China’s Credit Growth Versus the West

By John Richardson

THE BIG gap in credit growth between China and the developed world has been thrown into further relief by recently released data – raising inflationary concerns in the world’s most important economy, while emphasising how rich-world countries remain on government life-support systems.

Broad money supply growth was a huge 30% in China in the ten months to November 2009, according to The Economist.

This compares with a fall in money in supply in the Euro area over the past year with US money supply only increasing by 1.2% in the six months to November last year.

In Australia, lending to the business sector declined by 8.2% in November 2009 year-on-year, said the Reserve Bank of Australia (RBS).

A strong indication of the importance of government life-support is that thanks to low interest rates and Canberra’s tax credits for first-time buyers, credit to the real-estate sector grew by 8.2% in November over the same month in 2008, the RBS added.

This supports the anecdotal stories I keep picking up of credit remaining very tight in the developed world, particularly for small -to medium-sized chemicals companies, end-users and traders. While banking systems might have been rescued from financial collapse, the surviving banks are too busy rebuilding capital to take the risk of increasing lending to businesses – and perhaps also because they fear another bust could be around the corner.

It also seems likely that even where banks are more relaxed about credit, rich-world companies in certain sectors – certainly including chemicals – are maintaining very tight cash-management policies because of this same fear of another bust.

“In this financial environment no-one is holding more than 2-3 weeks inventory cover,” said an Australian plastics processor.

“Who could finance it and take the risk in (such) a volatile market?”

Some converters have, according to one Singapore-based polyolefins trader, been constantly caught out by new supply that hasn’t arrived due to all the project delays –and now most recently production problems in Saudi Arabia.

This forced them to restock when low inventory levels became quickly depleted during several supply-side shocks in 2009 and into the first weeks of this year. This has made an awful lot of money for the traders.

The converters – and also many of their suppliers who also continue to exercise careful cash-management – appear to be aware of the risk of a sudden collapse in crude and other commodity prices.

The danger of a mini-repeat of H2 2008 lingers. Everyone down all the chemicals chains could again be left with big inventory losses if the bull-runs in crude, commodity and equity markets suddenly come to an end at a time when stocks are high.

But as Paul Hodges, chemicals consultant with International eChem has pointed out, rising crude and chemicals prices automatically increase potential losses – no matter how strict your inventory management.

Watch out for much more on all these themes (and a great deal more) throughout this week.

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