China Syndrome

Problems in petrochemicals

Since the new opening of China three years ago, Western businessmen have faced a Great Wall of ignorance about that country's industries. Even some government ministers did not have a firm grasp on the situation inside the country. Last July, when economic figures were released for the first time in nearly 25 years, Chinese government officials admitted privately that some of the numbers came from declassified reports of the U.S. Central Intelligence Agency.

Now the most detailed and comprehensive work ever done on a major segment of the Chinese economy has opened a crack in that wall. The Bank of America's Hong Kong subsidiary has amassed a two-volume, 450-page report (price: $5,000) on the petrochemical industry that provides the first definitive view of a contemporary Chinese industry. Mandarin-speaking and Harvard-trained Anthropologist Robert Silin, 39, compiled the report, making three trips to China.

In China's ambitious Four Modernizations program, petroleum-based chemicals are a pivotal industry. Says Silin: "It leads into so many other areas of basic industry, like synthetic fibers, fertilizers, rubber and plastic." His basic finding: China has embarked on a promising effort to expand its petrochemical production dramatically so that it could eventually become a major manufacturer and exporter of synthetics and resins. By 1985, if all goes well, China's production of ethylene will quadruple from 455,000 metric tons a year to 1.9 million. Polyethylene output is expected to expand from its very low current levels to about 1 million metric tons annually.

The initial Chinese investment in petrochemicals is huge. In the past two years, Peking has signed contracts worth nearly $2 billion, as much as one-third of its total technology bought abroad, to build four ethylene plants and three hydrocracking units. Most of these imports will be paid for in cash on delivery, thus creating a substantial drain on the country's foreign reserves, which are estimated to be as little as $1.5 billion.

The country's petrochemical future contains several other question marks. The most troubling is crude oil supply. In 1985 the petrochemical industry will need approximately 330,000 bbl. per day of oil. Estimates of China's total reserves vary from a respectable 20 billion bbl. to a Saudi-like 100 billion bbl. or more. But much of this lies offshore, where production is still five to ten years away. More easily exploitable onshore fields are no longer yielding the once steady 10% production increases. Last year the increase was 2%.

Technical obstacles also hamper development. China lacks port and petro chemical transportation facilities to service the new complexes and the trained manpower to build and run them. Despite a population that studies estimate has topped 1 billion, the corps of skilled technicians is too small to meet China's future needs in petrochemicals alone.

The Bank of America report, in sum, portrays a growing industry that eventually will be looking for markets abroad but that is in need of equipment and technology. There could be good opportunities for foreign involvement, but Silin's realistic assessment of the difficulties China faces has doubtless dampened some of the grander illusions about a vast and voracious new Chinese market just coming in sight.

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