SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson.
In 2014, we reported for the first time the risks associated with local government spending in China that is strongly tied to land sales.
All was well as long as the demand for land remained strong and land values continued to rise. But not now because of the Common Prosperity Policy pivot and the extra oxygen taken from the housing market by zero COVID policies.
Because local government finances are stretched, an audit study, reported by the South China Morning Post, said special purpose bonds were used by local authorities for expenditures other than infrastructure. Bonds are only supposed to be spent on infrastructure.
If China cannot significantly increase infrastructure spending during the remainder of 2022, it narrows the options for achieving an economic recovery. Other challenges include the stop-start nature of the easing of zero-COVID restrictions and the effect on retail sales.
The above may explain why iron ore prices have fallen 20% over the past three weeks. This also explains why the outlook for the Chinese high-density polyethylene (HDPE) market appears to have deteriorated:
- Our previous best result for China HDPE demand growth in 2022 was 6%. My worst case scenario was a 3% drop.
- Now, however, we fear that the best outcome for HDPE demand in 2022 will be flat or no growth. Our worst result is a decline of 4%.
China’s net HDPE imports in 2022 could be as low as 4.8 million tons from 6.4 million tons in 2021 due to weak demand growth, new local capacity and operating rates high nationals.
Editor’s Note: This blog post is an opinion piece. The opinions expressed are those of the author and do not necessarily represent those of CIHI.