Credo quia absurdum

What then are we to make of the strange juxtaposition that all attention in Hong Kong this week is focused on the annual Rugby Sevens tournament, whereas in London the papers have been obsessed with the Brown Sarkozy soccer summit at the Emirates stadium (and not just because of the presence of Nicholas´s glamorous new First Lady ?) Suffice it to say that the mood in Hong Kong shipping circles this week is markedly upbeat, in sharp contrast, we believe, to the fears of gloom and doom which seem to be affecting many Western countries.

The dry cargo market in particular has recently turned optimistic on the back of a sharp rebound in Brasil China freight rates. Indeed some seasoned traders are privately predicting that hire for "trips out" will eventually exceed the record levels of a year ago. These firms have been willing to put their money where their mouth is by chartering vessels for long periods from late 2008 or even 2009 at healthy rates. In this regard they are willing to turn a blind eye to what is now widely coming to be known as the "2010 problem". The problem as everyone is now aware is that if everything goes on schedule, 2010 will see the delivery of more than four times the largest number of capes ever before delivered in a single year. "If everything goes on schedule" is of course the caveat on which the optimistics base their case. They are willing to bet that a significant portion of these newbuilding contracts will never be fulfilled. In support of their argument they point to scarcity of steel, main engines and other equipment. In addition they expect that financial constraints will come into play in the form of problems with buyers finance as well as refund guarantees. And finally they think that some smaller yards will be simply unable to fulfil their commitments due to skyrocketing costs and mismatching currencies.

It takes a big leap of faith to believe that growth in Chinese demand can erode the expected oversupply of tonnage in 2010, but the fact remains that no-one has made much money betting against the mainland for the past few years.

Western sentiment on China has turned nervous in the past few months. Whereas last year if was widely perceived that China could be the saviour of the world economy, nowadays there are widespread doubts on a number of fronts.

In a world of falling stock markets, the Shanghai bourse has registered some of the biggest drops of all, collapsing by over 40% from its high of October 2007. Some "blue chip" stocks like PetroChina (the mainland´s biggest company) are down more than one half. Although some of the declines may be caused by contagion from US markets, they also reflect very real concerns that the Chinese economy itslef cannot be immune to likelihood of recession in a major trading partner. In addition there have been widely publicised problems caused by the harsh winter. Shortages of coal and petrol forced parts of the country to go almost onto a war footing, and millions of migrant workers were stranded trying to make the annual trip home to visit their families for Chinese new year.

The Olympic games, though widely expected to support the economic boom, are now perceived to be a possible part of the malaise. Pollution in Beijing, as anyone who has been there recently can attest, remains a major problem. It is now expected that a number of factories will simply have to close down for extended periods if the air quality is to be alleviated in time. As if this was not bad enough, Chinese consumers are now having to deal with inflation at a 12 year high of around 8.7%. Food prices in particular have risen by a painful 23% or so year on year. All these things raise the spectre of possible social unrest that is most feared by the Chinese government. Finally, China is now having to deal with the particularly bad timing of a sudden outbreak of bad publicity caused by riots in Tibet. This (although partially counterbalanced by warming relations accross the Taiwan strait following the election of a somewhat more pro-Beijing government there), has even led to talk of boycotts of the games or perhaps its opening ceremony. In spite of all this, it is clear that sentiment among the Chinese population remains undaunted. When the Olympic flame began its epic journey in Greece last week, enthusiasm rose to fever pitch, and refused to be dented by what was perceived as foreign attempts to spoil Beijing´s games over Tibet. In its longest journey ever, the Olympic flame is set to travel 137,000 km over 130 days, being borne (if all goes well) to the top of Mount Everest, as well as to at least 111 mainland cities in more than 30 provinces in China.

As the early Christians said, "Credo quia absurdum", ("I believe because it is unbelievable") and indeed it takes an almost religious turn of mind to comprehend the giant strides that China has taken economically during the past decade. So, in Hong Kong we still think that it is riskier to bet against China overcoming its current difficulties than to bargain for a continuation of the benign conditions that have created the current bull market in shipping.