x close

We use cookies to improve our site and your experience. By continuing to browse on this website you accept the use of cookies.

Bookmark and Share

View from the Bridge - China April 2012

As we approach the start of the second quarter, economists are analysing how the growing superpower's year is shaping up; with the end of the 'two meetings' of the NPC (National People's Congress) and the NPPCC (National People's Party Consultative Conference), many still are comparing government projections with the nation's quarterly figures.

During the two meetings, the government once again lowered its GDP forecast from 8% to just 7.5% for 2012. JP Morgan & Chase analyst Adrian Mowat claims that even this figure might be optimistic, citing decreased production in the nation's industry stalwarts - cement, steel and construction - as indicators that China is, in fact, already in an economic “hard landing”. The consultancy that correctly predicted America's 2007 crash, A. Gary Shilling & Co, has said GDP growth could be lower than 6% if the government fails to address certain glaring economic issues.

Manufacturing activity has shrunk for the fifth straight month, causing concerns that the slowdown is not only due to reduced exports over the lunar new year, but also from a slump in domestic demand. The Purchasing Manger's Index (PMI) had also fallen from 49.6 to just 48.1 by the end of February, leaving some calling for further easing measures from Beijing.

Fuel prices have also been adjusted for the second time since the start of the year, with diesel and gasoline rising by 7.8% and 7% respectively, which will boost refining costs by around $7 a barrel. Although the government worked hard to keep prices artificially low and curb inflation, it exceeded targets of 4% every month last year.

Rising fuel costs have also caused the nation's carmakers to experience an acute drop in new year sales, with one domestic light vehicle producer, FAW Group, seeing net profits plummet by 88% in 2011.  A Chinese Association of Automotive Manufacturer's report has revised forecasts for industry growth and now anticipates less than 5% growth in the sector this year. Nonetheless, IHS Automotive recently predicted that sales passenger car sales will nearly double to 31 million units by 2020.

Several controversial protectionist policies have since been made to boost domestic sales. Firstly, foreign automakers will no longer enjoy beneficial status when forming joint-ventures and will encounter a significant amount of red tape if they continue to pursue them, which does not auger well for approval of Chery's planned JVs with Western brands Jaguar Land Rover and Volvo.

Secondly, the ubiquitous fleets of black Audis will no longer be a common sight China as new regulations force procurement departments to purchase domestically produced cars. Government purchasing is worth around $16 billion each year. FAW Group will soak up some of the demand, and has invested $280 million revamping Mao's once-famous “red flag” limousine.

Foreign direct investment (FDI) has also decreased for the fourth straight month in a row and is now 0.9% lower than last year at $7.73bn per annum. The gloomy global economy has been cited as the chief reason for the hiccup in China's robust growth model, as orders from Europe and Japan continue to languish.

Despite poor FDI figures, the country's overseas direct investment (ODI) in the EU has reached unprecedented levels, growing 94% last year. ODI for January and February was a healthy $7.74bn as the growing Asian superpower continues to invest heavily in its largest importing region by far.

Nonetheless, China continue to rebuff claims that a “hard landing” is really happening and is vigorously developing domestic service sectors, an area the National Development and Reform Commission (NDRC) is particularly keen to improve. HSBC reckons that factors unique to China's economy could see GDP at a healthy 8% this year – not as impressive as the double digit growth it has enjoyed in the past few years, but considerably more favourable than Shilling's pessimistic 6% or lower.

Tepid auto-sector growth and slowing construction may affect lubricants companies marketing at the PCMO and HDDO sectors well into Q2 and perhaps Q3 if the government can't reaccelerate the economy. Nonetheless, certain environmental initiatives raised at the 'two meetings' will ensure that lubricants and greases will be required to meet higher emission standards, meaning more additives and higher grades of base oil.

While the demand for higher quality lubes may help the downstream prospects for Sinopec this year, its poor 2011 refining figures are a further indication of the pressure of domestic fuel price controls and the higher import costs of raw materials.

As always, if you have any feedback, ideas or possible content for the OATS China Bulletin or website, we would be delighted to hear from you. Simply contact Diana Shen at DShen@oats.co.uk.

Sebastian Crawshaw
Chairman, OATS

Tags: China, GDP, Sinopec, View from the Bridge

Published 23rd March, 2012


Looking for more information about OATS products and services?

Visit the OATS website

OATS solutions

FREE lubes bulletin

Subscribe to the OATS Bulletin: a streamlined look at the month's lubricants and additives news.

First name
Last name

We will never pass your details to anyone else.
Privacy policy...