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An intriguing sign of the times for China's ports and shipping sector emerged in March, when Shanghai and Ningbo-Zhoushan, the two largest ports in the country, which are traditionally seen as bitter …
An intriguing sign of the times for China's ports and shipping sector emerged in March, when Shanghai and Ningbo-Zhoushan, the two largest ports in the country, which are traditionally seen as bitter rivals, announced they were setting up a CNY100mn (US$14.6mn) joint venture to capitalise on opportunities in the domestic shipping sector. BMI believes this new spirit of cooperation indicates a significant change in the industry. After over a decade, breakneck export growth may be slowing, and both ports seem to have realised that further increases in their container-handling capacities may no longer be required. The joint venture suggests they have detected a new opportunity in domestic, river-based shipping, particularly in the Yangtze Delta. It is clear that the Chinese macroeconomic environment is changing, and the ports and shipping sector needs to adapt. BMI notes that growth, which slowed during the global recession in 2009, is again surging ahead in the first half of 2010, so much so that there is a real danger of overheating. We expect that the Beijing authorities will tighten credit in the second half of this year, provoking a controlled 'double dip' recession with growth slowing again in 2011. The key risk concerns the authorities' ability to fine-tune the economy; any overreaction or combination with renewed global financial worries could turn the expected dip into more of a plunge. An important point is that the Chinese economy is undergoing a qualitative change during this transition: as the economy matures export-led growth is moderating and the country's foreign trade is rebalancing. Imports are now more dynamic than exports. Indeed, over the next five years we expect import growth to run at above-GDP levels, while exports will lag behind GDP. Strong volume increases are being notched up across China's main ports this year. However, over a oneto two-year period we expect the growth of cargo handling to drop from the high double digits to low single digits, reflecting the combined effect of the expected double dip recession and the longer-term rebalancing of foreign trade. At Shanghai and Ningbo-Zhoushan, for example, this year's tonnage growth will range from over 15% to just under 30%. But these numbers will fall sharply to the 2-3% range in 2011, and remain moderate over the next five years. The box sector will also lose dynamism as Chinese imports, many of them in the form of commodities and bulk cargo, emerge as the new growth sector. We believe China's trade is at something of a crossroads. Up till now foreign trade has grown at a much faster rate than the domestic economy, a natural reflection of the way that the huge economy has been opening up to the world. As the economy begins to mature the pace of foreign trade growth is moderating. Our prediction is that over the next five years foreign trade will grow at an average rate of 7.9% per annum, on a par with the overall economy. As noted above, imports are expected to grow slightly faster than GDP, while exports will lag a little. This may explain why some shipping companies are now looking to the import business as the focus of their new investment, and to the Yangtze Delta (traditionally the main inward shipping route) rather than the Pearl River (traditionally the main export channel). On the whole, the risks to our shipping and ports forecast scenario are on the downside. Our central double dip scenario is quite an undramatic affair, and one that many emerging economies would love to suffer. It is best described as 'fast-slow, fast-slow' with the dip years being 2009 and 2011, when growth comes down to 'lows', by Chinese standards, of 8.7% (2009) and 7.5% (2011). Simply put, the risk is that the 2011 low could be significantly lower. A combination of factors could make this happen. They could include an over-tightening of China's monetary policy, a sharp revaluation of the yuan, and some kind of local or global negative shock to investor confidence.