China’s stimulus package augurs well for petrochemicals - sources

03 April 2014 06:15 Source:ICIS News

By John Richardson

China offers stimulus packagePERTH (ICIS)--China’s decision to launch a new economic stimulus package will boost chemicals demand as a result of new infrastructure investments in railways and affordable housing for low-income earners, industry sources said on Thursday.

But the clampdown on the availability of credit for speculation in chemicals and other sectors looks set to continue, they added.

“The package is what we had expected a few days ago, following comments that had been made by Li Keqiang’s, China’s Premier about the need to stabilise growth,” said a Hong Kong-based source with a major polyolefins producer.

Speaking before the announcement of the package, the source had warned that the government had to act because there was a danger of 2014 GDP (gross domestic product) growth falling below 6.5%.

“Growth below 6.5% and Beijing would not be able to create enough jobs for the some 7m new graduates every year. If they don’t create enough jobs for the graduates, they will end up with social unrest,” he had said.

Li, during China’s annual National People’s Congress meeting in March, announced that the government wanted to create 10m jobs in 2014, whilst keeping the urban unemployment rate at below 4.6%.

But the deceleration of growth in Q1 as credit availability became tight, and as manufacturing and retail sales growth also slowed down, raised concerns that these targets would not be hit – hence, the stimulus package.

According to media reports, the package includes an 18% increase in the total number of railway lines being built in 2014 compared with last year. The package was announced after the State Council's monthly meeting on Wednesday.

The government will sell $24bn of US of bonds this year to build the railways in the less-developed central and western regions. It also plans a $35bn fund dedicated to rail financing.

The package offers more investment on slum clearance and affordable housing for low-income earners.

And importantly for the chemicals industry, existing tax breaks for small businesses will be extended until the end of 2016. The tax threshold for small businesses will also be raised. Most of the buyers of chemicals in China are small and medium-sized businesses.

Industry sources said that the stimulus measures would help boost chemicals and polymers demand, as a result of the extra spending on railways and housing.

“The package is also all in line with efforts to encourage more growth in western provinces,” said a second source with a polyolefins producer, who is based in Singapore.

“In a city such as Shanghai, growth in low value manufacturing is pretty much tapped out because of high labour and land costs, but this is definitely not the case as you move further inland – which is what plastic processors are doing with government support.

“When you think about it, in the corridor between Shanghai and the city of Chengdu in Sichuan province, there are 300-400m people, who, at the moment, don’t consume as much plastics as in the more developed areas. This is where the biggest manufacturing and consumption-growth opportunities lie.”

There was no mention in the stimulus package of easier credit conditions.

Credit creation, especially via the highly speculative shadow-banking system, is expected to remain lower than last year, making life much harder for speculators in the chemicals and other sectors.

The policy of allowing the Yuan to trade against the US dollar in a wider range - designed to root-out speculation - is also expected to stay in place.

China’s slower growth had contributed to very disappointing post-Lunar New Year petrochemicals demand, as end-users, short of credit, have minimised their raw-material purchases.

The polyolefin industry sources stressed that the new package was carefully targeted at more sustainable areas of economic growth.

“It is clear that the government wants to get rid of overcapacity and so, if you look at the new package, it does not include any help for oversupplied industries that they want to restructure, such as steel and cement,” added the second source.

“Plus, there is no helping for struggling real-estate companies. Beijing wants to take the air out of the property bubble – and it wants to get rid of speculation in general.”

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By John Richardosn