CHINA, despite all the discussion about the beneficial impact of new economic stimulus, remains in my view trapped between an economic rock of being unable to significantly boost domestic consumption and the hard place of a more difficult export climate.
The rock of raising domestic spending
Until or unless China fixes weak healthcare and pension systems – and maybe also does something to give rural migrants to urban areas better job opportunities and wages by changing the Hukou residency system – the growth in domestic spending is unlikely to be at the levels we saw during the 1992-2021 Petrochemicals Supercycle.
Savings rates in China hit a new record high in China last year, the Wall Street Journal reported in its 12 January 2024 edition: $19.13 trillion. That’s how much Chinese households had stashed away in savings by the end of 2023, hitting yet another record high, data from the People’s Bank of China shows.
Newsweek wrote in this 31 May 2024 article: China’s average savings rate between 2018 and 2022 was as high as 45 percent compared with 23 percent in the rest of the world, a challenge that has its roots in the demographic shift in a country of over 1.4 billion in which the proportion of those of working age to retirees is falling.
Retail sales of consumer goods, a key indicator of domestic demand, increased by just 2.3 percent in April, according to China’s statistics bureau. This was 1.5 percentage points lower than economists forecast in a Reuters poll and the smallest increase since December 2022.
Fixing the pension and healthcare systems and changing Hukou isn’t going to happen overnight. Is the political will there to fix these problems? As Peking University economist Michael Pettis argues, improving social welfare and raising wages would require a big transfer wealth.
And, anyway, can China afford to substantially reshape is welfare systems given that its debt-to-GDP ratio, including local government liabilities, reached 110% in 2022?
Because savings rates are so high, and because China’s domestic consumption is around just 35% of GDP, half of that of developed economies, the long-term potential for a surge in domestic spending might be big.
But at least in the short term, policy fixes look difficult. And we must factor in the loss of growth momentum resulting from the end of a real-estate bubble. Real estate is worth some 29% of China’s GDP. As fellow ICIS blogger Paul Hodges wrote in this 19 May blog post:
- Beijing property prices fell 10-30% from their peak by December 2023.
- Residential home sales were down 31%, and property developer cash reserves by 26%, by March.
- China’s Top 100 developers saw new property sales fall 47% year-on-year in January – April this year.
The property oversupply is huge. In the same blog post, Paul wrote: He Keng, former deputy head of the official Statistics Bureau, suggests that today’s housing surplus could perhaps house 3 billion people:
“How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes are enough for 3 billion people. That estimate might be a bit much, but 1.4 billion people probably can’t fill them,” he said.
The hard place of exports
“If China is to maintain growth rates of 4-5% per year, it can only do so if the rest of the world agrees to reduce its own investment and manufacturing levels to less than half the Chinese level,” wrote Michael Pettis in a December 2023 article for the Carnegie Endowment for International Peace.
The rest of the world is hardly likely to accommodate China given the big reshoring push resulting from the Inflation Reduction Act and the EU Green Deal. Investigations into allegedly unfair China trading practices have also increased along with antidumping measures.
Focusing on petrochemicals, the latest polypropylene (PP) trade data suggest that China’s exports might hit a new record high of 2.6m tonnes in 2024, double last year’s exports.
As the table above details, China’s top ten export partners included Brazil, Bangladesh, India and Peru in January-April this year. Before 2021, China’s much-smaller volume of exports went mainly to Southeast Asia (SEA). It has a free-trade deal with SEA.
Can China continue to spread its PP net very wide given, for example, the call by Brazil’s chemicals industry association for higher import tariffs on chemicals and polymers?
If it cannot continue to penetrate a wider range of destinations because of increased trade tensions, we might see its PP exports and plant operating rates decline. What applies to PP because could just as much apply to solar panels and EVs etc.
Keeping a sense of long-term perspective
Short-term chemicals markets have a habit of rebounding strongly on sentiment. We might thus see improvements in markets on recent stimulus measures, and any further stimulus measures announced during next month’s important 3rd Plenum meeting of China’s government.
But any improvement in sentiment must, in my view, be placed in the above economic context. And at the risk of being boring (I’ve probably gone well beyond just a risk), consider the latest version of my PP spreads slide below (the pattern is the same in polyethylene).
Despite the recent stimulus announcements, average CFR PP price spreads over CFR Japan naphtha costs remain the lowest in 2024 since we began our price assessments in 2003.
The table at the bottom of the chart is particularly important. It shows PP spreads during the 1992-2021 Petrochemicals Supercycle compared with spreads from January 2022 up until 7 June this year.
Until average PP spreads recover by 149% from where they were up until 7 June, there will have been no return to the great markets we saw during the Supercycle. Meanwhile, too capacity will continue to chase too little demand.
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