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  • Chinese capitalism, case studies.

    As a starter, I will post a series of article related to capitalism with Chinese characteristics. Focusing on how the state hinter and support industries that might or might not pay dividends down the road.

    There is something unnatural about the Chinese approach to be sure and I can't imagine it can be duplicated elsewhere


    Notable lines


    But in China, the world's biggest shipbuilder by volume, government intervention helped the industry defy the norm.

    Debt-laden shipyards that otherwise should have gone bust were allowed to stay afloat thanks to easy credit, which stemmed from government efforts to bolster foreign exchange reserves to protect the economy from the crisis.

    "This is just the beginning of the woes for shipbuilders and the worst has yet to come."

    To survive and keep some of the sector's 400,000 workers employed,



    China's shipyards founder as building boom ends

    By Ruby Lian and Alison Leung

    YUEQING, China | Thu May 3, 2012 6:32am IST

    (Reuters) - Welder Zhang fires up his blow torch and looks up at the towering, 8,800-tonnes oil tanker that is likely to be his last job at China's privately owned Qiligang Shipbuilding Co.


    Barring a miracle, the 50-year-old will soon join the thousands of unemployed shipbuilders who have fallen victim to the end of China's maritime boom and the long-awaited consolidation of its more than 1,600 shipbuilding companies.

    Four years into one of the worst downturns to afflict the global shipping industry, hundreds of small to mid-sized shipyards are teetering on the brink of bankruptcy as foreign orders dwindle and domestic lenders slash credit.

    "The building of this ship is almost done, and we don't expect to have any new jobs soon," said Zhang, who asked to be identified by one name.

    "We used to work 30 days a month, but now we work only 10 to 20 days because not many ships are being built. Many workers have moved on to other jobs."

    Qiligang Shipbuilding is one of several troubled firms in the eastern coastal Zhejiang province, the world's largest manufacturing base for small to medium-sized dry docks.

    According to local media, around 80 percent of shipyards in Zhejiang have either suspended production or are operating at half their capacity.

    "The grass is growing high in many yards that have closed due to a lack of orders," said Zhang Shouguo, secretary general of industry group the China Shipowners' Association.

    "This is just the beginning of the woes for shipbuilders and the worst has yet to come."

    To survive and keep some of the sector's 400,000 workers employed, shipyards must turn to less lucrative businesses such as leasing vessels, real estate or, in the worst case, tearing apart the ships they once used to build, industry experts say.

    "Shipbuilding is a very cyclical industry and those who can maintain strength, complete structural restructuring and transform will be a major force after the recovery," said Zhang Yao, spokesman for Singapore-listed Yangzijiang Shipbuilding (YAZG.SI), one of China's largest vessel building firms.

    "For others without flexibility to deal with the market changes, dormancy may be their best choice. Eventually more than 30 percent of existing shipbuilders will disappear."

    His forecast is relatively optimistic compared to the view of other industry officials. The head of the government's China State Shipbuilding Corporation, Tan Zuojun, told local media in February he believed 50 percent of domestic shipyards would go bankrupt in the next two to three years.

    MARITIME RECESSION

    The shipping industry has yet to recover from being mauled by the 2008 global financial crisis, which triggered what the International Monetary Fund called the "Great Trade Collapse".

    The Baltic Dry Index, the benchmark for the freight market and an indicator of global economic activity, plummeted more than 94 percent in 2008 from a record high of 11,793 points. This week, it was trading above 1,100.

    During a maritime recession, shipbuilding is usually the first and hardest hit sector as global ship owners delay or cancel orders for new vessels to save capital reserves.

    But in China, the world's biggest shipbuilder by volume, government intervention helped the industry defy the norm.

    Debt-laden shipyards that otherwise should have gone bust were allowed to stay afloat thanks to easy credit, which stemmed from government efforts to bolster foreign exchange reserves to protect the economy from the crisis.

    Lending to the overall shipping industry shot up more than 500 percent year-on-year to nearly $4 billion in 2008, according to loan market information service Thomson Reuters LPC.

    "When Chinese shipyards have new orders, the buyers must bring foreign currency into China since the shipping contracts are in U.S. dollars," said Lam Pak Ho, Hong Kong-based senior manager at Bank of China.

    The huge expansion in Chinese shipyards, which currently hold about half the world's new ship orders, helped create a glut of low-tech vessels that has kept freight rates low and prolonged the agony for ship owners across the globe.

    As these foreign firm struggle, orders have declined and financing has become problematic, prompting Beijing to turn its back on what has now become an unprofitable business.

    Credit has also dried up as the government tries to cool the economy, falling more than 87 percent from 2008 to around $501 million last year.

    New orders to Chinese shipyards tumbled 52 percent last year to 36.22 million deadweight tonnes, the China Association of National Shipbuilding Industry says. This year, new orders are down about 40 percent year-on-year in January-February.

    SURVIVAL OF THE FITTEST

    Only the largest Chinese shipyards such as China Shipbuilding Industry Corp (601989.SS), China Rongsheng Heavy Industries (1101.HK) and Yangzijiang Shipbuilding, are expected to survive this round of consolidation.

    In the government's five-year economic forecast, China's 10 largest shipbuilders are expected to hold at least 70 percent of the domestic market by the end of 2015, compared to less than 50 percent in 2010.

    A short drive from the Qiligang Shipbuilding yard in Zhejiang, two unfinished oil tankers stand in the once bustling dry dock owned by struggling Dongfang Shipbuilding (DFSB.L).

    The shipyard, which had employed more than 600 workers just over a year ago, could become another scrap yard if the company fails to find a more profitable way to survive. China is one of the world's leading ship recycling nations.

    "At the end of this year, you could see many shipyards turn into scrap yards," said Venkatesh Narayanaswamy, the former chairman of Dongfang Shipbuilding. "This would be the worst case scenario, because the profit margins are much lower."

    (Additional reporting by Randy Fabi in Singapore; Editing by Miral Fahmy)
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

  • #2
    I've heard that Turkey is the place to go for ship hulls nowadays.

    Comment


    • #3
      xinhui,

      Superficially, it seems as if China's support for its shipbuilders amounted to a jobs program, one that China can no longer afford. It almost resembles a US-style stimulus measure, e.g. GM and Chrysler, although without a realistic expectation of recovery for all 1,600 shipyards.
      To be Truly ignorant, Man requires an Education - Plato

      Comment


      • #4
        Yup, that is correct.

        Someone made the following analogy: American capitalism encourage creative destruction. Thank about ipod replacing record stores, computer replacing typewriters, cell phone replacing phone booth. Google displacing Yahoo. Destroying of the old to give way for the new. If anything we have learned since 2008, is that the American economy can take shocks and allow room for mistake (for now)

        The Chinese capitalism, if you can call it that is about creative creation -- creative something that should be dead, ie the 1,600 shipyards. China would love to move up the value chain, but as long as the priority is to extend the life of the old, it will be difficult.

        No saying which is better, just to point out different priorities. The Chinese government... for lack of a better term... never takes the handling of her economy as purely "economic". Geopolitics, national strategic positions, internal chaos, corruption (can't leave this one out) I can't imagine how limited resource can stay in play when there are so many priorities out there lobbying in.



        Sorry for standing on the soap box and rant.
        “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

        Comment


        • #5
          xinhui:

          What do you make of the pledges China made during Clinton's just-completed visit? Is it moving in the right direction or is it just after US high tech stuff previously barred to it?
          To be Truly ignorant, Man requires an Education - Plato

          Comment


          • #6
            Originally posted by xinhui View Post
            American capitalism encourage creative destruction.
            In theory, but in practice given the stimulus spending after the last crisis, its clear that ideology isn't what is followed but pragmatism. You can call it socialism with american characteristics, but i'd just call it pragmatism.

            As a result of the stimulus spending the US can show some growth today.

            Whereas the EU opted for austerity and its growth is a mere fraction.

            Two different parts of the world which champion different ideologies applying the others thinking to solve their problem :)

            Originally posted by xinhui View Post
            If anything we have learned since 2008, is that the American economy can take shocks and allow room for mistake (for now)
            Do you foresee a double dip recession affecting the US like in the EU ?

            Originally posted by xinhui View Post
            The Chinese capitalism, if you can call it that is about creative creation -- creative something that should be dead, ie the 1,600 shipyards. China would love to move up the value chain, but as long as the priority is to extend the life of the old, it will be difficult.
            Reminds me of the French model of the 80s. Strong state subsidies for key industries. France had the best telecom networks, high speed rail, aircraft industry, nuclear etc in Europe. They even did it for their automobile industry albeit indirectly through trade restrictions which could not compete outside France, so that was a loss and had the opposite effect.

            Whereas in the UK, Maggie killed any industries that could not support themselves. Within a decade she wiped out entire industries. The mantra was to move into services. Services not manufacturing is what will fuel growth. It did to a certain extent but it also reduced the manufacturing base a great deal. UK could not afford subsidies at the level the French did.

            Look at France today, pretty stagnant and has been so for the last decade, since those heady days of the 80s & 90s.

            Originally posted by xinhui View Post
            No saying which is better, just to point out different priorities. The Chinese government... for lack of a better term... never takes the handling of her economy as purely "economic". Geopolitics, national strategic positions, internal chaos, corruption (can't leave this one out) I can't imagine how limited resource can stay in play when there are so many priorities out there lobbying in.
            So long as the reserves exist to fund this China can do it. At some point (maybe ten years later) questions will be raised and they will have to set priorities. Until then it will be good times in China :)
            Last edited by Double Edge; 05 May 12,, 15:37.

            Comment


            • #7
              Originally posted by JAD_333 View Post
              xinhui:

              What do you make of the pledges China made during Clinton's just-completed visit? Is it moving in the right direction or is it just after US high tech stuff previously barred to it?
              The glass half full of me think the pledges while being pledges might have some legs for two reasons. 1) They are off the news front page and people's radar screen. under-the-table agreements between US and China tends to get done, quietly.

              2. The Chinese export already heading toward a balance. While the movement of the RMB is still slow but it is heading toward the direction the US wanting to see.

              See the following Times write-up: China also needs to adopt to the new economic reality -- EU and American just won't buy as much they used to -- they can't export their way out forward. They have to change, one way or another. Those pledges should be viewed with skepticism. That said, given the on-going trends, there is a good chance that they will be put into action.




              May 1, 2012
              China’s Vanishing Trade Imbalance
              By EDUARDO PORTER

              America’s economic imbalance with China has been a singular concern of policy makers for more than half a decade. Senators Charles E. Schumer and Lindsey Graham wanted to punish China for pegging the exchange rate to the dollar in 2005 — arguing that its policy of cheapening the currency to subsidize exports was fueling a huge trade surplus that cost America jobs.

              Their bill never passed. But reducing China’s surpluses has remained at the top of the bilateral agenda ever since.

              Something unexpected has happened to China’s economy, however. Its surplus with the rest of the world has largely disappeared.

              China’s imbalance with the United States is still likely to take center stage when Treasury Secretary Timothy F. Geithner sits down to the fourth round of the U.S.-China Strategic and Economic Dialogue this week. But he will have a harder time making the case that America’s trade deficit is somehow China’s fault.

              China’s current-account surplus — the broadest measure of its trade relations, which tracks how much more China exports in goods and services than it imports — has plummeted. In 2007 it amounted to more than 10 percent of the entire Chinese economy.

              By last year it had shrunk to about 2.8 percent. And the International Monetary Fund estimates it will decline to 2.3 percent of the nation’s output in 2012, the smallest since 2001.

              The United States’ current-account deficit has shrunk, too, to 3.1 percent from 5.1 of American gross domestic product. Senator Schumer and colleagues nonetheless continue to attack China for its cheap currency. Last October the Senate passed a bill, which has yet to pass the House, to let American companies seek duties on Chinese imports to compensate for what is said to be an undervaluation.

              Mitt Romney has promised that if he becomes president he will declare China guilty of currency manipulation, something which the Obama administration has declined to do and which would pave the way to slapping duties on Chinese exports.

              But to hear leaders in Beijing, the problem is solved. In March, China’s premier, Wen Jiabao, said the Chinese currency may “have reached its equilibrium level.” China’s currency manipulation is undisputed. The government tightly controls the exchange rate to preserve the competitiveness of Chinese exports. The manipulation has been at the core of a strategy that led China’s merchandise exports to quintuple from 2000 to 2010, increasing its share of world exports by about 0.75 of a percentage point a year, according to the I.M.F.

              Still, there is reason to think that China’s economic strategy may be turning a corner. While its current-account surplus with the United States, $318 billion last year, was somewhat bigger than it was in 2007, China actually ran a big deficit with the rest of the world. China’s vast takeover of world markets may be running out of steam.

              “The rapid growth of China’s export market share during the past decade was the result of a variety of factors that have largely run their course,” noted the I.M.F.’s World Economic Outlook, published in April. These include cheap labor, multinationals’ outsourcing of production to China, a huge jump in productivity and China’s 2001 entry into the World Trade Organization, which limited the ability of other countries to stop its exports.

              There is scattered evidence. China’s wages have been rising over the last decade — about 10 percent a year in real terms, according to Nicholas R. Lardy of the Peterson Institute for International Economics. The combination of climbing Chinese wages and transportation costs has led American companies, including General Electric and Master Lock, to reassess their global production lines and move some production back to the United States.

              Though China has only slowly loosened its grip on the exchange rate, the appreciation is greater than it might appear at first sight. Nominally, China’s renminbi has risen 8 percent against the dollar since June of 2010. But factoring in China’s higher inflation, it has gained about 13 percent. And it has appreciated about 40 percent in real terms since 2005.

              This is making a difference. The I.M.F. forecasts that China’s surplus will rebound gradually to 4.25 percent of the country’s output by 2017. But it noted that if the renminbi continues to gain — either through faster appreciation or sustained higher inflation — the surplus will be smaller.

              Skepticism is warranted, of course. It is too soon to know whether these changes really mean China is turning a page in its development strategy. The I.M.F.’s central forecast is that China’s share of world markets will keep growing at the same rate as in recent years.

              An important reason the surplus shrank in China is that the global recession clipped consumer spending in its main export markets in the United States and Europe. China’s own reaction to the global contraction — a huge buildup of roads, rail and other public infrastructure alongside a wave of cheap lending for private investment in construction and other projects — sucked in imports rapidly.

              These factors are unwinding. What is more, the investment boom could help Chinese companies gain share in new, high-tech markets where they did not compete before. In the wind energy industry, for example, China now has about 6 percent of world exports, up from almost zero five years ago.

              Still, China has not adopted many of the reforms that economists suggest are needed to lay the groundwork for a new phase of development that relies less on exports to other countries and depends more on the spending of the Chinese themselves. To do this, wages and incomes must rise.

              The government must bolster the social safety net — providing better pensions and health care to Chinese families so they do not have to save every last penny in case of a rainy day. And interest rates on bank deposits — which the government keeps artificially low to reduce its borrowing costs and provide cheap credit to industry — must rise too, so consumers can get a return on their savings.

              Despite these uncertainties, the goal of a more balanced Chinese economy is closer than it has been in at least a decade.

              Some effects of the global recession will linger. Exports of machines and equipment to the United States, accounting for 10 to 15 percent of China’s export growth early in the last decade, will not recover until the American housing market does. And China’s terms of trade will get worse as the price of energy and the other raw materials it imports keeps rising even as the electronic devices and other machines it exports keep getting cheaper.

              China has already saturated markets in many of the low-tech goods it makes — toys, for example. And gaining new markets in higher-tech goods against established rivals is likely to become increasingly difficult.

              And weird as this may seem for a country of 1.4 billion people, China is looking at a labor shortage down the road that will start increasing wages ahead of productivity growth, eroding China’s competitive edge. Its working-age population is expected to peak and start shrinking within five years, partly as a result of the one-child policy that depressed birthrates and accelerated the aging of the population.

              China’s backward farm economy will continue shedding workers for a few years, adding to the urban labor force. Still, Chinese factories on the coast are having a harder time drawing workers from the agricultural hinterland in the west. That is partly because rising food prices are raising farm incomes. And it is partly because living conditions are grim in Chinese cities, where workers must make do without a social safety net.

              Whether China’s economy stays on a more balanced keel is important for the entire world, which is struggling with weak consumer demand after a deep recession. It is also important for China — whose reliance on exports to drive employment and growth is distorting the economy, repressing consumer demand, feeding a surge in unproductive investment and loading banks with dubious loans.

              China’s economy is in a peculiar spot. Its surplus has shrunk drastically, but without any of the reforms needed to transform China into more of a consumer economy that relies less on exports. In fact, household consumption has fallen consistently as a share of the economy since the early 1990s.

              This path leads nowhere good. Further investment booms may continue to shrink China’s trade surplus. But they come at a high cost: more resources wasted on empty buildings and unused roads.

              Fortunately, China’s leaders appear to understand the need to change. The 12th five-year plan begun last year is centered on the goal of raising family incomes, shifting to an economy more reliant on the production of services and building the kind of safety net that gives the Chinese people the confidence to spend some of their vast savings.

              If these reforms are actually made, China could be on a more sustainable path of economic growth that would increase the well-being of regular Chinese. And American senators would have to blame somebody else for the nation’s trade deficit.

              E-mail: [email protected]
              Attached Files
              “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

              Comment


              • #8
                Do you foresee a double dip recession affecting the US like in the EU ?

                I am more optimistic now as inch by inch jobs are coming back to the US. I don't expect (hope) a double dip. Barring any unforeseen circumstances in the EU Land, of course. The glass half full of me thinks while things are moving not as fast people would like to see but it is moving toward the right direction.

                I am no economist, I have no idea what I am talking about 99% of the time but my stock portfolio has a nice run in the last several months, especially my ETFs. I lie to my wife and my boss all the time, I would never lie to my doctor and my wallet.
                “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                Comment


                • #9
                  An important reason the surplus shrank in China is that the global recession clipped consumer spending in its main export markets in the United States and Europe. China’s own reaction to the global contraction — a huge buildup of roads, rail and other public infrastructure alongside a wave of cheap lending for private investment in construction and other projects — sucked in imports rapidly.
                  This implies it was a unique event rather than a trend.

                  Skepticism is warranted, of course. It is too soon to know whether these changes really mean China is turning a page in its development strategy. The I.M.F.’s central forecast is that China’s share of world markets will keep growing at the same rate as in recent years.
                  yep

                  Still, China has not adopted many of the reforms that economists suggest are needed to lay the groundwork for a new phase of development that relies less on exports to other countries and depends more on the spending of the Chinese themselves. To do this, wages and incomes must rise.
                  it will be interesting to see how China tackles this. How/Why to counter the 'if it aint broke, don't fix it' thinking. There is some risk involved here. Too many jobs lost and domestic unrest increases. Growth rates drop and the same issue arises again. Yet if they don't do something they will face this problem anyway. The incoming administration will face a unique challenge that recent others have not, they will leave office ten years later with a lower growth rate than when they entered. How are the public going to react to that.

                  There is another obstacle and that is business lobbies or vested interests. Business isn't going to like paying higher wages.

                  How strong is the influence of vested interests in China, xinhui ?
                  Last edited by Double Edge; 06 May 12,, 06:05.

                  Comment


                  • #10
                    Let’s see . . .

                    The world economy is out-of-balance.
                    China has too much money, and others too little.
                    China funnels money (inefficiently, to be sure) into shipbuilding.
                    Price of ships falls, hurting a handful of shipbuilders around the world.
                    Price of ships falls, helping a handful of ship buyers around the world.
                    As shipping hulls become cheaper, they are replaced more frequently.
                    Newer ship hulls tend to be more fuel efficient.
                    More fuel efficient ships save money on transportation, and [insert favorite environmental bias] the planet.
                    Cheaper transport costs help lower prices / reduce price inflation for end users (OK, it's a theory).

                    Net effect of China’s subsidy is to transfer wealth from an area of abundance to one of relative scarcity, and [insert favorite environmental bias] the planet in the process.
                    Trust me?
                    I'm an economist!

                    Comment


                    • #11
                      How strong is the influence of vested interests in China, xinhui ?
                      perhaps DOR has enough free time to write a book for you.
                      “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                      Comment


                      • #12
                        Originally posted by xinhui View Post
                        Do you foresee a double dip recession affecting the US like in the EU ?
                        I don't think so. But like you, I'm not an economist, just a small businessman. Judging from my business, which has been bad in some respects but not so bad in others--I mean home building down vs remodeling up.

                        Across the board tax increases could take it down So could a large drop in exports. Both are possible. A rise in rates on US borrowing could force the government to seek more tax revenue. The double dip in the EU could affect US exports. An explosion in oil prices is another danger; read Iran. I see people swinging between confidence and no confidence. When there's good economic news the phone rings more often. When gas prices go up and the news gets dark, it doesn't ring as much.


                        I am more optimistic now as inch by inch jobs are coming back to the US. I don't expect (hope) a double dip. Barring any unforeseen circumstances in the EU Land, of course. The glass half full of me thinks while things are moving not as fast people would like to see but it is moving toward the right direction.
                        Yes; I like every little sign that companies are bringing back jobs. Maybe it was inevitable as the countries that "took" them away began entering a new phase of economic growth like that described in the NYT piece you posted. And I agree, the economy is moving in the right direction, albeit slowly. What's not moving in the right direction is Federal spending and deficit control. Until we fix them, the economy will not be all it can be.

                        I am no economist, I have no idea what I am talking about 99% of the time but my stock portfolio has a nice run in the last several months, especially my ETFs. I lie to my wife and my boss all the time, I would never lie to my doctor and my wallet.
                        lol...I can't lie to my wife; she always catches me, and I don't lie to my boss, since I am the boss. My doctor is Pakistani and my wallet is small. What else is there to say?
                        To be Truly ignorant, Man requires an Education - Plato

                        Comment


                        • #13
                          Originally posted by DOR View Post
                          Cheaper transport costs help lower prices / reduce price inflation for end users (OK, it's a theory).
                          Provided the cost of fuel oil remains constant or drops :)

                          Originally posted by xinhui
                          perhaps DOR has enough free time to write a book for you.
                          Vested interests is the major reason that reforms have stalled in India.

                          Princelings have controlling stakes in a number of companies. To agree to reforms that help the country will hurt their bottom line.

                          How will the CCP push reforms that hurt this bottom line. CCP might be able to push things in other spheres but here they will come up against the business community.

                          Comment


                          • #14
                            Are entrenched interests necessarily a problem?

                            The SOE system is not necessarily bad for China; the SOEs help provide funding to the government and by creating government funding, cut down on the total tax rate for other sectors of the economy.

                            And it's been done before; the Song dynasty, for instance, obtained over 50% of its government revenue through its salt and iron monopoly, and the Song dynasty was renowned for its economy.

                            I believe in modern China, the SOEs comprise between 10-20% of the state revenues and this amounts to a 11-25% reduction in government fees.

                            Comment


                            • #15
                              Whereas in the UK, Maggie killed any industries that could not support themselves. Within a decade she wiped out entire industries. The mantra was to move into services. Services not manufacturing is what will fuel growth.
                              DE,

                              Many, myself included don't believe services is the end-all solution for everyone. UK/French is not China. Apple and orange.
                              “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

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