China Economic Optimism

By John Richardson

ECONOMISTS think China’s growth has bottomed out, thanks to unexpectedly strong March bank lending.

They also think that interest rates will stay low for a long time, even if rates cannot be cut because of the inflation problem

New loans in March totalled Rmb1trn ($159bn), more than banking analysts had expected.

This renewed economic stimulus might be behind month-on-month improvements in retail sales and industrial production figures during March.

Further optimism was drawn from comments by Wen Jiabiao, China’s premier. He said there was “a need to “strengthen our back-up plans and make room for contingency policies”, in light of Friday’s announcement that Q1 GDP growth was 8.1 percent – the lowest in nearly three years.

But weak March export growth is an indication that there is, quite obviously, nothing that China can do about the external environment.

Plus, the blog remains concerned that domestic policy responses to weaker growth are limited both by inflation and by the need to press ahead with economic reforms.

Old-style huge stimulus, on the scale of 2009-2010, would place the economic reform process at risk as the speculators would once again benefit, thereby increasing income inequality. Wen, in his comments on the property market, has made it clear that this will not be allowed to happen.

In addition, the government’s determination to further low real estate prices will surely act as a drag on economic growth. Beijing property prices fell by 21 percent in Q1.

A big new economic stimulus would also, crucially, weaken the credentials of the “reformist” faction within China’s senior leadership. This faction faces a tough job in ensuring a smooth leadership transition later this year, as the events surrounding the arrest of Bo Xilai have illustrated.

Despite the optimism of the economists, chemicals and polymer markets were showing no signs of recovery last week. For example:

*Asian polyethylene (PE) prices were assessed $10-20/tonne lower by our colleagues at ICIS pricing. Demand remained weak.

*Polyester demand was also weak as concerns persisted that there would be no peak manufacturing season for textiles this year, which normally runs from April until June.

*Upstream of polyester, mono-ethylene (MEG) inventories in China remained high. This is the result of traders anticipating a strong post-Lunar New Year demand recovery that has yet to happen. One purified terephthalic acid (PTA) end-user was rumoured to have resold his paraxylene (PX) raw material because of the weak demand.

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