Process Economics Program Report 204B
Published: Nov. 2005
This report extends SRIC’s work on comparative regional economics to include the rapidly
growing and increasingly influential petrochemical industry in China. The study is somewhat
different from our “normal” PEP report. While the main aim of the study is to provide insights in
comparative investment costs in petrochemical projects and the costs of petrochemicals
production in China and to relate them to the development in the Chinese petrochemical industry
in general, we have also covered the major macro economic indicators of China as well as some
policy and strategic issues that we believe are important to foreign investors wishing to invest in
the fast growing and rapidly evolving petrochemical industry in China.
There are two main themes in the report: 1) investment climate and regulatory costs in a
broad sense and; 2) construction and production costs in China’s petrochemical industry.
Investment climate, regulatory issues, government approval and decision transparency in
China and their implied costs have been of major concern to foreign investors. With this in mind,
in the first part of the report, we access key macro economic indicators, recent changes and
trends in the administration and regulation of the industry, new licensing and approval schemes
specific to foreign investment, as well as key challenges in investing and operating in China. This
is followed by a brief description of government policies and incentives for foreign investment.
The implications of the recent changes and initiatives are discussed with the view to achieve
informed investment decision making on site selection for new investment projects in China.
The second theme of the report concentrates on the comparative cost competitiveness of
the Chinese petrochemical industry. In this part of the report, we compare investment costs and
operating costs for two representative locations (East Coast and a representative location in the
Central and Western region) in China with those of the US Gulf Coast. Our primary focus is on
the East Coast of China as it has been and will continue to be the main region for foreign
investment in China. For comparative perspective in costs of petrochemicals production, we use
ethylene and polyethylene as the surrogates and benchmark the costs of production in China
against those in the United States, Germany, Saudi Arabia and Japan.
On 21 July 2005, the Chinese government allowed its currency (RMB) to appreciate against
the US dollar by 2.1% and stopped the decade-old RMB peg to US dollar. However, it appears
that there is still considerable international pressure for the RMB to appreciate further. It is
therefore timely to evaluate the potential impact of RMB appreciation on the costs and
competitiveness of the Chinese petrochemical industry. Although this is not the main focus of the
report, the analyses do provide both useful benchmarks and frameworks for assessing the effects
of the Chinese currency revaluation in directional terms, and we evaluate some of those impacts
in the report.
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