China's Petroleum and Chemical Industry Prosperity Index for March 2023 continued to decline
Click:0    DateTime:May.12,2023

By China Petroleum and Chemical Industry Federation, Sublime China Information (SCI)

Key summary

Despite the recovery on course, China's Petroleum and Chemical Industry Prosperity Index continued its downside amid the off-season

Tracking February’s downtrend, China's Petroleum and Chemical Industry Prosperity Indexfell into a relatively cold range in March 2023, at 92.67. Demand was weak amid the off-season, and the rubber, plastic, and other polymers manufacturing industry was still facing heavy destocking pressure, so Index of Rubber, Plastic Products and Other Polymer Products dropped to the vigilant overly cold zone, dragging down Prosperity Index of Chemical Raw Materials and Chemical Products Manufacturing Industry in synch. Prosperity Index of Fuel Processing Industry remained firm, as travelling demand strengthened with the warmer weather. The approach of the air conditioning season after the winter was easing the low-inventory pressure in the crude oil and natural gas sector. Although Prosperity Index of Petroleum and Natural Gas Extraction Industry extended the downtrend from February, it was maintained in a relatively hot range.

Market focus

● The US and European Central Banks continue to raise interest rates, and there are early signs of a financial crisis

The European Central Bank lifted interest rates by 50BP on March 16, 2023. The Federal Reserve raised interest rates by 25BP on March 22, reiterating the 2% inflation target. The Bank of England raised interest rates by 25BP on March 23. The liquidity was tightening in line with higher interest rates, hitting the global financial markets more significantly. Silicon Valley Bank, the 16th largest bank in the US, faced a sudden bank run and capital crisis on March 8, and collapsed two days later, triggering panic in the financial market. The US Signature Bank was shut down on March 12, deteriorating the panic sentiment further. On March 19, UBS took over the messy Credit Suisse with the support of the Swiss Central Bank, and completely wrote down AT1 bonds, resulting in losses of over $17 billion. Flight to safety sentiment was prevailing globally. As a result, gold prices once rose over $2000/ounce, and international crude oil prices saw a decrease of over $10/barrel. In late March, as the panic sentiment was eased, oil prices regained some ground. 

Suggestions and notes

● Market forecast

Demand recovery will become more uncertain, making market sentiment more cautious.

● Risk alert 

Core inflation remains high, despite lowered global inflation, and hence there will be still room for the US and European central banks to raise interest rates. There is higher probability that liquidity tightening will trigger financial risks, which will increase uncertainty of demand recovery. Therefore, the co-existence of high inflation, high interest rates, and high risks will likely result in a correction in commodity prices.

Overview of China's Petroleum and Chemical Industry Prosperity

China's Petroleum and Chemical Industry Prosperity Index fell back to 92.67 in March 2023, down by 2.36 percentage points from February 2023, and it entered the relatively cold zone. The index marked a year-on-year decline of 4.46 percentage points, indicating that the downtrend continued to narrow (see Figure 1).

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Figure 1 Movement of China’s Petroleum and Chemical Industry Prosperity Index     (historical average level = 100)

There was less momentum powering Chinese economy in March 2023, so the recovery turned into a stable period. According to data from the National Bureau of Statistics, the manufacturing PMI decreased slightly to 51.9 in March 2023, down by 0.7 percentage points compared with that in February. China's real estate sales rebounded significantly amid multiple positive factors, with the cumulative sales of the top 100 real estate companies during January-March turning positive year on year. In February, social financing increased by RMB1.95 trillion year on year, higher than market expectations. A sharp increase in both companies’ and residents’ medium and long-term loans signaled a significant rebound in the structural credits. International-wise, major central banks’ interest rate hikes were tightening liquidity among the US and European banks, as well as investment banks, which aroused flight to safety sentiment globally and hit the economic recovery much. Under the circumstances, commodity prices decreased except for precious metals. However, as the panic sentiment was eased later, the market regained some ground, but the uncertainty about demand recovery increased.

Industry-wise, demand was weak amid the off-season (see Table 1), and the rubber, plastic, and other polymers manufacturing industry was still facing heavy destocking pressure, so Index of Rubber, Plastic Products and Other Polymer Products dropped by3.27 percentage points to the overly cold zone, dragging Prosperity Index of Chemical Raw Materials and Chemical Products Manufacturing Industry down by 5.29 percentage points month on month, marking the largest decline among sub-industries. The index was still in the overly cold range. Prosperity Index of Fuel Processing Industry rose by 0.57 percentage points month on month, making it the only sub-segment registering month-on-month positive growth. The oil and gas inventory was maintained at a relatively high level after the winter in the Northern Hemisphere, and the international crude oil and natural gas prices dropped significantly. With the energy crisis retreating out of the market sight, Prosperity Index of Petroleum and Natural Gas Extraction Industry dropped by 2.36 percentage points month on month, but it remained in the hot zone. In a nutshell, the fall in China's Petroleum and Chemical Industry Prosperity Index into a relatively cold range was mainly attributed to the off-season. However, the decline was narrowed to 4.60 percentage points compared with the same period of last year and was the smallest year on year. This indicated that the recovery is still on course. 

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Hot spot analysis and future prospect

1. PBC's reduction in deposit reserve ratio to protect liquidity; expectations on credits loosening to be further lifted

Social financing increased sharply from January to February 2023 given the implementation of multiple favorable policies. The demand for liquidity increased in line with recovering credits, and the financing and lending rates of capital rose, so the People's Bank of China (PBC) carried out excess renewal of Medium-term Lending Facility quota for several consecutive months. Following that, PBC announced reducing the deposit reserve ratio by 25BP, and trimming weighted average deposit reserve ratio of financial institutions to 7.6% on March 17. The initial released about RMB500 billion of long-term funds so as to meet credit needs and maintain reasonable and abundant liquidity, which will lend support to the economic recovery.

2. A shift from liquidity crisis to financial crisis

Global central banks released a huge amount of liquidity to guard against the impact of the pandemic on the economy, indirectly resulting in the global inflation. To ride over the inflation, the Federal Reserve raised interest rates by 25BP in March 2022, officially kicking off a new round of tightening cycle. Compared with the previous tightening cycle (2015-2019), the speed and magnitude of interest rate hikes and balance sheet shrinking doubled. The rapid tightening of liquidity significantly held back inflation, but it also laid hidden dangers for a financial market crisis. The US technology companies reported ample cash flow during the pandemic, and hence Silicon Valley Bank who mainly served technology companies saw mounting deposits and showed eager investment needs. It allocated a big portion of assets in fixed income bonds. However, the interest rate hikes led to big losses. On March 10, Silicon Valley Bank collapsed just 48 hours after a sudden bank run, making it the biggest bank failure in the US since the 2008 subprime crisis. The universality of the bank’s asset liability structure rapidly aroused panic sentiment in the financial market. Mid-March saw investors’ concerns quickly turn to the financial system sparked by the collapse of the US Signature Bank, Credit Suisse’s takeover by UBS and Deutsche Bank’s sharp hike of CDS from the liquidity crisis.To ease the financial market pressure, the Federal Reserve and the European Central Bank provided short-term liquidity supportively. The Federal Reserve, which was in the balance sheet shrinking cycle, expanded its balance sheet by over $390 billion within two weeks from March 8 to 22, effectively resolving the US banks’ systemic risks. The panic sentiment in the financial market was eased from late March, but the systemic risk remained. The relationship between de-inflation, maintaining financial market stability, and maintaining economic growth has formed an "Impossible trinity", and the US dollar monetary policy will impose bigger uncertainty to the global commodity markets.

3. Future prospect

China's Petroleum and Chemical Industry Prosperity Index continued its downtrend in March 2023, which was consistent with the seasonal characteristics. The rapid narrowing of year-on-year decline also nailed down the long-term recovery trend. There were tailwinds during the month, such as stable growth rate of domestic credits, recovering domestic demand, and improving market conditions. International-wise, major central banks found it difficult to combat the highly sticky inflation, and hence they are likely to raise interest rates in the short term. The interest rate hikes also bring bigger pressure to the financial market, and the risk of a global systemic financial crisis is still mounting. The panic caused by the crisis of smaller-scale banks and investment banks in the first half of March drove down commodity prices. After the panic sentiment was eased in in the second half of March, the commodity prices regained some ground. In the medium term, the tightening of liquidity will make a global systemic financial crisis more possibly take place, and the recovery of demand will also face bigger challenges. It is expected that China's Petroleum and Chemical Industry Prosperity Index will continue to rebound, at a limited pace, but it is very likely to see year-on-year positive performance.