Fitch Ratings expects China’s “anti-involution” policies, aimed at reducing unhealthy competition, to provide moderate support to the refining sector’s financial performance, with margins likely to stabilise amid tighter restrictions on new capacity additions and some capacity exits. However, we believe margin pressure will persist downstream for chemical producers, where overcapacity challenges are set to be more resistant.

The government’s new “Workplan for Stable Growth in the Petrochemical and Chemical Industry (2025-2026)” lays out stricter capacity rules for the refining sector, building on previous targets that sought to phase out refineries with a capacity of less than 2 million tonnes per year. Under the updated workplan, future capacity additions can only be smaller than the capacity being retired, signalling a shift towards flat or even declining national refining capacity in the next few years.

China’s crude refining capacity reached 955 million tonnes at end-2024, close to the 1 billion tonne ceiling imposed by the government. We regard this ceiling as a hard cap, given that the authorities have forced capacity reductions when it was approached in the past, most recently in 2022 when several small-scale “teapot” refiners were forced to exit the industry.

Gasoline (petrol) and diesel consumption are falling in China due to rising electric vehicle penetration and broader electrification, but petrochemical demand is growing as the economy expands. This has encouraged China’s national oil companies (NOCs) to invest in oil-to-chemicals refining, which may partly offset weaker sales of traditional fuel.

Fitch expects refining margins to recover modestly amid increased market concentration and the exit of inefficient plants, supported by the workplan’s new capacity controls. However, if the government’s capacity controls are less effective than we anticipate, higher production would be likely to weigh on the margin recovery.

For the petrochemicals sector, the workplan seeks to reduce overcapacity risks in sectors such as coal-based methanol, but we believe it will be difficult to institute major changes. The government is likely to continue to support large-scale, integrated projects to address supply gaps for high-end petrochemical products, but this will add to the challenge of addressing overcapacity among low-end products, particularly given that production interlinkages between the sector’s diverse outputs can make it hard to target supply of specific products. As a result, we do not think anti-involution policies will have a substantial short-term impact on chemicals production.

Capacity for basic products such as ethylene and propylene, as well as polymers like polyethylene (PE), polypropylene (PP), polyvinyl chloride (PVC), and propylene oxide, has expanded at a faster rate than consumption in recent years. Volume growth in exports of these basic products is unlikely to resolve the issue of overcapacity, and we expect the segment’s low profitability to persist.

Among Fitch-rated issuers, integrated NOCs such as PetroChina Company Limited (A/Stable) and China Petroleum & Chemical Corporation (Sinopec, A/Stable) are well positioned to benefit from increased industry concentration in the refining segment. Their vertically integrated business structure gives them high self-sufficiency and low raw material costs, which can mitigate margin pressure in petrochemical sector downturns. We also expect less intensive NOC capex spending pressure to support margins in 2026-2030, following the launch of several big projects in recent years. This effect should be stronger at PetroChina, as most of its capex is in upstream segments and tends to fall when oil prices decline.

The ‘bb’ Standalone Credit Profile (SCP) of chemical producer Shanghai Huayi Holdings Group Co., Ltd. could face narrowing headroom in the current environment. However, under Fitch’s government-related enterprise (GRE) criteria, a one-notch SCP downgrade would not necessarily affect its ‘BBB’/Stable Issuer Default Rating, all else being equal.
Source: Fitch Ratings