Over the last few months concerns over economic growth were thrown around with much abandon but it was not until two weeks ago when the People’s Bank of China (PBoC) devalued the Yuan that such concerns reached fever pitch. Subsequently to this, poor data released on Friday showed that Chinese manufacturing had seen its fastest decline in six and half years, triggering big losses on the Chinese stock markets. The Shanghai Composite Index fell by more than 8% yesterday in what Chinese state media has dubbed ‘Black Monday’. Other major indexes such as the FTSE 100, Dow Jones Hang Seng and the Japanese Nikkei also suffered heavy losses. Understandably, this fall has led to considerable concern. Data from Reuters shows that shares in China have dropped 38% since its mid-June peak, erasing all year to date gains. These are big numbers and as one would expect the ‘talking heads’ of 24 hour rolling news have jumped on them with the usual doom and gloom characteristic and are talking the subject to death. However, the facts seem to be somewhat misrepresented and the usual scaremongering technique is prevailing.
Let us drill into this a little more. The PBoC’s original aim of devaluing the Yuan against the dollar was to boost exports, such an action was supposed to prop up exports which have been languishing throughout 2015 (July exports saw an 8.3% year on year contraction) by making them cheaper (of course, it has the opposite effect for imports). In reality, it was interpreted by investors as a sign that the economy is weaker than expected as the string of disappointing data releases has now confirmed. The IMF expects China to post 6.8% in economic growth this year, decelerating from the 7.4% registered in 2014. So therefore, it is no wonder there has been such concern. But is it really as bad as we are being told? As the time of writing, the Chinese stock market was actually up 40% year on year, and the European stock exchanges seem to have recovered with the FTSE 100 up 3.5% on yesterdays close!
Unsurprisingly, this has led to questions of import demand which of course is a key driver for the Specialised Products markets. China is the world biggest consumer and importer of chemicals with the latter totalling 49.5 million tonnes in 2014 according to the Clarksons Platou Specialised Products seaborne trade statistics. There have been suggestions from some quarters that 2015 chemical imports have been flat but according to our data, imports began to recover in March of this year after a negative January and February. Imports averaged a 3.6% increase year on year during the first half of 2015 to 25.7 million tonnes of which 19.4 million tonnes was organic chemicals. This is also reflected in freight rate performance, particular on the transpacific trade lane where levels are up 49.6% year on year. These figures suggest a much more positive performance than was thought. Whether the current financial issues will affect Chinese chemical import demand in the coming months is not so clear. One rather bullish article in the Financial Times recently suggests the Chinese construction market, which accounts for 10% of GDP, may have lost its boom but it is far from disaster with the Chinese still likely to buy 10 million homes this year with high deposit requirements. This of course will have a knock on effect for chemicals imports needed to produce construction materials and consequential household goods.
Despite the fact that we must exercise caution as the situation is continuing to develop as we speak (Chinese interest rates have just been lowered on effort to support the economy); things do not look so gloomy if we take all these factors into account. What is clear is that we may have entered a ‘new normal’ lower growth environment of 6-7% per annum. This certainly represents a downturn for an economy that has been traditionally export led to one of increasing domestic consumption. However, this is against a backdrop of a lower growth environment related to an economy that is a lot bigger than it was ten years ago, and such small percentage changes represent sizeable nominal values. As the data shows, the Specialised Products markets remain resilient so far and so for now the stock market correction may be nothing more than that!!