China’s slowdown accelerates as IOUs substitute for credit

Economic growth

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D'turn 5Apr14The end of Q1 seems a good moment to look back at the position of the benchmark markets in the IeC Downturn Monitor.  Compared to previous quarters, there has been surprisingly little movement:

  • Benzene has remained the most volatile, with supply outages temporarily pushing up prices (green line)
  • HDPE has trended higher, but these are mainly nominal prices as they are well above global levels (yellow)
  • The S&P 500 Index has been modestly positive (purple), as has naphtha (black)
  • The US$ has weakened slightly versus the Japanese yen, but now seems to be rising again (brown)
  • Brent crude oil has slipped over the past month (blue)
  • China’s PTA market has seen the biggest move, down 9% (red)

This seems to suggest markets are in a waiting period, unsure whether to push forward in the hope of better future demand.  This is clearly bad news, as Q1 is the seasonally strongest quarter this year, with Easter delayed until April.  So this indecision on the part of markets is a worrying sign.

Equally worrying is the continued downturn in China.  Its PTA market was easily the worst performer of 2013, with prices falling 16% from $1181/t to $997/t.  And the fall has accelerated in Q1, with prices down a further 9%, despite a minor rally in the past 2 weeks.

This is further evidence that the new leadership’s policies are starting to have a major impact on demand.  They appear to be clamping down hard on the shadow banking system, and credit is becoming increasingly hard to get.

The Wall Street Journal thus reports that many companies are now paying by IOU – a signed and company stamped ‘promise to pay’ in the future.  It goes on to suggest that these IOUs now account for over 16% of total money supply, and that their use is continuing to rise.

An even clearer sign is the downturn in the real estate market.  This has been a money-making machine for everyone concerned since urban property markets were liberalised in 1998.  But with prices now in the stratosphere, it seems that a major downturn has begun.  This has potentially enormous implications for Asian and global markets.

One simple statistic sums up the scale of the problem.  Dealogic report that Chinese property developers have accounted for 40% of all non-financial dollar bonds sold by companies across Asia (excluding Japan) so far in 2014.

If you would like to explore the subject in more depth, the blog has just written a detailed analysis on US investment site Seeking Alpha, under the title Investment In Chinese Real Estate No Longer Looks ‘Safe As Houses’.  Free to download, it suggests that the impact of the downturn will not only hit financial markets.

Critically important for the chemicals industry is that a real estate downturn will also explode the myth of China as a vast middle class market.  Consumer spending has been buoyed by the wealth effect, not by incomes, as the blog highlighted in February.

Benchmark product price movements since January 2014 are below, with ICIS pricing comments:
PTA China, down 9%. “Supply growth continues to outpace demand growth, and the majority of market participants held a bearish market sentiment”
Brent crude oil, down 3%
US$: yen, down 2%
Naphtha Europe, up 1%. “Naphtha demand among the European petrochemicals sector has yet to pick up, with propane remaining the most popular alternative feedstock for cracking”
S&P 500 stock market index, up 2%
HDPE US export, up 6%. “Current prices are much too high to generate any interest from the global market, with even the Latin American market being supplied by lower-priced Asian material”
Benzene, Europe, up 8%. “Current regional tightness stems from a swathe of production problems in eastern and southern Europe and some talk of limited run rates among producers in western Europe”

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