Anxiety Builds Over China Growth

Will growth spread quickly enough?

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By John Richardson

Global chemicals production had returned to 2006 levels by October of this year, according to this slide ACCProduction09Versus06.ppt from the American Chemistry Council (ACC).

Worldwide chemicals growth rates might not return to 2008 levels until 2012, Jurgen Hambrecht, CEO of BASF, warned on the release of the company’s Q3 results.

The overall picture is being made to look bad by structural overcapacities and deep-seated economic problems in Europe and the US.

Booming emerging markets, particularly China, matter more than ever to Western chemicals producers.

So the big question being asked as we approach the New Year is whether China’s almost hard-to-believe growth in chemicals demand in 2009 – reflected in a big surge in imports – can be maintained.

High-density polyethylene (HPDPE imports rose by 73% with low-density (LDPE) imports up by 85% in January-September, according to Shanghai-based commodities information service CBI.

Total PE imports in 2008 were 4.5m tonnes, but had China imported 3.75m tonnes by the end of H1 of this year alone, added CBI.

“China will enter a long period of slower and more volatile growth in probably 2-3 years when fiscal stimulus runs out”, warned Michael Pettis, former Wall Street trader and professor at Peking University’s Guanghua School of Management

This would force the country to make adjustments it had so far tried to avoid, added Pettis on his blog, China Financial Markets.

These adjustments, accordinng to a Shanghai-based expatriate, involve a major shift away from export and industrial investment-led growth to a more broad-based rise in consumer spending.

“What’s holding back consumption is the lack of a decent welfare system, forcing people to maintain high savings levels to cover education and health costs,” he added.

A lot of the wealth generated by China’s growth was concentrated in the hands of the state-owned enterprises, Pettis added.

Higher dividend payments to company shareholders (sometimes no dividends are paid at all) and broader financial sector liberalisation were needed, said the professor.

China’s critics argue that the response to the global economic crisis has so far been mainly more of the same: Providing a huge increase in funding for a big build-up industrial capacity and infrastructure.

The infrastructure, including 120,000 kilometres in high-speed rail lines, has the potential to accelerate urbanisation.

“There is little doubt that China’s hope for prosperity in the long run lies in transferring the majority of farmers into higher-productivity jobs in the cities,” wrote the well-respected Beijing-based economic research publication, the China Economic Quarterly, in an article earlier this year

“But simply moving a farmer into a city does not make him an economically significant consumer.”

Chinese households with annual expenditure of below $5,000 – i.e. about 90% of the population – spent most of their money on housing, food and clothing, the CEQ added.

Those with income levels high enough to be able to spend more than $5,000 per year, the so-called “consumption households”, mainly live in three regions – the Yangtze River Delta, The Pearl River Delta and the Beijing-Tianjin corridor, the article continued.

Each of these regions surrounds megacities, whereas other “consumption households” are more thinly scattered across the rest of China.

“Although there are a growing number of these households dispersed across the rest of the country, they are not concentrated enough to justify a sales and distribution presence for many products and services,” the research publication added.

“Research my MasterCard suggests that multinational consumer-goods companies require a concentration of at least 20,000 consumption households to establish a viable market.”

Distribution costs remain a barrier for setting up in the hinterland, despite big improvements in transportation over the last decade, said the CEQ.

“Logistics costs account for 20% of average goods prices in China compared to 10% in the US, according to the US Department of Commerce,” the CEQ added.

Plenty of reasons, perhaps, for chemicals companies to be a little cautious over their forecasted growth rates in China over the next few years.

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