Many commentators were shocked by China’s weak trade data on Monday – with imports falling 12.5% versus July 2015, and January – July imports down 10.5%. But they were no surprise to anyone focused on developments in the chemical industry, which has once again confirmed its status as the most reliable leading indicator for the economy.
The chart shows net trade data in H1 2009 – 2016 for PVC – one of the most traded chemical products, used in construction for doors, windows, cables and other key areas. China’s own production has almost doubled over the period to 8.3 million tonnes, whilst its demand has only increased by around a third. As a result:
□ China has swung from being the world’s largest importer in 2009 to one of the leading exporters in 2016
□ NE Asia has been the main loser, with its exports to China falling by two-thirds to 187kt: NAFTA exports have fallen by more than a third to 130kt
□ China’s own exports have also started to surge, up from just 30kt in 2009 to 575kt this year
The data also confirms that China is now well on the way to reaching its ambitious targets for self-sufficiency (as set out in the current 5-Year Plan to 2020). For ethylene (the raw material for PVC, alongside chlorine) the aim is to reach 62% by 2020, compared to 49% in 2014.
Unfortunately, however, many commentators still remain in denial about these developments. Their shocked reactions to the trade data confirm their continuing failure to appreciate that China’s economic policies have never been based on Western concepts of cost-curves and corporate profitability.
As the chart above suggests, China is instead focused on avoiding social unrest, and preserving the Communist Party’s hold on power. It follows Deng Xiaoping’s policy, which aimed to keep living standards rising in order to maintain the Party’s role in government.
This policy makes perfect sense for China, as it seeks to avoid a return to the chaos of Mao’s ‘Cultural Revolution’:
□ It means that maintaining employment is a key objective, along with steady growth in incomes
□ Western concepts of focusing on corporate profitability and shareholder value are much less important
□ Productivity improvement is therefore critical to economic progress. New data shows, for example, that factory workers now have an average of 10 years schooling, compared to 8 years just a decade ago, helping to enable productivity to double over the same period
The other key change in recent years has been President Xi’s decision to move away from the stimulus policies followed between 2009 – 2013, in response to the financial crisis. China had provided around half of the total stimulus during this period. Inevitably, therefore, this triggered the Great Unwinding of global stimulus.
Unfortunately, as shown by this week’s reaction to China’s trade data, consensus thinking still fails to recognise the impact of these New Normal developments. But this failure also creates a major opportunity for those individuals, companies and investors who prefer to trust their own judgement on the outlook for China and the global economy .