China And Tearing Up The Rule Book: A Ten-Point Guide

By John Richardson

WE thought it would be helpful for chemicals to summarise our thoughts on China as chemicals and other companies prepare their strategies for 2015.

See our ten-point guide below, with relevant links to our previous coverage and coverage elsewhere:

1. The Deng Xiaoping growth model went on far for too long, especially post 2009, and has inflicted serious damage on the Chinese economy – bad debts, overcapacity, the environment and income inequality etc.
2. The new leadership have made it crystal clear, ever since they took power, that this model would have to be dismantled.
3. It was clear from late last year, and perhaps earlier, that this was very likely to happen in 2014.
4. No chemicals company should be surprised, therefore, if the “official”, but actually fictitious growth number is missed.
5. Instead they should focus on strategies to deal with how bad it will get before it gets better (and it will get a lot better, we think. Future growth prospects are nothing short of tremendous).
6. How long will this take? At least five years, during which we should prepare for all sorts of disruptions to the old way that the economy – and so chemicals markets – behave.
7. Good guides to the extent of economic strength will continue to be loan growth, electricity consumption, rail freight movements – and also chemical industry operating rates.
8. The more that loan growth, and the rest of these measures, revert back to previous levels before rebalancing has been completed, the more this is bad news in the longer term; it means the government has listened to all the clamour out there.
9. They won’t listen because they know they would make the eventual rebalancing much harder by adding to bad debt and overcapacity problems etc.
10. Crucially, they don’t have to listen, from a popularity and so political survival standpoint because a.) blue collar labour markets are incredibly tight, with graduate unemployment now the issue. And you won’t create enough jobs for graduates by pursuing the old growth model, and b.) the public want these changes – e.g.  discontent over income inequality and the environment.