Imagine living in the capital city of a major country, and suffering the level of pollution shown in the above photo on a regular basis. We used the photo in chapter 6 of Boom, Gloom and the New Normal when we highlighted how pollution was inevitably going to move up the political agenda in China. Controversial at the time, it warned:
“Recent growth in China and India has come at a price: Poor air quality, chronic water shortages and deforestation.”
By February 2014, the pressure to act was becoming almost overwhelming as:
“The problems have worsened, to the point where almost everyone now agrees that they are creating a major political problem. The new leadership simply has to solve this, if it wants to remain in office. Beijing and the 6 northern provinces have now been shrouded in smog for 6 days, and on Wednesday the US embassy reported that the levels of PM2.5, the small particles that pose the greatest risk to human health, were “beyond index” at 512.”
Guangdong province, close to Hong Kong, had already moved to clean up. But other provinces did little or nothing, as officials worried about the likely impact on jobs. A major part of the problem was that the economy is the Premier’s responsibility, and Premier Li has been more worried about maintaining growth via stimulus programmes.
This year, however, Xi finally lost patience ahead of next month’s 5-yearly People’s Congress – at which he will be renominated for another 5-year term. Having signed China up to the Paris Agreement on climate change in December 2015, he seized control of the economic agenda, as I noted in the Financial Times:
“Xi knows that reducing pollution, rather than maintaining economic growth, has become key to continued Communist Party rule. The recent rapid elevation of Beijing’s mayor, Cai Qi, to become party chief for the city is further confirmation of the high priority now being given to tackling air pollution and stabilising house prices.
“Taken together, these policies represent a paradigm shift from those put in place 40 years ago by Deng Xiaoping after Mao’s death in 1976. This shift has critically important implications, as it means growth is no longer the main priority of China’s leadership. In turn, this means that stimulus programmes of the type unleashed in 2012, and on a more limited basis by Premier Li last year, are a thing of the past.”
Since then, the Beijing area, and surrounding provinces such as Hebei and Henan, have become a centre of the battle against pollution. One key development has been the use of thousands of drones to spot, and measure air and water pollution, and then identify and photograph the culprits. As state-controlled Xinhua reported last week:
“A total of 599 companies, mainly construction materials, furniture, chemicals, packaging and printing, were relocated out of the capital, said the Beijing municipal commission of development and reform. Beijing also closed 2,543 firms and ordered 2,315 firms to make changes. About 73% had pollution issues.”
Similarly, a senior chemical industry executive told me last week:
“I was in/near Cangzhou the other day (another city on the list) where the government have created a large National Level Economic Zone including a dedicated chemical “park” to accommodate the companies that are being cleared out of Beijing and surrounds. This was an otherwise nondescript flatland whose only previous claim to fame was a Mao era collaboration with then Czechoslovakia to make tractors.”
The war on pollution has another side to it, of course, as it marks the end of the “growth at any cost” economic model.
As a result, realism is finally returning to discussion about China’s real growth potential. As last month’s IMF Report on China noted, GDP growth had only averaged 7.3% over the 5 years to 2016 because of stimulus: without this, growth would have been just 5.3%. As a result, the IMF also highlighted an increasing risk of “a possible sharp decline in growth in the medium term”, as well as a need to boost domestic consumption by reducing savings.
This is a welcome development. Too many companies and analysts have indulged in wishful thinking, wanting to believe China had suddenly become middle-class by Western standards. In reality, as the second chart shows, the growth surge was due to $20tn of stimulus lending via official and shadow banking channels.
At its peak, between 2009 – 2013, this lending reached 3.2x official GDP. And GDP itself was probably also over-stated for internal political reasons, as Communist Party officials were routinely judged for promotion on their success in generating GDP growth. Now the pendulum has swung the other way, as the Caixin business magazine has reported:
“In a document jointly released by the Ministry of Environmental Protection and nine other ministry-level bodies, if a city does not achieve 60% of the emission reduction target, the city’s vice mayor will be held responsible. If the city achieves less than 30% of its target, the mayor will be held responsible; and if the PM2.5 level ends up increasing instead of falling over the winter, the party secretary of the city will be held responsible.
“Possible punishment includes party disciplinary or administrative punishments, the document says.”
Large economies are like super-tankers, they take a long time to change course. As I noted nearly 2 years ago, China is now attempting to move in a radically new direction, away from export-driven growth and infrastructure spending – and towards a New Normal economy based on the mobile internet:
“The winners are developing services-led businesses focused on China’s New Normal markets – such as those aimed at boosting living standards in the poverty-stricken rural areas, or for environmental clean-up. The losers will be those who cling to the hope that more stimulus is just around the corner, and that China’s Old Normal will somehow return.”
Those who have done well under the old regime, like the Party heads focused on job-creation and the opportunities that it created for large-scale corruption, will inevitably fight hard to preserve their way of life. Next month’s Congress will therefore be critical in assessing just how much power Xi will have to pursue his reform policies in his second term.
As I noted a year ago, this Congress will settle key questions. Will Premier Li gain a second term, and continue to be able to obstruct reform? Will anti-corruption tsar Wang maintain his position on the all-powerful Politburo Standing Committee, despite being over the nominal age limit?
The Congress is therefore likely to the most important meeting since 1997, when Jiang Zemin gained re-appointment for his second term as President and led China out of poverty via membership of the World Trade Organisation. Now, as set out in the China 2030 Report (published when Xi became President), Xi has to led China in a new direction.
Otherwise, he will be unable to achieve his twin goals of
□ Making China a “moderately prosperous society” by 2021 (the centenary of the Chinese Communist Party)
□ Making it a “fully developed, rich and powerful nation” by 2049 (the centenary of the People’s Republic), and returned to its historical status as the Middle Kingdom via his ‘One Belt, One Road’ project.
President Trump’s defeat on healthcare makes it very unlikely that he will be able to push through his proposed $1tn infrastructure boost, as I discuss in a video interview with Will Beacham, deputy editor of ICIS Chemical Business
BARCELONA (ICIS)–Donald Trump’s infrastructure plan is unlikely to be approved because of a legislative bottleneck, denying the US chemical sector a key source of demand growth to absorb the 4.5m tonnes/year of new polyethylene capacity due on stream this year, according to a chemicals industry consultant.
In a video interview, International eChem chairman Paul Hodges said that the US chemical sector will have to find innovative ways to stimulate domestic demand in the face of possible restrictions on global free trade in petrochemicals and polymers. The industry cannot rely on the infrastructure programme or President Trump’s strategy to re-shore industrial production to create enough demand growth, he added.
New Presidents only have a very short window for action, Hodges said: “The record of the last few administrations is that Congress can only deal with one topic at a time. The battle on healthcare had been getting in the way of tax reform, which was President Trump’s top priority. And as for infrastructure – his third priority – I can’t see Congress getting through three major programmes in the next 12 months.”
Hodges believes US presidents only really have the first year of their term to achieve major goals. By 2018 the run-up to the mid-term elections will make it very hard to achieve change. He points out that it took President Ronald Reagan until his second term to achieve his tax reforms.
“We have to assume infrastructure is dead. There is no magic wand to be waved and the industry has to look at self-help,” says Hodges, unless President Trump does a deal with the Democrats. However, he believes there are huge opportunities for innovative US chemicals and polymers in serving the water and food sectors with commodity and specialty polymers to help reduce waste.
The US has a major water shortage problem, says Hodges, and yet 30-40% never reaches the customer because it leaks out of the system. It also has a major problem with food where 30-40% is thrown away because of wastage.
According to the consultant: “The industry has a fantastic opportunity to employ a lot of technical development people to work with the utility and food companies in order to stop that waste. You have to employ more people … or the product just won’t be sold – let’s get out there and do something to sell more PE and PVC into the water and food industries.”
Please click here to watch the full interview.
President Trump ran for office on the basis that he would “drain the swamp” in Washington, and deliver major change in a number of critical areas, as I noted immediately after his election on 14 November. Sensibly, his “Contract with America” also recognised that his Top 10 legislative priorities would take time to deliver:
“I will work with Congress to introduce the following broader legislative measures and fight for their passage within the first 100 days of my Administration:
1. Middle Class Tax Relief And Simplification Act. 2. End The Offshoring Act.
3. American Energy & Infrastructure Act. 4. School Choice And Education Opportunity Act.
5. Repeal and Replace Obamacare Act. 6. Affordable Childcare and Eldercare Act.
7. End Illegal Immigration Act. 8. Restoring Community Safety Act.
9. Restoring National Security Act. 10. Clean up Corruption in Washington Act. ”
We are now more than halfway through his first 100 days, and already it is becoming clear that his priorities have been upended by House Republicans. They have replaced Tax Reform at the top of their agenda with his 5th priority, Healthcare Reform, as the President confirmed earlier this month:
“Before we do the tax — which is actually very well finalized — but we can’t submit it until the health care statutorily or otherwise,” Trump told reporters before a White House budget meeting. “So we’re doing the health care — again moving along very well — sometime during the month of March, maybe mid-to-early March, we’ll be submitting something that I think people will be very impressed by.”
This is a potentially major setback for Trump’s agenda given that, at best, Congress is unlikely to agree on a healthcare bill before the summer. This will mean he has lost 6 critical months in which to push forward on tax reform, his top priority. In turn, any progress on his 3rd priority, the $1tn infrastructure spending project, will have to wait until next year. As the conservative National Review has warned, this “is a polite way of saying it may not happen at all”.
The issue is simple. As President Obama discovered in 2009, Congress can only handle one big initiative at a time.
Even though the Democrats also controlled both Houses, Obama was forced to choose between healthcare reform and climate change for his first term, and had to leave climate change for his second term. President Trump may now be about to learn the same lesson, as he endeavours to pass both healthcare and tax reform. It seems he may have simply misjudged the complexity of the healthcare issue, as he told State Governors last month:
“Nobody knew that healthcare could be so complicated. Everybody is different, every state is different, and different requirements, but I think we have something that’s going to really be excellent.”
The House currently hopes to agree its own draft healthcare bill within days. But progress in the Senate – where Republicans hold only 52 of the 100 seats – may well be much slower. One key issue is that US healthcare costs are already far more expensive than in Switzerland and other major countries, as the Wall Street Journal chart confirms:
□ It costs over a third more to deliver a normal baby in the US than in Switzerland, at nearly $11k
□ A routine knee replacement is also a third more expensive in the US at $28k
□ A heart bypass operation costs more than twice as much in the US at $78k
□ Compared to other advanced economies, US costs are even more out of line
Politically, the position is also likely to become more difficult. AARP, the powerful American Association of Retired People, has urged its 38 million members to oppose the House bill, calling it an “age tax” which would increase premiums by $13k/year for a 64-year old earning $24.5k/year:
“AARP recognizes the magnitude of the upcoming vote on this harmful legislation that creates an age tax, cuts the life of Medicare and gives sweetheart deals to big drug and insurance companies while doing nothing to lower the cost of health care or prescriptions”.
AARP’s move confirms a Foxnews poll showing only a third of voters currently support the House bill, and reinforces a warning from the non-political Congressional Budget Office that it ”would leave 24 million more Americans without health insurance“. Similarly a Pew poll shows half of all Republicans earning less than $30k/year believe the government has a responsibility to ensure health coverage for all.
Unsurprisingly, therefore, 4 senior Republican senators have already signalled serious opposition to key parts of the Bill, due to its potential to strip people of Medicaid coverage. As they wrote to congressional leaders:
“Unfortunately, the current version of the House bill…provides almost no new flexibility for states, does not ensure the resources necessary to make sure no one is left out, and shifts significant new costs to states.”
Republican senator, John Boozman, has also highlighted a more fundamental issue:
“This is difficult—it’s 18% of the economy. My concern is not with the timeline; my concern is doing it right.”
Boozman’s analysis is confirmed by the Our World in Data chart above, which shows:
The US currently spends more on healthcare per person than any other country
Since 1970, its spending has risen around 30-fold, from $300 to $9000 in 2014 (in $1970)
Switzerland is the next-highest spender at $6750 per person – one third less than the US
Yet average life expectancy is Switzerland is nearly 83 years compared to 79 years in the US
Life expectancy is, of course, not the only outcome by which to measure healthcare spending. But it is certainly highly important for most people. And as the study’s authors comment:
“All countries in this graph have followed an upward trajectory (life expectancy increased as health expenditure increased), but the U.S. stands out as an exception following a much flatter trajectory; gains in life expectancy from additional health spending in the U.S. were much smaller than in the other high-income countries, particularly since the mid-1980s.”
It is still early days for the Trump administration, but it seems clear that healthcare reform is unlikely to proceed smoothly. In turn, this makes it unlikely that Congress will pass both tax reform and infrastructure spending this year, disappointing many companies and investors.
Instead, they may well find that President Trump follows President Reagan in leaving tax reform until his second term. After all, even Reagan and his highly-skilled Treasury Secretary, James Baker, found that it took them 2 years to craft the necessary bi-partisan support in Congress that enabled his landmark reform to become law in 1986.