the 2009-2021 speculative frenzy that led to rapid growth in personal wealth and consumer spending.
China’s PE demand could fall by as much as 5% in 2023
But, as always, one view of any market is not enough. The only way that chemicals and polymers producers and buyers can sensibly plan their businesses is through deep and constantly revised scenarios. Hence, the chart below which slightly updates my earlier scenarios for China’s polyethylene (PE) demand in 2023 (see the December 2022 blog posts).
Last year’s demand, as I said earlier, appears to have totalled 37.6m tonnes across the three grades, 1% lower than in 2021.
Scenario 1 for this year assumes the Chinese economy comes roaring back. For this to happen, two other events would need to happen which I have yet to consider:
- A decline in COVID deaths and infections early enough in 2023 to make a significant difference to this year’s growth. Some analysts project that a big decline will have happened by Q2.
- No major collapse in China’s exports on economic problems elsewhere. China’s exports are worth around 20% of the country’s GDP.
Under Scenario 1, China’s PE demand in 2023 would total 39.1m tonnes, 4% higher than last year; Scenario 2 would see demand at 36.4m tonnes, 3% lower; and Scenario 3 would involve a contraction of 5% to 35.7m tonnes.
I think you can guess which are my preferred scenarios. They are, of course, Scenarios 2 and 3.