China is in transition. The Government changed earlier this year and the economic model of infrastructure-led GPD growth has run its course, needing to be rebalanced towards consumption.
China's GDP growth is sliding back toward more sustainable levels for a “mega-economy”, so we are seeing a fall in the nation's PMI index, below 50 again, at 47.7, indicating a contraction. All transitions are uncomfortable. As the previous certainties no longer apply, signals are often contradictory.
Lou Jiwei, China’s finance minister, told reporters at a media conference in the US that 6.5% GDP growth would be acceptable in the future, adding that he wouldn’t be surprised if the actual figures for 2013 fell below 7%. Before long, however, he was once again reaffirming the government's overall view that an average of 7.5% as an appropriate target through 2020 and even speculated that China might exceed that amount. The finance minister said he was “confident” in the numbers.
Despite personal savings levels being very high by Western standards, governmental debt - at various tiers of the economy - and “off-balance sheet funding”, following the 2009 stimulus, is potentially unsustainable. A recent article in a state-controlled media outlet claimed non-financial Chinese companies had a debt-to-equity ratio of 4.42, compared to 2.79 at their US counterparts. This level of debt can be viewed as both unhealthy and unsustainable, yet, without SOEs and fixed investment, GDP will struggle to meet government targets.
The government has denied it would release another massive financial stimulus to help it reach its GDP targets and is focussing on controlling the fiscal deficit. Hence the recently announced audit on all government debt.
Beijing’s economists would much rather see consumption increase from the 35% of GDP is stands at today, than spend more on already over-invested SOEs. 'Normal' GDP levels of 50% would require an enormous shift in consumer behaviour and a glut of credit to consumers. The challenge is to unlock of the personal cash, much of which is set aside for potential healthcare provision. This change will not happen quickly.
Since the cash shortage in June, car buyers have had to wait twice as long to obtain auto financing. Combined with potential new restrictions on car purchases in polluted cities, this would mean fewer cars on the road. Without doubt, 116 significant cities being forced to disclose their air quality data is very positive news for the lubricants industry in the longer term, where the drive to improve air quality will lead to tighter specifications and greater real application of those norms. This may also help to focus the debate about whether it is cars or coal that are the main cause of China's pollution.
Research and Markets has released a report claiming the Asia-Pacific region, fuelled by China, will drive lubes consumption growth through to 2017. While the current Chinese economic model may be showing signs of transition, there is no indication that the Chinese consumers will have any less of a love affair with their car than Western counterparts. Freedom and flexibility of movement by car is a worldwide phenomenon – as is the increasing use of the internet to market lubricants. OATS' coverage of the Chinese car parc continues to grow to meet that need.
As always, to comment on anything you have read in this month's Bulletin, or to seek expert advice on Chinese and global lubes markets, please don't hesitate to contact Diana Shen. We also invite you to share the OATS China Bulletin with your colleagues and contacts.
Sebastian Crawshaw
Chairman, OATS