The Two Different Chinas: Outcome Remains Uncertain

China, Company Strategy, Economics, Sustainability, Technology


By John Richardson

THIS year’s “sugar high” was always going to be that exactly that – if you look at the right data. The staggering increase in China’s total credit   in Q1 2016 over the first quarter of last year  –by as much as 58% – was only ever going to deliver a mild, and unsustainable, uptick in GDP growth.

And even this mild uptick is now under threat. The latest Caixin/Markit Manufacturing Purchasing Managers’ index – for April – declined. This was the 14th consecutive month in which this particular index has shrunk.

What data was I talking about at the beginning of this post? As an important reminder, it is this:

  • Chinese government researchers estimated that in 2007, $1 of credit added 83 cents to GDP growth.
  • By 2013, $1 was only adding 17 cents, and it was thought that in 2014 each dollar of new borrowing would only add 10 cents to growth.

It is therefore reasonable to assume that if you today added more oversupply in real estate and in steel and cement etc. today, this would reduce GDP growth.

And yet on the subject of cement, even more new factories are being built, as I discussed last month.

Real estate prices are also on the rise again, despite already quite alarming affordability levels in some of China’s biggest cities.

When I was in Shanghai last month, I was asked by a Chinese friend what the multiple of an average salary was over the cost of an average home in Perth, Australia, where I live. Perth is an expensive real estate market, relative to several other parts of Australia.

“Rule of thumb, around seven times,” was my reply.

She did some quick calculations on her smartphone and showed me the equivalent for Shanghai – 33. Yes, this is not a misprint – 33.

Here is a question for you: How on earth can this be socially and politically – and so, of course, economically – sustainable?

Against what you might perceive as excessive negativity you can present a great deal of other types of data, on, say, the growth in internet sales, which, I agree, offers huge potential. As The Economist wrote last week:

In 2010 online shopping accounted for only 3% of total private consumption, but it now makes up 15%.

The same article talks about continued strong growth in overall retail sales, and concludes with this perhaps rather bold claim:

China’s consumer economy will expand over the next five years by some $2.3 trillion. Despite the deficiencies in economic forecasts, that incremental gain would be bigger than the entire consumer economy in Britain or Germany today.

But if you told this story to Zhang Yuzeng, a freelance electrician, carpenter and plumber, who lives in the city of Shenyang in northeast China, he would surely stare at you in disbelief.

Mr Zhang, as the New York Times reports, is today lucky to earn $30 a day, if he can find any work at all, compared with the Old Normal rate of $50 a day or more.

He is struggling get by because Shenyang is heavily dependent for its growth on real estate and steel.

As the “law of diminishing returns” that I just detailed above indicates, no amount of new credit can make enough of a difference to Shenyang because of the quite breath-taking levels of oversupply in real estate, steel and other “old industries”.

Plus, economic reforms were continuing at apace with steel mills etc. being closed down – before this latest renewed and largely wasted surge in credit.

What do these contrasting impressions of China tell us? It is these four things:

  1. That the Q1 2016 surge in credit was an attempt to return to the “Old Normal”, but it could never possibly have worked. This was always mathematically impossible.
  2. This new rise in lending represents another example of just how long, and difficult, the reform process is going to be.
  3. But the reformers, led by the determined and visionary Xi Jinping, remain committed.
  4. Nobody should pretend to know – and that’s the honest answer – how long it will take the new sources of growth to replace the permanently lost, old sources of growth. Will the transition even work successfully at all?

This just scratches the surface of the multiple layers of complexity surrounding China’s attempts to build a New Normal.

But the above serves as reminder that you need multiple scenarios.

Only by building, and constantly revisiting, these multiple scenarios will you be able to make a success of doing business in China in the future.


Go Where The Money Is: Sanitation And Water


By John Richardson HOW do you define global progress? Is it the number of extra ...

Learn more

US Water Crisis: Be Part Of The Solution, Not The Problem


By John Richardson IT SHOULD be pretty obvious to all of us that there is a huge...

Learn more
More posts
China ethylene glycols and paraxylene: new 2021-2031 import scenarios as self-sufficiency threat increases

By John Richardson WHEN I WAS a boy in 1970s Britain, a new pair of shoes was an expensive propositi...

Iran may gain 48% of total China HDPE imports, 85% of LDPE imports by 2025 because of new deal

By John Richardson IRAN and China earlier this month signed a wide-ranging economic and security agr...

China early data points to 42% fall in 2021 HDPE imports

By John Richardson China’s high-density polyethylene (HDPE) imports in 2021 look as if they might ...

China early data point to PP imports collapsing by 78% this year with SM 67% lower

By John Richardson CHINA’S apparent demand for polyethylene, polypropylene (PP), styrene monomer (...

China’s environmental policies: scenarios essential for impact on local and global petrochemicals

By John Richardson WE MUST develop very nuanced, broad ranging and constantly updated scenarios abou...

Worsening semiconductor shortages highlight need for new approach to demand

By John Richardson PETROCHEMICAL companies need to set up demand teams that focus on all the new sho...

China petrochemicals and the lack of logical basis for the 2021 boom theory

    By John Richardson IF YOU DO a Google search, you will find a lot of articles on China...

Seeing through the lack of data: new scenarios for global LLDPE demand in 2021-2025

By John Richardson WE DON’T HAVE THE DATA sets nor the data tools to work out what is going to hap...


Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more


Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more