Listing boost for China's military
By Russell Hsiao
Following a dismal performance by China's shipbuilding industry - new orders
tumbled 96% year on year in the first five months to a net of 1.18 million
deadweight tons (DWT) - the sector posted a substantial boost of 8.8 million
DWT in new orders for the months of June and July combined.
In July, the country's new shipbuilding orders of 4.1 million DWT accounted for
nearly 70% of the world's total, according to statistics released by the China
Association of the National Shipbuilding Industry (CANSI).
The surge in orders has some observers in the Chinese media hailing a recovery
for the ailing industry, which faced a shortage of credit and looming job cuts
if the conditions did not improve. Yet
recovery is far from certain, according to some industry insiders and analysts,
and the real hurdle will surface in the coming months, when small- and
medium-scale shipbuilders may have to stop production or close down factories,
and large builders will be forced to lay off workers and cut salaries.
These challenges, however, are buoyed by another trend that may signal changes
in the Chinese leadership's thinking toward further reforms of its
defense-industrial complex, in particular the ability of its defense assets to
solicit private funding - starting with the SBI.
As a case in point, in the past month, the China Securities Regulatory
Commission, the country's main securities regulator, approved an initial public
offering in the Shanghai Stock Exchange by China Shipbuilding Industry
Corporation, a state-controlled conglomerate that is the largest supplier of
capital ships to the Chinese Navy, to issue 1.995 billion shares, or a 30%
stake, with plans to raise 6.4 billion yuan (US$936 million) to expand its
capacity.
A prime reason for the sector's lagging performance, coming amid overcapacity
of the shipping market, was a stagnating trade volume in new ships. China's SBI
was also struck by order cancellations, ship delivery delays and financial
strain.
A Ministry of Industry and Information Technology spokesperson described the
overcapacity as "acute", and observers placed the blame for at the feet of the
global economic slowdown. These problems, however, may point to further
indication of the need for the industry to enact sweeping reforms to overcome
its three major bottlenecks: financial, technological, and managerial.
As one industry specialist candidly explained back in 2003: "At the present
time, China's shipbuilding industry has the following problems: obsolete
production modes, yet-to-be formed effective technological innovation systems,
lack of experienced scientific research personnel, and lack of administrative
and management personnel ... ". [1]
In response to the crisis, the central government committed a considerable
stimulus to shore up the ailing shipbuilding sector. In February, the State
Council approved a stimulus package aimed at encouraging financial institutions
to lend more to ship buyers and also to offer incentives for purchasers of
ocean-going ships. According to one industry expert, "The policy of encouraging
financial institutions to lend more to ship buyers has actually helped Chinese
shipbuilders to maintain orders. Because of the unfolding financial crisis,
many ship buyers feel incapable of forking out the money. This policy has
undoubtedly given them confidence and helped cut order cancellations and
payment delays".
Further measures to aid the weakening industry included a 20 billion yuan
industry investment fund in Tianjin, southeast of Beijing, which would aid in
equity investment, ship leasing, supporting mergers and acquisitions among
shipyards and purchasing vessels orders for which are cancelled by buyers.
Nevertheless, most domestic banks continued lending with caution, despite the
country's top economic planner vowing to fund the industry in early June.
More telling of the economic crisis's implications for shipbuilders, however,
is the effect that it appears to have had on Beijing leadership’s attitude
toward China's civilian economy and its defense industrial complex, in terms of
allowing its defense assets to vie for private funding.
The listing of China Shipbuilding Industry Corporation may signal a new
willingness by Beijing authorities to loosen its grip on the sector and
publicly list its defense assets. The move would establish a "refueling
pipeline" between the burgeoning Chinese capital market and its real economy,
and boost the development of the real economy.
Furthermore, industry specialists believe that the measure could incentivize
management, and it gives it a new funding route for its defense budget - as
long as it turns over a profit.
It is worth noting, however, that commercial shipbuilding has always been
considered a strategic industry, since its infrastructure can also support
warship construction. Nonetheless, valid concerns over China's growing naval
power may at least be alleviated to an extent by the transparency that listing
may bring.
Note
1. Liu Xiaoxing et al, "The Development Strategy of China’s Shipbuilding
Industry", Chuanbo gongcheng (Ship Engineering), Vol 25, No 4, August 2003.
Russell Hsiao is the editor of China Brief at The Jamestown Foundation.
(This article first appeared in The Jamestown
Foundation. Used with permission. Copyright 2009 The Jamestown
Foundation.)
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