By John Richardson
People have had time to adjust. My fellow blogger Paul Hodges and I have been highlighting China’s demographic and debt risks for more than a decade.
Conventional thinking is now moving in line with our thinking. I see this as being the result of a growing awareness that China’s recovery from the zero-COVID restrictions will be muted – because of the above two challenges.
On China’s demographic crisis, it is so significant and complex that it might be worth another book to follow the book that Paul and I published in 2011. A case in point is Paul’s latest blogpost where we wrote:
- China’s “normal level” of excess male births ranges between 103/105:100 around the world.
- China was already higher at 106: 100 in 1950-1979. And then it averaged 114: 100 in 1980-2021.
- It was even higher during the main period of the One-Child Policy from 1988-2016 at 116: 100.
- Essentially, China “lost” around 54m girls between 1988-2018 and has “lost” 73m girls since 1980.
This is obviously affecting household formation and demand for many things, including real estate, which is worth some 29% of China’s GDP. So much, in my view, for another boom in China’s real estate sector.
Ripping up the rule book and starting again
One of my contacts wrote on LinkedIn last Sunday, “This is a cheerful way to start to the week”, commenting on my post that global petrochemicals capacity exceeding demand had hit a record high.
In all seriousness, yes, I agree. As the old assumptions about growth are unpicked and stitched back together with a new thread, this will focus everyone’s attention on the two biggest routes to revenue growth: Tackling the carbon and plastic waste challenges.
Now that chasing volume growth is no longer the No 1 revenue growth opportunity as more value lies in environmental solutions, this is clearly an incredibly positive and optimistic outcome. There is a strong financial motive to do the right thing.
Sustainability is a subject for other blogposts. Meanwhile, let me use high-density polyethylene (HDPE) – as I did with polypropylene (PP) earlier this month – to unpick the old China growth story.
The rest of the developing world’s HDPE demand was 17.5m tonnes in 2022 (4.97bn people) versus China’s 17.1m tonnes (1.44bn people). This reflected per capita demand at just 3.5 kilograms (kg) in the rest of the developing world versus 11.8kg in China.
In 1990, both China’s and the rest of the developing world’s per capital consumption were at around 1kg.
Back to demographics. Consider the chart below.
State-led investment in infrastructure, tax incentives and a youthful population led to a boom in export-driven economic growth from 1992 onwards, following Deng Xiaoping’s Southern Tour.
Growth was then turbocharged by China’s admission to the World Trade Organisation (WTO) in late 2001, which removed the tariffs and quotas that had restricted China’s exports. This allowed China to extract maximum value out of its youthful population.
But China’s birth rate per woman has collapsed from a peak of 7.5 per mother in 1963 to only 1.2 in 2022 – well below the population replacement rate of 2.1 birth per woman.
The easy credit conditions in the West that supported booming demand for China’s exports are no longer as easy.
As the Baby Boomers retire, they are being replaced by younger people who favour “less is more” – spending less on physical things because of environmental concerns.
The chart below explains the role of the 2009-2021 credit bubble in driving China’s HDPE consumption.
As China’s population began to age, extra juice was added to HDPE demand growth by the 2009-2021 lending boom. This was initially a response to the Global Financial Crisis, but later continued because of the “fear of stopping”.
Now, though, to add more credit on this scale would be like pushing on a piece of string because of the scale of bad debts and the ageing population.
Between 2000 and 2008, China’s HDPE per capita consumption rose from exactly 2kg to 4.1kg on mainly export-led growth. But then it rose from 4.1kg in 2008 to 5.4kg in 2009 – the biggest annual increase in record as the credit boom got underway.
By 2021, per capita consumption was at 11.8kg. But note that this was down from 12.3kg in 2020. And in 2022 over 2021, demand growth in millions of tonnes was flat as per capita consumption also plateaued at 11.8kg.
2021-2022 represented the weakest demand growth on record, which, I believe, confirms the impact of China’s debt and demographic challenges.
Now let’s imagine China’s HDPE per capita consumption had grown between 1990 and 2022 at the same rates as the developing world.
If you multiply the China per capita numbers by its population and convert from kilograms to millions of tonnes, you get the orange line in the above chart – what actually happened.
Multiply the developing world numbers by China’s population, convert again to millions of tonnes and you get the blue line.
The difference in consumption between the two lines is 119m tonnes! In other words, many of the export-focused HDPE plants that has been built to serve China would probably not have been built.
The next chart compares the growth of per capita HDPE demand in China versus the developed world – again between 1990 and 2022.
Unlike in PP where China has overtaken the developed world, developed world per capita consumption in 2022 was at 14.7kg versus 11.8kg in China. This reflects the more “local for local” nature of HDPE demand – less dependence on exports of manufactured goods, where China still dominates.
But take this into account: The developed world’s average per capita income in 2022 was $48,000 versus just $13,000 in China.
It is important that we closely evaluate whether the downside scenario in the chart below might be the direction of travel.
Our base case sees China’s per capita HDPE demand increasing from 12.4kg in 2023 to 18.4kg in 2040, overtaking last year’s developed world per capital consumption in 2028.
The downside would see positive growth in China’s per capita consumption until 2030 – but lower than the base case – and negative growth from then onwards.
The above chart translates these two outcomes into millions of tonnes. Cumulative demand under the downside scenario would be 97m tonnes lower than our base case.
China’s petrochemicals demand in general has, in my opinion, grown way beyond the pace of its growth in per capita incomes because of what I believe were the one-off historic events detailed above.
Now that these events are over, why shouldn’t demand decline rather than grow?
Conclusion: China Demand Workshops
The last sentence is an open question for everyone. I would be delighted to hear your views.
And I would be delighted, along with my ICIS consulting colleagues, to hold China Demand Workshops to discuss all the themes above – and any more themes you want to bring to the table.
Remodelling your company’s approach to China is as important as building a sustainability strategy.