China’s new stimulus measures to support economy, but unlikely to help olefins demand recovery

The new economic stimulus announced by the Chinese government is unlikely to support the already falling demand for olefins and polyolefins due to fears of rising inflation and possible measures to control it. Each stimulus adds to the common man’s disposable income and helps boost consumer spending, and therefore also supports inflation proportionally, which may be bad news for Chinese policymakers.

Economy in decline
After a phenomenal 8% growth in gross domestic product (GDP) recorded in calendar year 2021, China’s economy is expected to slow to 3.7% growth in calendar year 2022. Goldman Sachs and Nomura both lowered their forecasts for economic growth in China, citing weaker demand. , the uncertainties linked to the zero-Covid policy and the energy supply crisis. Goldman Sachs, in its latest forecast released earlier this month, lowered its Chinese GDP growth forecast for the year 2022 to 3% from 3.3% earlier, which Nomura cut to 2.8% now from 3 .3% earlier.

Economists at both banks noted an increase in Covid cases across the country as well as a contraction in real estate investment in July, which weighed on sentiment towards the real estate sector. Nomura believes that China will continue its zero-tolerance policy towards Covid until March 2023, which will hamper the country’s economic growth. Goldman Sachs cited the latest July economic data as well as near-term energy constraints due to an unusually hot and dry summer as one of the reasons for an economic slowdown. China is suffering from one of its worst heat waves in decades, straining an already stretched power supply and driving production cuts in parts of its industrial areas.

GROW WITH TIME China’s recovery and GDP growth
Calendar year	Stimulus (trillion yuan)	GDP growth
2015	0.1	7.0
2016	0.2	6.9
2017	0.9	7.0
2018	1.2	6.8
2019	2.1	6.0
2020	3.8	2.1
2021	3.7	8.0
2022	4.1	3.7

Source: Ministry of Finance, State Council, China

For 2022 = 3.7 trillion yuan fee + 0.4 trillion yuan unused from previous year

Indicating a slowdown, the National Bureau of Statistics (NMS) reported China’s GDP growth of just 0.4% in the April-June quarter, hampered by a drop in industrial activity and government spending. consumption following pandemic-induced lockdowns. The weak global environment disrupted the movement of economic growth. On a quarterly basis, GDP fell 2.6% in the second quarter, while it stood at 2.5% for the first half of the current year.

In addition, the International Monetary Fund (IMF) in July this year revised China’s economic growth forecast down from 1.1% to 3.3% for the current year and from 1.3% to 4.6% for next year. Through its periodic report – World Economic Outlook – on the global economy, the IMF feared a profound impact of the Covid-induced lockdowns on the Chinese economy. Additionally, the ongoing real estate crisis and its global fallout has had a massive impact on the Chinese economy.

New Stimulus
In a bid to support the accelerating economy, the State Council, China’s cabinet, added a new amount of credit support to its political banks and government-controlled institutions. Based on the allocation of the 300 billion yuan (approximately US$43.87 billion) of policy-supported and development-oriented financial instruments to specific projects, the quota share of these instruments will be increased by more than 300 billion yuan. The balance of the special purpose bond quota worth more than 500 billion yuan is expected to be well utilized according to law and issued by the end of October. This will help stimulate effective investment, stimulate consumption and solve the problem of insufficient demand for loans.

It is estimated that China will inject a total stimulus of 5 trillion yuan in 2022, of which, according to experts, 4.1 trillion yuan (including about 0.4 trillion from the unspent balance from the previous year) has already been announced. so far. The proposed stimulus amount will be the largest in years and an increase of nearly 25% from the roughly 3.7 trillion yuan announced the previous year.

The stimulus package has grown exorbitantly in recent years due to China’s zero-tolerance Covid policy which has called for intermittent lockdowns in major cities including Shanghai, Wuhan and a host of others. The frequent outbreaks of the Covid epidemic have not only disrupted the consumer-driven economy, but have also affected factory production over the past two and a half years. Consequently, gross domestic product (GDP) growth has slowed in China and triggered the need for further capital injection for economic growth.

Economic reform measures
While announcing the new economic stimulus package after China’s State Council executive meeting, Premier Li Keqiang said, “China will adopt follow-up policies in addition to the package to stabilize the economy as part of efforts intensified to consolidate the bases for economic recovery and growth. , and send task forces to localities to oversee and assist work on this front to promote policy implementation at a faster pace.

Li further made plans to roll out 19 additional follow-up policies to create greater synergy, in addition to providing the package of policies to stabilize the economy with the aim of promoting economic stabilization and recovery, maintaining key economic indicators in the right range and work to obtain the best possible results.

“Given the current circumstances, we must seize the window of opportunity and maintain the appropriate political scale. Available funds should be used to best advantage. This will increase effective investment, boost consumption and help keep economic activities on a stable path,” Li added.

Meanwhile, China plans to continue to exploit the effect of prime rate reform to reduce the cost of corporate finance and consumer loans. Additionally, a set of infrastructure projects with mature conditions will be approved and launched. Projects must generate returns and be of good quality. Misappropriation of funds will be avoided and measures will be put in place to support the development and investment of private companies and promote the healthy and sustainable development of the platform economy.

In addition to allowing local flexible lending, China has postponed the payment of government levies for a quarter. Localities have been encouraged to set up risk compensation funds for loans to micro, small and medium enterprises (MSMEs) and self-employed households.

Inflation risk
China has maintained a low inflation rate so far compared to the US, UK and India. The National Bureau of Statistics (BNS) announced a growth in the producer price index (PPI) of 4.2% in July against a rise of 6.1% in June. Analysts had previously forecast China’s PPI at 4.8% for July.

By contrast, the consumer price index (CPI) reported a 2.7% rise in July, the fastest pace of growth since July 2020, but below expectations for a 2.0% gain. .9%. Chinese Premier Keqiang said the government has set an annual consumer inflation target of around 3%. “In an effort to underscore the need to stabilize prices and employment, China would be able to keep the 2022 CPI below 3.5%. Reports suggest that the stimulus package announced in the US has helped boost inflation there. Therefore, the stimulus in China should also support inflation.

Lower demand for olefins
Experts believe that demand for olefins in China is expected to decline this year due to a weak global economy followed by a slowdown in the real estate sector. Most polymers have reported a decline in consumption over the last three years of the Covid pandemic. Low-density polyethylene (LDPE), for example, saw a decline of around 1.5-2% in 2019, followed by a decline of 4-5% in 2020 and 2021. China is the largest consumer of LDPE.

A few years ago, when the global demand for olefins was peaking with robust growth in the global economy, several companies set up their new plants in the same or different location with a massive investment plan in the expansion of new and industrial facilities. In addition to the existing players, several new entrants have entered the polypropylene manufacturing industry with their huge investment plans. Thus, the domestic supply in China increased, which ultimately reduced the share of imports in the country’s large commercial market. Prior to the Covid pandemic, Chinese market momentum was robust, with several agencies forecasting demand growth to continue. But, the Covid epidemic has now reversed the trend.

The increase in local production has contributed to reducing the import of olefins into China in recent years, which has also continued in the first half of the current calendar year. Trade sources forecast the overall import of polypropylene from China, for example, at around 2 million tonnes between January and June this year, down nearly 15% from the same period last year. Confirming weak demand sentiment, prices for all polymers and their feedstocks have plunged up to 60% since the recent peak in April this year.

Conclusion
The demand for olefins and polyolefins is directly linked to the growth of the economy and the real estate sector. Given that these two demand drivers are struggling to sustain growth, the stimulus may not prove beneficial, at least in the medium term.

DILIP KUMAR JAI
Editor
[email protected]