Short Rebound or Beginning of Recovery?
Year:2009 ISSUE:4
COLUMN:EDITORS NOTE
Click:325    DateTime:Feb.17,2009
Short Rebound or Beginning of Recovery?       

After the Chinese New Year (January 26th), China's economy started to show obvious signs of a rebound - the total value of new loans from banks to enterprises continued to grow; consumer spending is still high and excessive inventories have been sold down in some industries. In the chemical industry, the December imports of polyethylene, polypropylene and polyvinyl chloride - the three most important resins - increased by around 85%, 25% and 100% respectively compared to November. So some economists argued strongly that November was the bottom for China's economy and announced that recovery is beginning. Of course many economic experts hold the opposite viewpoint that the January index represents only a short rebound and China's economy will remain slack in 2009 because the government's spurring package will not solve the current problems and may even bring about bigger problems. Production capacity surplus or soft overseas demand is considered to be the root problem.
   For the Chinese government, the big issue to address is peasants. The big potential for China to drive domestic demand is based on peasants, but, it is estimated, around 30 million peasants that have been working in cities will lose their jobs this year. So the government may make greater investments to stimulate demand for their labor, and in turn to give them money to spend.
     The worst news recently for China's farmers is a drought in the northern region. If the shortage of water cannot be solved in February, millions of hectares of plants will wither, which will cause the price of grain to go up and possibly reduce the demand for chemical fertilizers and pesticides.    
   China's biggest advantage, compared with the developed economies, may be that the people have lost less confidence in spite of experiencing the sharp fall in the fourth quarter due to the disappearance of overseas demand. According to a manager in Sinopec's engineering design institute, the largest one in China's petrochemical industry, a total amount of EPC contracts awarded to the institute for the first half of 2009 exceeds that in the same period of 2008.
   A source from the Ministry of Commodities disclosed that a super purchase group is being organized by the government, aiming to purchase equipment, commodities and technologies in Europe. The rough purchase list includes the United Kingdom's low carbon technologies, pharmaceuticals and education concerns; Germany's heavy mechanical manufacture and high speed train technology; and Spain's communication equipment and sea water desalination technology.
   In response to the rumor of a stimulus package for China's petrochemical industry, an official advised that the discussion has never addressed support of even RMB100 million, let alone construction of 20 petrochemical plants. In the aspect of refining and ethylene, the government's stimulus plan will only promote the projects that are already under construction. Some stimulus policies will replace cash support, according to the source.
    Traders also agreed that chemical prices bottomed out in January. "China's factories typically try to collect cash for the Chinese New Year holidays, so they scramble to sell goods without counting on cost. The prices of some chemicals started to pick up from the early February," said Helen Chang of Orica.

Zhong Weike
February 10th, 2008