The above chart is the blog’s best effort to correlate the change in China’s bank lending with the real economy. It shows electricity consumption (blue line) and lending (red column) since July 2008.
Electricity consumption is an excellent proxy for the real economy, and probably more reliable than GDP figures, which are widely believed to be manipulated by regional governments to meet central targets:
• Electricity consumption fell 14% from Q3 to Q4 2008, and then a further 3% in Q1 2009, as China’s exports collapsed due to the financial crisis.
• Bank lending was also falling until November 2008, along with exports. But it then revived dramatically, as government introduced new targets.
• Lending jumped to $70bn in November from October’s $27bn, and more than trebled in Q1 2009 versus Q4 2008.
• This increased lending then stimulated the real economy. Electricity consumption rose to record levels, with Q2 2009 up 12% versus Q1, and Q3 up a further 16% versus Q2.
What happens next is, of course, the key question? From the petchem viewpoint, the main issue is the likely impact from the government’s $580bn stimulus programme, which aimed to ramp up output in key growth sectors for employment such as refining and petchems.
This is clearly now happening. Refining runs are expected to be up 8% in June, versus 2009. And average naphtha yields are up from 10.9% to 11.3% over the same period. So feedstock volumes into petchems, and hence petchem production, have risen 12% since June 2009.
This is a massive increase in petchem output, especially when economic growth (as measured by electricity consumption) is now stabilising. So the pressure will come on import volume into China. In addition, this weekend’s currency revaluation will probably add to pricing pressures, as China seeks to ensure its higher volumes remain competitive.