In English if you say “he’s gone west” you mean he’s a “goner” (i.e. dead). It’s a phrase the stock market might now be applying to China’s economy. But in China, if you “go west” you get to the town of Urumqi. It has 3 million people, per capita income of $11,000 a year, the Texas Cafe serves great Tex-Mex, and it’s China’s “fastest growing city”. Oh yes – and it’s the world city most remote from the sea (2,400km).
China Really Is A Big Place
The point is that, unlike any other developing region, China is a very, very big place. Many economists would classify China’s recent growth as typical of the “Trade Development Cycle” model. Economic development uses vast quantities of raw materials, for building infrastructure and stocks of durables. Then the focus turns to less material intensive products – there’s not much iron ore in a Gucci handbag. Anyway, it looks as if China might have reached this inflection point in its development cycle.
Previous Growth Regions
Forty years ago Europe and Japan went through the same process. Between 1965 and 1973 Japan was the miracle economy, accounting for two thirds of dry bulk trade growth – just like China. The problems began in 1973 as heavy industry, especially steel, reached unsustainable capacity levels. In 2001 China’s steel output was 151mt, up from 90mt in 1993. Useful growth which brought China’s steel production in line with Europe’s output of 159mt. But by 2013 China’s output hit 815mt and is likely to be about the same in 2015. Familiar territory.
How Big Is Too Big?
The problem is figuring out when China’s trade development is overshooting. China is so much bigger than Japan and Europe. But by looking at the ratio of the growth in total Chinese seaborne imports to growth in Chinese industrial production, a change is apparent (see chart). If the ratio is over 1, trade is growing more quickly than industrial production – from 2000 to 2003 the ratio averaged 1.6. If the ratio is 1, seaborne imports and industrial production are growing at around the same rate – in 2004-12 the ratio averaged 0.9. Below 1 is bad news – since 2012 the ratio has averaged 0.4 and has been negative in recent months.
Good News & Bad
The good news is that China’s industrial production trend remains at about 5-6% per annum. There is still a long way to go in developing the economy, especially the inland provinces. The bad news is that the stagnation of imports looks suspiciously like the structural slowdown of a maturing Trade Development Cycle. For a while it seemed that coal might fill the growth gap, but with the new attitude to the environment, that seems less likely.
So there you have it. Lots of drama, but the underlying economics suggest that the Chinese economy is having normal development pains, intensified by its size and the pace of growth. For shipping this may not be the end of the road, but it’s time to take a careful look at the management of the business. When a customer the size of China gets growth pains, you just can’t ignore it. Have a nice day.