By John Richardson
HERE is some good news to start the week: The latest Bank of England “stress test” for UK banks includes this scenario for China:
- China’s real GDP growth falls to just 1.7% in Q4 of this year.
- Chinese residential property prices trough in 2016 at 35% below their level at end-2014.
Why is this good news? Because a major central bank has fallen into line with the growing consensus that things will have to get an awful lot worse in China before they get better. This is a positive start to Monday morning because it offers further encouragement to chemicals companies to get on with vital scenario planning on how to cope with a very different China.
If you need even more evidence to convince you that in the short term, the economic pain will get a lot worse before it gets better, then look at the data released last week on producer price deflation. March prices at the factory gate declined by 4.6%, which now means that producer prices have been falling for three straight years. Do you really, honestly, still think that China-driven deflation does not represent a global threat?
Still not convinced that more pain lies ahead? Please remember what Li Keqiang, China’s prime minister, said to the National People’s Congress (NPC), the country’s annual parliamentary meeting, last month. It was this:
This is not nail-clipping. This is like taking a knife to one’s own flesh. But however painful it might be, we are determined to keep going until our job is done.
There is nothing new in the frank tone of Li’s speech. Both Li and the country’s president, Xi Jinping, have been pulling absolutely no punches whatsoever since November 2013 in warning the world just how the difficult the reform process is going to be.
So, apart from the Bank of England’s warning that real GDP growth will slip to just 1.7% in the fourth quarter of this year, which I am sure is way below most chemical companies’ assumptions, what should we expect for the rest of this year?
One key event to prepare for an “industrial shakeout”. Beijing has picked winners and losers in each of its industrial sectors. The winners will be provided with more capital, whilst those identified as losers will be starved of financing and will be thus forced to consolidate.
How do chemicals producers go about identifying customers in China who will win versus those who will lose?
An excellent starting point is the same speech made by Li to the NPC when he added: “China’s economic growth model remains inefficient, our capacity for innovation is insufficient, overcapacity is a pronounced problem and the foundation of agriculture is weak.”
I will provide some thoughts on what exactly this might mean, in practical terms, later this week.