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China looks inwards as export demand remains weak

Posted to Far East Maritime (by on October 25, 2012

From factory of the world to factory of the mainland – it’s all about domestic consumption for the time being.

China became known as the world’s factory by offering manufacturing costs that could not be matched by the developed nations. Its wages paid to uneducated rural migrant labour were a fraction of the mostly unionized pay required in the West, and land for factories was plentiful and cheap. Tax and other financial incentives were offered to keep costs even lower.

 But as China’s economic development grew at breakneck speed, it spawned the fastest growing middle class in the world. Millions of people suddenly wanted new stuff – cars and TVs, toasters, expensive red wine and jewellery. A cargo airline exec told me his carrier was flying a freighter filled with Ferraris to China as fast as the cars could be produced. For the most expensive luxury goods the world has to offer, the limiting factor was no longer demand, but supply.

As people moved up the economic ladder, their expectations began to change. It was no longer okay to have no hot water or electricity, with an open sewer running past the shack. Children needed clothes and shoes, better schooling, the latest iPad and a mobile phone.

Then mainlanders looked out their windows and found their view robbed by Armageddon-like pollution that has turned the air in every Chinese city into a gritty, foul soup. They found that every waterway in the country had become a toxic dumping ground, and the streets were choking gridlocks. Environmental regulations in China, strict as they are, remain poorly enforced or officials collude with factory owners to subvert restrictions.

Under pressure, Beijing began to crack down, regularly increasing the minimum wage and forcing factories of low value goods generating pollution during their production to move inland or close down.

But as the inland provinces began to grow and improve their economies, migrant labourers that powered the South China manufacturing machine increasingly failed to return from holidays after finding work closer to home. The resultant severe labour shortages have forced wages even higher, and with already narrow margins, thousands of factories have shut their doors.

This is all very interesting, I hear you say, but what does it have to do with shipping?

Well, the goods that are carried by container lines are generally of the high volume, low value variety – toys, garments, DIY bits and pieces, furniture. It is the sort of stuff made in the Pearl River Delta’s “factory of the world”, so any disruption in this manufacturing centre has serious implications for the lines. Such as factories being forced inland to places like Chongqing. Serving customers in the world’s biggest city requires a complex set of solutions with the Yangtze River, road or rail used to get containers to the coast.

Even so, a melting down Europe and a flat US has crippled many factories, either inland or at the coast, and slowed China’s exports, as can be seen by falling ship utilization levels among the carriers, especially on the Asia-Europe trade.

Industrial production is down, factory output has dropped and fewer containers for export are arriving at the container ports for shipping to western markets. Ship utilization has dropped below 90 percent, and with rates below break even levels, profitability and shipping lines will remain strangers for a while.

China’s growing domestic consumption is good news for the country, but aside from bulkers carrying coal and ore, it won’t help the box shipping business much. What the container carriers need is sustained buying from consumers in the US and Europe that can drive new orders down the supply chain and get the factory furnaces fired up once again.

Just don’t count on that sustained global recovery coming anytime soon. Pascal Lamy, Director-General of the WTO, could not have framed the future in a bleaker manner when he said last week: “The global economy remains caught in the tailwinds of a crisis and it may be many more years before it enters a sustained recovery mode.”

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