AT THE END of last year, Beijing softened its stance on monetary policy, replacing the word “prudent” with “moderately loose” for the first time since the 2009 credit explosion. This shift raised hopes that China was preparing to take serious action to revive economic growth.
At the time, I said that this wouldn’t make much difference because of China’s long-term internal structural challenges and the jeopardy facing its exports because of global, notjust including the US, trade tensions.
Three months later and nothing has changed, despite flesh being put on the bones of “moderately loose” through announcements at this month’s National People’s Congress meeting and on 16 March. There then followed 16 March announcements involving a 30-point action plan that analysts, quoted by the South China Morning Post, said was the most comprehensive package for boosting consumer spending in four decades.
Before I delve into why I believe the best we can hope for is a moderate short-term rebound in growth as a result of the action plan, here are some the key measures:
- A budget deficit increase to 4% of GDP—the highest level in 31 years
- A 13% increase in local government borrowing quotas.
- A 30% increase in long-term treasury bond issuance. This will be used to double the scale compared with last year of the consumer-trade in programme. This will allow more people to take advantage of cash incentives to swap new for old consumer goods. Items covered include microwaves, water purifiers, dishwashers, rice cookers and digital products (cell phones, tablets, smartwatches, fitness bracelets) – and ICE and EV automobiles.
- A RMB 500 billion ($70 billion) injection into state-owned banks to strengthen financial stability.
- Further interest rate cuts to support borrowing and investment.
- Income Enhancement: The government aims to raise both urban and rural incomes, including measures to boost farmers’ earnings through housing reforms.
- Subsides for childcare costs.
- Wage Increases: Efforts are underway to boost wages, thereby enhancing consumers’ purchasing power and stimulating economic activity.
- Support for Emerging Sectors: The plan includes support for emerging industries such as artificial intelligence (AI).
- Social Benefits Expansion: There is a focus on aligning consumption with broader social goals, including elderly care and work-life balance, to improve overall quality of life.
Consumer Spending: The Same Old Problem
These measures still don’t address the deep structural issues behind China’s low consumption levels.
Falling house prices have wiped out an estimated 25 trillion yuan ($3.4 trillion) in household wealth—equivalent to one-third of annual household income. Youth unemployment remains above 10%, despite government efforts to improve job prospects.
The Consumer Price Index, a benchmark for measuring inflation, fell by 0.7% in February from the previous year. The producer price index, which tracks factory gate prices, fell by 2.2% year-on-year, marking the 29th consecutive month of decline.
Even without these headwinds, Michael Pettis, an expert on China’s economy at Peking University, argues that no country at this stage of development has been able to sustain the kind of consumption growth that China now needs.
In a December 2023 report for the Carnegie Endowment for International Peace, Pettis said that China had to increase consumption growth to at least 6-7% per year to maintain GDP growth at 4-5%.
In 2024, China’s domestic consumption grew by around 5%. This was sharply down from an annual average of 8% in 1996-2022, most of which fell within the Chemicals Supercycle years.
Pettis argued that achieve the required 6-7% consumption growth, China would need higher wages which would erode its manufacturing competitiveness, higher taxes on businesses which could discourage investment and a stronger currency which would reduce export-driven growth.
He contended that China’s economic model was built on wage suppression, making this transition extremely difficult.
Demographics: The Biggest Long-Term Challenge
Even if China manages to stabilise its economy in the short term, it faces a much bigger challenge in the long run—its rapidly shrinking population.
“The United Nations expects China’s population to fall to 1.26 billion in 2050 and 767 million by 2100. These are down 53 million and 134 million, respectively, from earlier UN projections,” wrote Kevin Swift, the ICIS economist, in this 30 August 2024 blog post.
“Recent analyses by demographers (Shanghai Academy of Sciences, Victoria University of Australia, etc) question the demographic assumptions behind these projections and expect China’s population could fall to as low as 1.22 billion in 2050 and 525 million in 2100.”
Kevin added that Demographer Yi Fuxian at the University of Wisconsin has questioned assumptions about current Chinese population and the likely path forward. He examined China’s demographic data and found clear and frequent discrepancies, such as the inconsistencies between reported births and the number of childhood vaccines administered and with primary school enrolment.
“These should parallel each other, and they do not. Analysts see that there are strong incentives for local governments to inflate data. Reflecting Occam’s Razor, the simplest explanation is that the births never happened,” continued Kevin
“Yi posits that China population in 2020 was 1.29 billion, not 1.42 billion, an undercount of over 130 million. The situation is most acute in northeast China where the economic engine has stalled. Yi speculated that with low fertility rates – 0.8 versus replacement level of 2.1 – China’s population will fall to 1.10 billion in 2050 and 390 million in 2100. Note that he has another even more pessimistic projection.”
“We have seen other estimates that China’s population could be 250 million less than what is currently reported. China accounts for roughly 40% of global plastic resins demand and as such, alternative futures concerning population and other factors significantly influence global plastic resins demand dynamics.”
This means China will have fewer workers and more retirees, making it even harder to sustain growth through consumer spending. Japan’s experience suggests that even with high levels of industrial automation, an ageing population leads to slower growth and deflationary pressure.
Trade Protectionism: A Growing Threat to China’s Export Model
“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,” wrote Pettis in the same Carnegie Endowment for International Peace article.
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.
But this accommodation seems unlikely to happen as other countries, including not just the US, push back against China’s growing dominance of exports.
While China’s 12-month trade balance with the US had risen by $49 billion since 2019, it was $72 billion with the European Union, $74 billion with Japan and Asia’s newly industrialised economies, and about $240 billion with the rest of the world, according to data compiled by Brad Setser of the Council on Foreign Relations.
Logan Wright, head of China research at the Rhodium Group said China accounted for just 13% of the world’s consumption but 28% of its investment. That investment only makes sense if China takes market share away from other countries, rendering their own manufacturing investment unviable, he said.
“Even as China targets advanced products such as electric vehicles and semiconductors, it refuses to surrender market share in lower-value products,” wrote the Wall Street Journal in a 29 August article.
The Financial Times, in a 6 December 2024 article, said the following:
- Most scholars agree that China’s rapid rise in manufacturing has no parallel since the US overtook Britain early in the 20th century.
- It is now the world’s “sole manufacturing superpower”, according to Richard Baldwin, professor of international economics at IMD Business School in Lausanne, who estimated in January that China’s share of global gross production had risen from 5 per cent in 1995 to 35 per cent by 2020 — three times that of the US and more than the next nine countries combined.
- China’s share of global manufactured exports was 20 per cent in 2020, up from 3 per cent in 1995 and dwarfing the US, Japan and Germany. Out of a total of about 5,000 products, China held a dominant position in exports for almost 600 in 2019, at least six times greater than for the US or Japan and more than double that of the EU, a paper by economists Sébastien Jean, Ariell Reshef, Gianluca Santoni and Vincent Vicard last year showed.
- Since then, China’s exports have roared further ahead and are expected to rise by 12 per cent in volume terms in 2024, according to Goldman Sachs.
As I discussed in my 2 December 2024 post, something may have to give in 2025. Because of the increased pressure from Chinese direct and indirect chemicals exports (as components of finished goods or as packaging for finished goods) since the Evergrande Turning Point, we could see an increase in trade protection measures against China.
AI: A Two-Speed Economy?
One area where China is still growing rapidly is AI. Companies like DeepSeek have driven a tech stock rally, and Beijing has announced a state-backed investment fund to accelerate AI development.
But who will benefit from China’s AI boom?
The stock market is rallying, but that does not mean wider economic benefits are being felt by ordinary citizens. In China, around 220 million people invest in stocks, representing less than 20% of the adult population, while in the US, over 60% of adults, or about 162 million people, own stocks.
AI investment is heavily concentrated in state-backed firms, reinforcing China’s state capitalist model rather than fostering broad-based economic growth. And AI-driven automation could eliminate millions of jobs, further depressing consumer demand.
This Drum Tower podcast, from The Economist, includes an interview with a Chinese citizen where he expressed concerns about job losses resulting from AI. As China forges ahead with investments in AI, to what extent will such views be representative of wider concerns. How might these concerns effect consumer sentiment?
What the spreads and margins data continue to tell us
Whoopee! In January-February 2025 average China CFR PE price spreads over CFR Japan naphtha costs were at $294/tonne. But since the NPC meeting (from January until 14 March) they had “soared” to $300/tonne.
Forgive my sarcasm. This stems from frustration at some analysis that looks at short-term market movements in connection with a misreading of China’s long-term economic challenge They then add two and two together to make five.
We have now had four consecutive years of spreads that have averaged the lowest of any other four-year period since the ICIS price assessments began in 1993. In 2021, the year before the Evergrande Turning point took effect, spreads averaged $5536/tonne. In 2022, they fell by more than $200/tonne and have remained at pretty much the same level since then.
Also note the table at the bottom of the chart where I look at average spreads for three major grades between 1993-2021, during the Chemicals Supercycle, and spreads since then – from January 2022 until March this year. You can also see average overall spreads for these two time periods.
We learn from this that in order for spreads to return to their Chemicals Supercycle levels, the following would have to happen: HDPE spreads would have to rise by 131%, LDPE spreads (a much smaller market) by 41% and LLDPE spreads by 90%. Average spreads across the three grades would thus have to rebound by 77%.
This is a vast amount of ground that needs to be made up, reflecting, as mentioned, China’s deep-seated economic challenges and this:
- Before the 2021 Evergrande Turning Point, petrochemicals and polymers producers in general (the trends in PE spreads are reflected across many other products) had assumed that China’s consumption growth would average 6-8% per year over the long-term. Now, 1-4% looks much more likely. Investments, which have become overinvestments, were premised on 6-8% with plants sanctioned on this basis coming onstream now and over the next 2-3 year. Given China’s dominance of global petrochemicals demand, this largely explains today’s vast oversupply.
Spreads are of course not margins. So, let’s next look at the latest ICIS variable cost naphtha-based margins assessments for PE in Northeast Asia. In this case, I have weighted the average margins across the three grades to reflect that LDPE, where margins are much stronger, only accounts for a small percentage of Northeast Asian production.
Margins during the Chemicals Supercycle from January 2014 until December 2021 averaged a positive $462/tonne. From 7 January 2022 until 14 March 2025, they averaged only $7/tonne with many weeks of negative margins.
Conclusion: Can This Stimulus Turn the Economy Around?
Short-term, the market rally may continue. Tech stocks and chemicals prices may see temporary gains. Some sectors could benefit from the higher deficit and lower interest rates.
But long-term, nothing has fundamentally changed.
✔️ Weak household spending will continue to hold back growth.
✔️ The real estate sector is still broken.
✔️ Demographic decline is accelerating.
✔️ Trade protectionism threatens China’s ability to rely on exports.
Without deep structural reforms—including higher wages, a stronger safety net, and a shift away from investment-led growth—China’s economy is unlikely to achieve a sustained recovery.
2025 may bring more stimulus—but not the economic transformation China really needs.
Of course, you might disagree. This blog is all about debate. The proof of the pudding will be the extent to which ICIS spread and margins data for PE and other products recover over the next 12-18 months.