Currently, the news seems full of warnings about the health of the Chinese economy. If it’s not worries over the extent of lending by the so-called “shadow banking” system, pessimists would have us believe that China is on the brink of a catastrophic housing bubble, or point to the impact of pollution reaching new highs in major Chinese cities. How should the shipping industry evaluate these issues?
What’s At Stake?
Of course, anything which harms the Chinese economy will generally be bad news. As the Graph of the Week shows, the Chinese economic miracle has been built on an import/export boom some distance in excess of the rest of the world’s efforts at trade growth, with Chinese trade growth accounting for over 90% of global expansion in some commodities.
The two drivers of the Chinese economic miracle which has transformed the shipping industries have been consumer exports, fuelled by cheap labour, and infrastructure investment in construction in China. These two factors are mutually interdependent: the share of the Chinese population living in cities has increased from 35% to 50% since 2000. All these new urbanites need housing, boosting construction. And what does this require? Steel, of course. Construction of housing for urban migrants, along with factories to employ them and services from shopping malls to roads and railways, has spurred Chinese seaborne iron ore imports to nearly 900mt p.a. The effect on the Capesize fleet needs no repeating.
If You Build It They Might Come
The real problem is not all of the construction is where it is needed: there are several virtually uninhabited brand new cities in Inner Mongolia, and a replica of central Paris (with Eiffel Tower!) in Zhejiang province. Signs of a slowdown in these sorts of construction projects have contributed to iron ore prices at the lowest levels in nearly 2 years.
Much of the construction effort of the last few years has been fuelled by fairly easy access to credit, with less conventional “shadow” credit a worry for some. Consumers have also taken on debt to increase their spending power. As more citizens begin to drive cars, oil import demand is stimulated. As they gain disposable income, demand is also generated for goods which drive expanded intra-Asian container trade and a greater need for imported manufacturing materials.
Pollution is another problem China now seems to be taking seriously. This is a bearish sign for areas of heavy industry including iron ore and crude oil importers, particularly the large number of steel mills in Hebei province, near Beijing.
Bad News? Or Not?
So, negative talk about the Chinese economy abounds. But time and again in the last decade, China has surprised (sometimes with the help of a little fiscal stimulus, admittedly), and a controlled deceleration remains the most likely outcome. Reports suggest that GDP growth will struggle to meet Beijing’s target of 7.5% this year. But a near miss would still be a growth rate that most other economies would love to be faced with. Moreover, industrial production in June was up 9.2% year-on-year, the fastest rate this year: maybe China still has the ability to surpass expectations. Have a nice day.