By John Richardson
Much of the high savings rates that have accumulated in China since the start of the zero COVID lockdowns have been made. Now that lockdowns have been abruptly ended, the common assumption is that higher savings rates will lead to an increase in consumer spending and thus the pricing and demand for chemicals and polymers.
Since large parts of the economy were shut down during the no-COVID period, reopening means an improvement in economic activity from a very low base – once the wave of exiting Omicron cases has been controlled. But the recovery, in my view, will be subdued by the state of the post-pandemic tea economy and the end of the real estate bubble.
Dickensian inequality and its impact on growth
Bear with me because the following background is important if we are to understand the consequences of the epidemic in China.
“Changes in the labor market are leading to a rapid increase in the number of workers entering the less secure informal economy, while employment in the formal manufacturing sector, which has been a basis for employment in China, is declining,” the US Center for Strategic and International Studies wrote in a study. May 2022.
Moreover, persistent unequal access to education and health care means that many employees lack the capabilities to excel in the high-skilled, higher-paying jobs that are emerging as the Chinese economy strives to reach high-income status. Automation is also increasing in China and could further reduce employment opportunities for a large portion of the workforce in the coming years,” the study said.
The study also highlighted the negative influence of China hoku A family registration system that leaves migrant workers without full access to health care, education, pensions, and unemployment benefits.
“The consequences are that a large segment of the population lives in relatively precarious conditions. In 2014, only 16% of rural migrants working in cities were covered by retirement benefits, only 18% had health insurance in urban areas, and 10% had health insurance,” the study added. They only have unemployment insurance.
The authors said the final result was a Gini share in China of 0.4, indicating a highly unequal society. The closer the score is to 0, the more equal the society and vice versa. The study added that Germany, Japan and the United States had better genetic influences.
“So what? These problems have been around for a long time. How important is that in the confines of a recovery in 2023? You might ask.
This is important as economic inequality appears to have been exacerbated by the handling of the pandemic.
For large segments of the country’s 1.4 billion people, the pandemic has shattered the fragile balance that previously supported the back-and-forth movement of people from rural areas to large cities. Zero-COVID’s vast web of cross-cutting restrictions has hurt low-income families.” financial times On January 3 article.
The daily added, young people in rural areas have been forced by the lockdown to study online, often using patchy internet connections. They have also been separated from their parents for long periods during the many lockdowns. This has left educational pathways to social mobility in the balance.
We must also take into account the relatively poor provision of health care in rural areas as the wave of exits begins.
I wrote a newspaper France Press agency In an article dated Jan. 6.
“Urban areas have nearly twice as many beds in medical institutions per capita than rural areas, according to China’s 2021 national statistics. The shortage of doctors is even more profound. For every 1,000 people, there are only two licensed doctors in rural areas versus 4.25 in urban areas; Beijing has Seven,” wrote the GRID news service in an April 8, 2022 article.
Young people in both rural and urban areas also face record high youth unemployment rates. In August last year, the official youth unemployment rate was at one of its highest levels on record. One in five urban youth was unemployed.
The economic problems of China’s youth prompted Yu Ji, a China expert at the Chatham House think tank, to tell the FT In the same article mentioned earlier: “The truly young Chinese generation will have the most painful memories of the epidemic.”
Beijing’s handling of the pandemic broke what Yu said was the social contract between the government and the population. This included guaranteed strong economic growth and an abundance of jobs. So you didn’t see any post-lockdown recovery caused by pent-up demand due to an “exhausted” middle class.
“We are going to enter a very long period of stagnation in the Chinese economy… To me, that is the greatest uncertainty,” Yu said, adding that inequality sounds “very Dickensian.”
Modeling inequality in polyethylene in China
If you follow my blog regularly, you will know that I have been warning about the dangers posed by regional economic inequality in China since 2014. About 1 billion of China’s 1.4 billion people live far from affluent coastal provinces.
We can plot the extent of rural-urban inequality using polyethylene (PE) consumption as an indicator of personal wealth. The more chemicals and polymers in general you consume, the richer you will be.
The International Monetary Fund provides estimates of China’s per capita income levels, in dollars, for each of the 31 mainland provinces.
I calculated the 2021 ratios, or percentages, of the county’s per capita income over the national average of 2021 per capita income. It then assumed the same ratios applied last year, since 2022 data for per capita income by county was not available.
For example, the per capita income in the richest district was Beijing in 2021 which was 227% of the national average income of $12,551. On the other hand, the per capita income of the poorest province of Gansu in China was only 51% of the national average.
I estimate that China’s demand for polyethylene in 2022 was about 37.6 million tons, an average of 1% lower than it was in 2021 across the three grades (see also my recent section on scenarios for polyethylene demand in 2023 for more details) .
Convert that 37.6 million tons into kilograms of consumption and divide it by China’s population of 1.4 billion in 2022 and you get a nationwide average per capita consumption of 26 kilograms. Multiply 26 kg by the regional per capita income by the national average and you get the map below.
The darker the blues, the more interrupts are consumed while the lighter shades show lower levels. Most of the provinces of dark shade are clustered around the coast of China. As you move inside, the colors fade.
And as I explained before, and you can see from the map, we can divide China into four economic regions. There are the rich southern and eastern coastal provinces, the Chinese rust belt in the northeast, the up and coming provinces adjacent to the rich southern and eastern coastal provinces, and the poor western provinces.
Now let’s display the numbers behind the map.
Then I measured the population in 2022 by county, again given by the IMF, multiplied the population by per capita consumption levels and converted kilograms into millions of tons. This resulted in the graph below.
Only 35% of the mainland population in 2022, living in the ten richest provinces of China, accounted for 49% of the total demand for polyethylene – 18.5 million tons. This compares to the 65% of the population residing in the remaining 21 provinces on the mainland which consumed 19.1 million tons – 51% of the total.
Of course, these are just approximations. The relationship between income levels and consumption of chemicals and polymers is not 100%. Between 15-20% of China’s demand for polyethylene goes into exports, depending on who you talk to.
With that said, I see the data above as good enough, and it’s a fair indication of the historical travel trend. The PE figures confirm the large economic divide in China.
New home sales will drop “another 25%” in 2023
Regular readers of the blog are also aware that I have been highlighting the dangers of the collapse of China’s real estate bubble, back in 2014. The implosion occurred last year, as I warned in January 2022.
The 16-point real estate bailout package launched in November last year has led to the misconception, in my view, that real estate spending will restore the high levels of 2009-2021. Combine this with the supposed spending increase from the end of the novel coronavirus outbreak, and there is a widespread view that the Chinese economy will see a solid recovery from around the second quarter of this year.
But as Ann Stevenson Yang, co-founder of J Capital Research, said in a January 3, 2022 interview with market: “During the long real estate boom years, you had all these secondary effects. For example, because real estate prices went up, local governments wanted to buy more land and develop more real estate.
So, they bought land use rights from the people and the money in their pockets increased consumer spending. And a lot of the new investment products saw huge growth from the money that came mainly from real estate sales to the government.”
“There’s a lot of real estate in China, and it’s overpriced. There’s not much you can do about it other than gradually absorbing losses, which means decades of steady growth or even a reversal of previous gains,” Yang said.
It is believed that around 70% of a family’s wealth is tied up in a real estate sector worth around 30% of GDP.
Symptoms of the end of the real estate bubble, Yang said, have led to lower car and appliance sales.
New home sales fell 31% in December from a year earlier. Citigroup Inc. analysts expect sales to fall another 25% in 2023 as the recovery will be constrained by lower supply and buyers’ expectations.” bloomberg In an article dated Jan. 6.
As I showed in 2022, confidence in the real estate market has plummeted. The “sale option” — that Beijing will never allow house and land prices to fall — no longer holds.
The real estate oversupply also means we will not see a repeat of the 2009-2021 speculative frenzy that led to rapid growth in personal wealth and consumer spending.
China’s demand for polyethylene could decline by up to 5% in 2023
But, as always, one vision is not enough for any market. The only way that producers and buyers of chemicals and polymers can sensibly plan their business is through deep, ever-modifying scenarios. Hence, the chart below which updates a bit my previous scenarios for China’s demand for polyethylene (PE) in 2023 (see December 2022 blog posts).
Last year’s demand, as I said earlier, appears to have been 37.6 million tons across the three grades, about 1% lower than it was in 2021.
The first scenario for this year assumes that the Chinese economy is coming back strong. For this to happen, two other events that I haven’t thought of yet have to happen:
- Coronavirus deaths and infections decline early enough in 2023 to make a significant difference to growth this year. Some analysts expect a significant decline by the second quarter.
- No major collapse in China’s exports due to economic problems elsewhere. China’s exports are worth about 20% of the country’s GDP.
Under scenario 1, China’s total demand for polyethylene in 2023 will be 39.1 million tons, up 4% from last year; Scenario 2 would see demand at 36.4 million tons, 3% lower; Scenario 3 would include a contraction of 5% to 35.7 million tons.
I guess you can guess my favorite scenarios. Which are, of course, scenarios 2 and 3.