BLOG: China’s PP demand in 2023 heading for a 1% decline on risk of just 2.5% GDP growth

SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson.

Twelve years ago, fellow ICIS blogger Paul Hodges and I first warned about China’s debt and demographic risks.

We weren’t, of course, able to say when China’s debt and demographic problems would come to a head. But since 2011, we’ve kept our readers regularly informed of the key milestones on the road to where we’ve arrived today – permanently much lower GDP and chemicals and polymers growth.

“A growth model dependent on stimulus and debt was always going to be unsustainable and now it has run out of steam,” Ruchir Sharma, chair of Rockefeller International, wrote in the Financial Times earlier this week.

He added that China’s GDP growth potential was only half of its 5% target for 2023 due to a shrinking population.

For those who haven’t followed our work over the last 12 years, see today’s post.

Using polypropylene (PP) as an example, I today discuss how China’s extraordinary growth in demand since 1999 was the result of three historic events that are now exactly that – history.

China benefited from economic liberalisation, a youthful population and the world’s biggest-ever economic stimulus package.

China’s births per woman fell below the population replacement rate in 2001 and have remained there ever since. The growth in family formations has been declining since 2013.

The decline in the growth of new families is affecting housing demand, as is the end of the old government “put option” for real estate investments.

Beijing had guaranteed that property prices would never fall, making investments in multiple properties a gamble worth taking. But since 2021, real estate prices have fallen, badly denting confidence in a sector that’s worth some 30% of China’s GDP.

There must surely be pressure to save more to cover rising pension and healthcare costs resulting from an ageing population during a period when, as Sharma also wrote in the FT, excess savings in China were equal to only 3% of GDP compared to 10% in the US.

The tried and tested approach to boosting GDP was investment on infrastructure. But now local governments, which are responsible for 70% of total government spending, are struggling to raise money for new bridges and roads because local government financing depends on rising land prices. Land prices are falling.

This explains why China’s PP demand growth could decline by 1% this year following 2% growth in 2022.

And the above explains why have likely entered a period of pretty much permanent low single digit or even negative growth in China’s chemicals and polymers demand.

The chemicals companies that started planning for this outcome 12 years ago will be in extremely strong positions.

Editor’s note: This blog post is an opinion piece. The views expressed are those of the author, and do not necessarily represent those of ICIS.