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China, demographics, debt and polymers demand

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By John Richardson on 13-Jun-2023

By John Richardson

THE ABOVE CHART underlines just how much the global chemicals industry has come to depend on growth in China and highlights the three historic events that had powered the country’s extraordinary rise in consumption.

The chart follows on from my earlier posts where I showed the same patterns in polypropylene (PP) and high-density polyethylene (HDPE).

Here, I pull together per capita consumption for nine major polymers: HDPE, low-density PE (LDPE), linear-low density PE (LLDPE), PP, polyvinyl chloride (PVC), general-purpose polystyrene (GPPS), high-impact PS (HIPS), expandable PS (EPS) and acrylonitrile butadiene styrene (ABS).

In 1992, per capita consumption for all these polymers was around 5 kilogrammes (Kgs) in China and 4Kgs in the rest of the developing world. The developed world’s per capita consumption was at 59Kgs.

But then came the three historic events:

  1. Deng Xiaoping’s tour of China’s southern provinces in 1992 which led to the opening-up of the economy to private investment. Private investment poured into export-focused manufacturing. This was supported by government spending on infrastructure and lending from the state-owned banks on favourable terms.
  2. Export-focused economic growth then really, really took off through China’s accession to the World Trade Organisation in 2001. This removed the tariffs and quotas that had restricted China’s exports to the West. This enabled China to take maximum advantage of what was then a youthful population, and therefore its low labour costs. Local chemicals and polymers demand was turbocharged.
  3. In early 2009, China launched the world’s biggest-ever economic stimulus package in an effort to make the economy more consumption and less manufacturing-driven. Chemicals demand was further turbocharged.

The next chart returns to 1992 and shows how per capita consumption in the three mega-regions related to demand in millions of tonnes and populations.

China’s 1.2bn people generated 6m tonnes of demand with the developing world ex-China’s population of 3.2bn people driving 14m tonnes of consumption. In the developed world, a population of 1bn consumed 58m tonnes.

Roll the clock forward to last year and this was the picture.

China’s consumption had risen to 107m tonnes from a population of 1.4bn; the developing world ex-China’s consumption was at 84m tonnes from a population of 5.3bn; and the developed world consumed 82m from 1.1bn people.

Examine the green trend line in the first chart again, representing China’s per capita consumption. It shows very strong growth between 1992 and 2008 – but even stronger growth from 2009 onwards. As you can see, the rate of increase accelerated.

But by 2009, China’s population was already ageing. China’s births per woman first fell below the population replacement rate of 2.1 in 2001 and has remained there in most years since then, according to the World Bank. In 2022, as the chart belows tells us, births per woman were just 1.2, which is more typical of a developed economy.

What caused this resiliently strong consumption growth in the post-2009 period? Exports?

Yes, in revenue terms, but not as percentages of GDP as the chart below from the World Bank illustrates. China’s exports over GDP peaked in the early 2000s and have been declining for most of the period since then.

China’s saturated housing market  

Thanks to Noah Smith, the economist, journalist and blogger for this 2 June blog post. The post identifies the “smoking gun” behind China’s polymers consumption growth since 2009, which is of course real estate.

Regular readers of my work should be aware that I’ve been highlighting the debt and demographic risks associated with China’s growth story since 2011.

I accurately called the economic slowdown that began in August 2021 because of the end of the property bubble. And my warning in January this year of a weak post zero-COVID economic recovery has been correct.

Smith uses the chart below in his blog – from the 2020 Kenneth S Rogoff and Yuanchen Yan study of China’s housing market – to show the extent to which China’s economy has become reliant on real estate.

No country other than Spain has come close to being as reliant on real estate for its GDP growth as China.

But whereas Spain’s dependence on GDP peaked and then rapidly declined from 2006 onwards, China’s percentage shares of GDP linked to property remained close to 30% up until the 2017 – the end-year of the above chart.

Since 2017, China’s economy has remained very reliant on real estate.  

China invested roughly 20-30% of GDP annually in the property and infrastructure sectors of the economy. Total investment was roughly 40 to 45% of GDP, and property and infrastructure each accounted for roughly one-third of total investment, said Peking University professor Michael Pettis in this August 2022 Carnegie Endowment for International Peace article.

Because of overbuilding prompted by the speculative real-estate frenzy, China had reached developed-country levels of living space per person in 2017, said the Smith in the same blog post. And, of course, demand for housing is falling as there are fewer young people around.

The chart below is from the same Rogoff and Yan study.

Further, as Smith points out – using another chart from Rogoff and Yan – under-developed local stock and bond markets had left savers heavily dependent on real estate as an asset class.

Still not convinced that China’s boom in polymers demand is not down to the old and empty cliché – the rise of the country’s middle classes?

The only problem with the old cliché – used in so many conference presentations, analyst presentations and research papers – is this: The data.

The above chart follows the same pattern as the charts I provided for PP and HDPE. It shows per capita consumption for the nine synthetic resins in the same four pivotal years versus per capita incomes.

In 2022, developed world demand was 82m tonnes from average per capita income of $48,000 and a population of 1.1bn. China’s demand from 1.4bn people was 107m tonnes, but its per capita income was only an average of $13,000. This would be well below the poverty level in the West.

What goes up might have to come down

“Although we tend to read mostly about Chinese manufacturing and exports, the real estate sector was at the very core of the country’s development model during the decades when Chinese growth wowed the world,” wrote Smith in the same post.

Hear, hear.

As he also highlighted, and I’ve discussed before, China needed to build a new economic growth model that was much less real-estate reliant, including finding a way of alternative funding for local governments that had relied on rising land prices. Provincial governments are responsible for some 70% of total government spending.

Can such a model be built? Nobody knows.

“After years of heavy borrowing, many in China are focused on paying down their debts this year—and the result could be weaker growth for a long time to come,” wrote the Wall Street Journal in this 11 June article.

“Now China finds itself facing a protracted period of what economists call deleveraging—the painful process in which borrowers divert income to pay down debts instead of spending and investing,” the newspaper added.

China’s long-term polymers demand growth forecasts have come down to accommodate these realities, from 6-7% as recently as three years ago to 1-3%.

But look again at the ICIS Supply & Demand data in today’s post along with the economic context. Why shouldn’t polymers demand growth now turn negative?

Growth went up by too much during the boom years. What goes up often comes down.