Impact of China’s Slowing Economy on Global Trade and Transportation

China’s economy is beginning to slow down.  It is at the weakest point since China’s admittance to the World Trade Organization in 2001 and continues to shrink as the country’s gross domestic product annual growth rate dips below double digits for the fourth year in a row.  The Chinese government has reported the official 2014 figure at 7%; however economists estimate this figure is actually smaller.  Large parts of China’s service sector are growing, but the industrial sectors, which have the most impacts on trade and the global economy, are bleaker.  Exports have decreased due to sluggish global demand and imports are shrinking due to a slowing domestic economy.   China is no longer the same dominant force in commodity trading that it has been for close to 15 years. This is uncharted territory as the country has been accustomed to unparalleled economic growth for more than a decade.   This trend is likely to continue; the International Monetary Fund estimates that the Chinese economy will grow by 6.8% in 2015, exporting uncertainty and sending shock waves through the trade and transportation industries.

Multinational corporations and countries have to respond to China’s weaker demand for imports. A shift from rapid to modest growth is having large effects on emerging markets that depend on the sale of goods to China.  A decrease of imports of minerals and soybeans to China has jolted many Latin American countries.  This has been particularly straining on Brazil.  China surpassed the United States in 2009 as Brazil’s number one trading partner.  According to Ilan Goldfajn, Chief Economist at Itau Unibanco, one of Brazil’s largest banks, “China is the most important risk factor for Brazil.”  He is forecasting Brazil’s economy to contract 2.3 % this year.   

The lower demand for exports to China combined with the influx of ultra-large container ships has created a situation where overcapacity has crippled the freight market by pushing freight rates to record lows.  This is particularly acute for goods being shipped from China to Europe. Rates from Asia to Europe are at their lowest rates since 2009 when the global economy was in the depths of the great recession.  This spring, the Shanghai-Europe trade lane freight rate was at $466 per 20-foot container (TEU).  The month of September closed with even lower rates of $313 per TEU; 70% lower than the same week in 2014. 

In an effort to increase trading, the Chinese government is taking steps to correct the weakening trade figures and jump-start their export engine. China devalued its currency in mid-August and according to the People’s Bank of China, it is a natural step towards the creation of a market dominated Chinese exchange rate.  While this may be true, it is nonetheless contributing to some uncertainty as there are no international guidelines established for currency manipulation.  If China pursues an aggressive policy of devaluing the Yuan, there are fears that a weakened currency can boost China’s own exports at the expense of those it buys from. 

The Chinese government also appears to be encouraging the merger of two state-owned container shipping enterprises, Cosco and China Shipping.  Rumors of this consolidation have been around for years, however it appears talks between the executives of the carriers have begun.  If the merger happens, this will create the world’s fourth-largest container shipping operator.  The consolidation could bring stability to the ocean transportation route by reducing competition and allowing higher pricing, something ocean carriers haven’t been able to sustain in recent years.  This may bring stability to China, however it is uncertain if the impacts to the container shipping industry will be significant enough to counteract the influx of new capacity.  An additional 1.6 million TEU of new capacity is expected to be added this year.  With the trend towards larger ships and expanding ports to accommodate large scale shipments, it appears this issue will be plaguing the freight markets for some time.  Drewry, the London-based analyst is forecasting this overcapacity crisis will only worsen in 2016.

With very low odds of an alternative Asian country challenging China’s dominant position in the global trade market, there is no doubt that China will remain the driving force in global trading for years. Most of the world’s supply chains still originate in Asia, with a majority of shipments from China. The impacts of their actions will continue to be felt around the globe and it is certain that China will continue to pursue solutions to boost its export economy. If China is successful, global supply chain interests from shippers to carriers may benefit from an injection of rapid and sustainable growth to global corporations and economies. Undoubtedly, all who have stakes in the global trade and transportation industries will be watching China closely.

References:

Carriers face three more years of excess capacity pain, Drewry warns

http://www.joc.com/maritime-news/carriers-face-three-more-years-excess-capacity-pain-drewry-warns_20151008.html

China’s actions sure to impact trade and transportation

http://www.joc.com/economy-watch/china%E2%80%99s-actions-sure-impact-trade-and-transportation_20150828.html

China’s slowing economy: The worst has yet to come

http://fortune.com/2015/01/21/china-economy-growth-slowdown/

No Golden Week sparkle for carriers battling low spot rates

http://www.joc.com/maritime-news/no-golden-week-sparkle-carriers-battling-low-spot-rates_20151004.html?utm_source=email&utm_medium=newsletter&utm_campaign=daily%25newswire&mgs1=5ba4l4kBTN

Weakening Chinese exports behind low container rates

http://www.joc.com/economy-watch/china-economy-news/weakening-chinese-exports-behind-low-container-rates_20150416.html

 

About Allyn International

Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance.  Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe and Asia and Allyn regional headquarters are strategically located in Fort Myers FL USA, Shanghai P.R. CHINA and Prague, CZECH REPUBLIC. For more information, log on to www.allynintl.com.