By John Richardson
CHINA’S polyethylene (PE) imports declined again in February, and are down by an average of 22% over both January and February of this year compared with the same period in 2014.
SOME people will tell you that this is nothing to be seriously worried about. They will argue that January-February 2014, imports reached an all-time high of 1.7 million tonnes for these two particular months, and were no less than 516,200 tonnes higher than during January-February 2013.
So their case for complacency rests on the notion that a big decline in imports during the first two months of 2015 was inevitable.
But the reasons why PE imports were so high last year, and the explanation for why they have fallen so dramatically so far this year, tell us something very significant about what is happening in both China’s overall economy and its PE industry. You need to be worried.
The surge in shipments in early 2014 was the result of foreign producers unloading their inventories towards the end of 2013 in order to beautify their financial results.
It always take two people to tango, of course, though. An army of willing buyers emerged in China for this material, many of whom, I think, didn’t wanted PE for its intrinsic value.
Instead, they only wanted these cargoes as financial instruments that enabled them to speculate in other commodities and in real estate. This was the collateral trading I discussed on several occasions last year.
Collateral trading was only possible because the slowdown in credit growth had yet to fully click into gear. But for the full-year 2014, we saw declines in both M2 money supply and lending.
The psychology was also very different in China during the early part of last year. Many people remained confident that China’s government would “blink” by launching another old-style stimulus programme. But, of course, this didn’t happen.
So the overall availability of credit has fallen, along with the appetite for borrowing and lending.
I have placed emphasis on the word overall because many analysts focus only on continued strong growth in official bank lending.
You instead need to look at total social financing (TSF). TSF is the measure of overall credit growth, as it comprises official loans via the state-owned banks and lending from the private, shadow-banking system.
TSF peaked in May 2013, soon after President Xinping came to power, at Rmb 1.57bn ($250bn) per month, but has since fallen by 14% to Rmb 1.36bn/month, said Paul Hodges in a 24 March blog post (see the above chart).
The decline in TSF is the result of the clampdown on the shadow-banking system as China tries to rid itself of harmful speculation. And because collateral trading was so highly speculative, its funding came from the shadow lenders.
Another important data point from January-February 2015 is the 15% rise year-on-year in local PE production. This is obviously another factor behind the decline in imports and reflects China’s determination to further boost its self-sufficiency.
Local plants will be run hard, regardless of their cost-per-tonne of production economics, as compensation for the overall economic slowdown.