Note to my readers: I had planned to write about China’s polyethylene (PE) market today, but have decided that it is, first of all, important to further explain the reasons why Asian chemicals markets are in such distress at the moment. (I will, instead, focus on PE tomorrow).
Oil prices are tumbling because real price discovery is returning to crude markets (more on this subject later this week. This subject is, of course, much-broader than just what has happened in China).
And as real price discovery returns to crude, it is becoming increasingly obvious that in China, price discovery had been obscured by excessive and harmful growth in credit.
Now that the credit bubble is over, we are beginning to discover what the real, sustainable demand growth is in China is for oil, chemicals, and of course the things made from chemicals – finished goods. Hence, the “state of panic” in chemicals markets. Chemicals companies must be confused, and must, surely, feel let down by their methods of forecasting demand.
There now follows pin-and-out-keep guide to credit and its role in shaping growth in China this year – and the prospects for 2015. If you ignored the importance of lending growth in 2014, you at least have the chance to put this right next year.
By John Richardson
IT was obvious as early as last December that credit creation would set the strength of China’s economic growth this year.
And it was equally clear from last December, and throughout the New Year, that China’s government was determined to reduce growth in lending. It meant what it said. I am still scratching my head about why many of my contacts in the chemicals industry thought otherwise.
The government’s direction was underlined, in thick red ink, in February when the Chinese Academy of Social Sciences, a government-run research body, announced the following: Total credit creation (official and shadow lending together) would have to increase on a year-on-year basis by 12% if the economy was going to grow at the same rate in 2014 as it did in 2013.
It warned that such an increased in lending was completely untenable because of China’s bad-debts crisis. This crisis is now, all too belatedly, is being broadly recognised outside China as potentially systemic crisis – and not something that will not easily go away.
Nobody, absolutely nobody, should therefore be surprised by the charts at the top of this blog post, from fellow blogger Paul Hodges. They show that:
- Official bank lending was up just 6% in January-October 2014 versus the same period last year,” he said.
- But in the case of shadow banking, it fell by 30% in January-October, with most of the decline occurring over the last few months.
Wow! Think about it. Total credit creation seems likely to be in minus territory this year compared with last year – and yet the Chinese Academy of Social Sciences said it would have to increase by 12% if this year’s real economic growth was to be the same as in 2013.
The emphasis I placed on real growth is for this reason: You cannot believe what the government says about GDP growth. Even Li Keqiang has admitted that this is the case.
And so it is absolutely essential that next year chemicals companies draw up their own versions of the “Li Keqiang index” to measure what is really happening China. This index measures credit growth, electricity consumption and rail-freight movements
Chemicals company CEOs must also, if they want to retain their credibility, stop talking to the press and investors in a one-dimensional way about the “rise of China’s middle class”.
They must instead talk about affordability and income levels as being China’s New Normal, now that the “wealth effect” from incredibly-damaging excessive credit growth is, once and for all, truly over.
And they must stop quoting investment bank, World Bank and IMF etc. GDP growth forecasts for China, as it obvious that these do not reflect what is actually happening on the ground, in the real economy where people buy and sell chemicals – and all the things made from chemicals.
What about the prospects for lending growth, and thus real economic growth, in 2015?
Another government statement is helpful here – in this case the one which was issued in late November. The government, through another of its research bodies, told the world that:
• No less than $6.8 trillion of investments made since 2009 have been “ineffective”.
• In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy during those two years.
• The crisis has deepened since the launch of a huge economic stimulus package in late 2008. In 2009, yuan (CNY) 7.9 trillion of spending was completely wasted. By last year, this had risen to CNY 13.2 trillion.
This tells us that credit conditions must get even tighter next year, as, in parallel, Beijing liberalises the banking sector in order to ensure is much-better allocated lending in the future.
But it is not just the fall in the availability of credit that people will need to monitor in 2015. They also must look at the sentiment on the ground. I think that Beijing has deliberately changed this sentiment – i.e. the “snowball effect” I described in October. People in China know that there is more pain ahead and so they have become more risk-averse.
This is reflected in comments made by Simon Hunt, the UK-based metals analysts and macroeconomist in a research note based on his recent trip to China.
“Banks are becoming parsimonious in their lending activities with credit lines focusing on large companies in each sector of activity, by calling in loans without notice and in other cases by not renewing loans,” wrote Hunt.
“They want to hoard cash for the expected worse times ahead. Many of our industrial friends are worried about 2015 and foresee worse times ahead,” he added.