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As China volume growth is no longer guaranteed, focus on growing value

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By John Richardson on 24-Apr-2024

By John Richardson

THE ABOVE CHART is an updated version of the chart that I first presented at the Asia Petrochemical Industry Conference (APIC) in New Delhi in May 2023. The chart extends the story of China’s extraordinary polymers demand growth from the 1992-2022 period to the 1992-2024 period.

In nine of the biggest synthetic resins, we can see that in terms of per capita consumption, China’s consumption has continued to climb past that of the Developed World despite:

  • China’s average per capita income being $13,156 in 2024, according to the IMF. This compares with $50,683/tonne in the Developed World.

Meanwhile, growth of per capita polymers demand in the much more populous region of the Developing World ex-China has been vastly overshadowed by growth in China:

  • In 1992, per capita polymers consumption in China was around 5kgs versus 4kgs in the Developing World ex-China. In 2024, ICIS estimates that China’s per capita consumption will be 82kgs from a population of 1.4bn versus compared with 18Kg in the Developing World ex-China with a population of 5.2bn.

It seems to be broadly accepted that the three big boosts to China’s polymers demand, detailed in the above chart are largely played out.

The economic liberalisation that followed Deng Xiaoping’s Southern Tour is now of course in the distant past. Also in the past is a youthful population that further powered growth.

China is saddled with high levels of debt left over from its giant economic stimulus package, making reflating the real-estate bubble very difficult – and, anyway, fewer babies is reducing the demand for property.

The big infrastructure spending that was also part of the stimulus package will also be difficult to repeat because many of China’s provinces face major debt burdens – and because many of the bridges, roads and airports etc. that China needs have already been built.

We know, of course, that per capita polymers consumption in any region our country, especially in China, is an imperfect measure of real, local demand because of the export component of consumption.

In China’s case, exports of polymers – either as packaging for finished goods or as components of the goods themselves – are said to account for 15-30% of demand, depending on the polymer. These are only estimates I’ve heard in the market, so they shouldn’t be taken as verified numbers.

Exports have of course been so, so important for China over the last 32 years. As we all know, China’s exports of manufactured goods dominate many supply chains.

And given the collapse of the real estate bubble, an ageing population and an inability to build as many new bridges and roads as in the past, China’s focus is doubling down on exports to shore up its economic growth.

But will this be possible given the growing trade tensions that Paul Hodges highlights in his latest ICIS Chemicals & Economy blog post, where he focuses on electric vehicles? What applies to EVs applies to other industrial sectors.

China may be caught between the rock of weaker domestic demand fundamentals and the hard place of being unable to raise its exports sufficiently to maintain GDP growth at 4-5% per year.

Here, it is worth considering the work of Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management where he specialises in Chinese financial markets.

 Here is a summary of an article he wrote for last December, for the Carnegie Endowment for International Peace (the passage below was first published in my 12 December 2023 blog post):

“If China were to maintain current growth rates [4-5% per year] while keeping its high investment and manufacturing shares of GDP, its share of global investment and manufacturing would expand much faster than its share of global GDP,” he said.

“In that case, it could only do so if the rest of the world agreed to accommodate that growth by reducing its own investment and manufacturing levels to less than half the Chinese level,” wrote Pettis.

He added that even without the geopolitical tensions and policies in the US, India, and the EU to boost domestic investment and manufacturing, this would still be highly unlikely.

But now, as we’ve seen, reshoring in the US is gathering pace as the EU seeks to reduce its trade deficit with China.

“Globally, according to the World Bank, investment represents on average 25% of each country’s GDP. But China’s investment share of GDP has never been below 40% during the past 20 years,” continued Pettis, as he added support to his argument about China’s difficulties in continuing with investment-led growth.

Under a scenario where China continued to focus on investment-led growth, the rest of the world would have to agree to reduce the investment share of its GDP by roughly 1 full percentage point to 19% of GDP, well under half of the Chinese level, Pettis added.

“This would also require China’s debt-to-GDP ratio to rise from just under 300% to at least 450–500 % in a decade,” he wrote.

“Given the huge difficulties the Chinese economy is already facing at current debt levels, and the difficulties Beijing has had in its attempts to reduce the debt burden, it is hard to imagine that the economy could tolerate such a substantial increase in debt,” continued the author.

But there is another way of China achieving long-term GDP growth of 4-5% year and this by raising consumption by 6-7% per year. In the process, investment growth could fall to 1% per annum.

“With consumption growing at roughly 4% a year before the pandemic (and much less since), is 6–7% growth in consumption possible?” asked Pettis.

“No country in history at this stage of the development model has been able to prevent consumption from dropping, let alone cause it to surge, but that doesn’t mean it’s impossible,” he said.

Consumption growth at 6-7% per year would require businesses to pay higher wages and higher taxes. China’s currency might also have to be strengthened in order to reduce China’s dependency on exports (exports being the same as manufacturing investments) as a driver of growth.

But Pettis said that China’s manufacturing competitiveness was based mainly on the very low share of income Chinese workers retained relative to their productivity. Making businesses pay more would seriously undermine China’s manufacturing competitiveness.

If government financing was reformed, however, Pettis said it was possible that local governments could foot the bill.

He warned, though, that transferring such a large share of local governments’ assets would be politically contentious and require “a transformation of a wide range of elite business, financial, and political institutions at the local and regional level”.

China’s economy had been structured for four decades on direct and indirect transfers from households to subsidise manufacturing and investment, he added.

This took the form of easy and cheap credit, weak wage growth, an undervalued currency, excess infrastructure spending, a weak social safety net, and other explicit and implicit transfers, wrote Pettis.

Transforming China’s economy to one to mainly driven by consumption instead of investment appears to be very difficult.

Conclusion: The risk of negative petrochemicals demand growth in China

It is now pretty much accepted that for the reasons described above, China’s annual polymers and petrochemicals demand growth is likely to fall to the low single digits over the next decade and more, down from historic double-digit growth.

But might growth even turn negative? It’s a scenario you need to consider given today’s events.

And if one adds the risk that China becomes pretty much self-sufficient in polyethylene (PE), polypropylene (PP), paraxylene (PX) and mono-ethylene glycol (MEG) by 2030, how should our industry respond?

The answer is to focus on value growth rather than volume growth. Producers can guarantee value growth through focusing on sustainability whereas volume growth is – for the reasons just provide and for other reasons such as climate change – far from guaranteed.

I will discuss some aspects of the sustainability transition in my next post, focusing just on Europe, as of course this is an enormous subject.