What You Can Do if You Run the Show

Back in June, the first three were generally reckoned to be the 2007/8 winter (one of the hardest on record), the Szechuan earthquake and the Tibet demonstrations. To this we can now add the melamine scandal, wherein it has been found that a large proportion of the country´s milk powder, including that which goes into baby formula, contains an industrial chemical that makes it appear more nutritious than it actually is.

Last but not least China is now facing an economic crisis. Even the Chinese government admits that figures for the third quarter show annual growth falling to below 9 per cent, a shockingly low figure by Chinese standards. But the reality, as many in the bulk shipping industry would confirm, feels much worse than this.

Bulk shipping and the Chinese construction industry have long been closely correlated. Since the good times for bulk shipping began in the late nineties, around 30 million homes have been built in China (most of them apartments). But now the good times seem to be over. The price of some new Beijing apartments has fallen from around 15000 RMB per square meter in February to around 9000 RMB. Sales during this month´s national holiday week were down 72 per cent year on year. And prices for most steel products have fallen by around 30 per cent. The good news for bulk shipping is that China has experienced housing slumps before and usually managed to bounce back, most recently in 2004. The bad news is that this did not happen against the background of a worldwide economic slump.

Until very recently it was still possible to defend the notion of a post Olympic bounce for China. The deniers could point to statistics that Australia´s iron ore exports increased to 251 million tons, up 22.7 per cent over the first nine months of this year. And even Brasil, where CVRD has been locked in a standoff with the Chinese over ore prices, registered its third biggest ever month of exports in September (at 25.29 milion tons, after August, 25.33 m tons, and July 26.58 million tons).

But in reality the September figures just confirm how sharp the decline has been. September cargoes were mostly fixed in July, when sentiment for both shipping and iron ore prices was still relatively firm. Since then, steel output has started to fall drastically in China, by 9.5 per cent year on year in September (the fourth consecutive monthly decline). The Chinese steel association CISA now predicts that total steel production in China for 2008 will be about 500 million tons, up by just 10 million tons from last year, and down by 20 to 50 million tons from earlier forecasts. Iron ore prices are collapsing in China, and no-one knows how to account for the 70 million tons of overpriced inventory sitting on the quayside.

There is some good news however. China is a command economy and there is no doubt the government is taking the situation very seriously. 80 million people are directly emplyed in the construction industry. At least part of the current slowdown is attributable to measures China took to cool a housing bubble one year ago. Now those measures are being put into reverse. On October 22nd, the Government announced the minimum down payment on homes will be reduced from 30 pct to 20 pct, stamp tax is to be eliminated, and mortgage rates reduced. Encouraging though this may be, Steel mills in China and traders in Hong Kong reckon that it will take at least 6 months for these measures to kick in.

More encouraging for the long term in October was the news that the Government is to accelerate the liberalisation of land rights for its farmers (about 730 million people - more than half the population), who presently occupy so called "noodle strips" of land in a system little changed from the collective era. By monetising these assets, the Government can effectively give money to the farmers. If fully carried through, these policies could in the long run have the effect of adding a huge new boost to the struggling economy.