Will China revive world economic growth and boost materials demand?

Many economic and media commentators point to Chinese consumers as the driver to world economic growth.? This never has been the case and it is still not.?

Investment planners in chemicals and materials need to correctly understand global industrial supply chains to place the right bets.? China is still a materials conversion engine, essentially tolling manufacturing products, for the rest of the world.? Raw materials in; finished products out. ?The engine may be beginning to sputter.? Planners that see this wrong may miss the shift in manufacturing and new supply chain dynamics.

Will Chinese consumers save the world economy?

Consumer spending is being driven by the consumerism of developed economies, where relative wealth buys multitudes inexpensive products manufactured by developing economies.? Unfortunately, developed economies treat many durable goods as “disposables’, ditching relatively new appliances, for example, to get new ones with more digital features. In 2022, US consumer expenditures totaled USD 16 trillion versus USD 6.8 trillion for China[1]. ??In 2022, US accounted for 30% of world consumer spending, while China accounted for only 13%.

Consumer spending is not even the driver for China’s economy.? Over the past five years, China’s consumer spending has been growing at 5.6%/yr., which is slower than its overall GDP growth of 6.5%/yr.? This means economic growth is coming from somewhere else.? As a matter of fact, government spending, investment and net exports are responsible for 61% of China’s GDP. ??For the US, 67% of GDP is consumer spending.

To put this into perspective, a 1% increase in spending by an average US consumer is equivalent to a 6.3% increase in spending by the average Chinese consumer.

Will Chinese manufacturing bring growth?

Currently, China has high inventories, caused partly by Covid port closures.? Businesses are importing less while exporting more to reduce those inventories.

Unlike major economies, China has been easing monetary policy as it faces a property bubble and reduced foreign direct invest (see previous post).

What does this mean chemicals and materials producers?

China is its own large manufacturing ecosystem, that takes in an enormous amount of raw material imports to feed even larger exports.? While China’s exports seem huge, at USD 3.7 trillion in 2022, they are also the world’s second largest importer, with exports exceeding imports by 33%. ??The net difference (exports less imports) is only responsible for about 3% of China’s GDP.

However, even a small increment of growth on such a large economy will mean more materials and supplies to feed investment, exports and consumer spending.?

Chemicals and material producers should:

·??????? Be cautious on the basis of economic and supply/demand outlooks without a grounded understanding of the China economy

·??????? Understand the future growth drivers and trajectories in China and shifting B2B customer manufacturing investments worldwide (see previous article) and plan capacity with the appropriate flexibility in the Asia

·??????? Weigh the costs of possible supply chain disruptions (like port closures) as a component of total costs to serve

·??????? Stay in touch with B2B customers’ plans for future capacity with an eye toward reducing transportation emissions;[2] be sure to understand how much is truly destined for domestic consumers

·??????? Plan inventory for resilience in the face of high global risks

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Also, see Worley’s latest thinking here:?https://www.worley.com/our-thinking

Opinions are my own and not the necessarily the views of my employer.

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[1] Data in this article is based on estimates from available data from the China National Statistics Bureau and the US Bureau of Economic Analysis; comments are based on past five years of data; World Bank

[2] One unit of polyethylene moved to Asia as a raw material, from the US and return subsequentially returned with a finished product, adds about 20% to its GHG emissions profile