Powering the Markets: The Chinese Colossus

Transcription

1 Powering the Markets: The Chinese Colossus February 13, 2004 On Tuesday February 10, the Norwegian-American and Hellenic- American Chambers of Commerce held their tenth annual joint shipping conference in the New York Helmsley Hotel. This year s conference entitled Powering the Markets: The Chinese Colossus, focused specifically on the economic, financial and legal factors within China. China is fueling shipping demand across the entire industry. The conference drew well over 150 shipowners, charterers, lawyers, brokers and others. This year s conference was co-chaired by Blaine Collins, vice president and regional manager for North and South America of Det Norske Veritas and John Stratakis, a partner with Poles, Tublin, Stratakis, Gonzalez & Weichert LLP. Opening Remarks Yuelin T. Yang, director of corporate development of IMC Pan Asia Alliance, opened the conference, reminding us that Norwegians and Greeks dominate shipping because, as he said, they have shipping in their blood. He then quickly brought the focus back to China. As Napoleon noted, Let China sleep, for when she wakes, she will shake the world, China is now wide awake and shaking the world. He provided several examples of why this is true.

2 By 2007, he said, China s middle class is estimated to reach 300 million people, equal to the current US population. Mr. Yang mentioned the $120 billion trade deficit that the US has with China. He said Walmart alone buys $15 billion worth of goods a year from Chinese suppliers and that more than half of China s exports are by subsidiaries of foreign multinationals. The world s most populous nation, he said, attracted more than $50 billion of foreign direct investment last year, mostly for manufacturing. On the downside is the number and frequency of non-performing loans. During his speech Yang quoted a Standard & Poors statistic that tagged China with more than 20% and up to 40% of non-performing loans, most of which are attributed to poorly-managed state-owned companies, some of which have become privatized to remedy the situation. That would amount to around $400 billion to $800 billion of dud loans, two-to-four times what it cost to bailout the USA s savings and loans in the 1980 s, he said. Mr. Yang also said that China has been investing money in two of its four largest state-run banks. The country also formed an independent banking watchdog called the China State Banking Regulatory Commission as an oversight committee for banking practices. China s Effect on Oil Demand and Transportation The next segment was a panel discussion called The Chinese Factor in Trade and Transportation moderated by Jeff Goetz, manager of Marine Projects and Consulting for Poten & Partners. Mr. Goetz reviewed where we were 10 years ago by citing the increase in rates. Ten years ago at the time of the first conference, a VLCC was earning $11,000 per day and a capesize bulk carrier was earning about $10,000 a day. Today they are earning about $75,000 a day and $100,000 a day, respectively. What a difference a decade makes, he said. Before introducing the speakers, he mentioned that news sources from The New York Times and The Economist to Oil and Gas Journal, Lloyd s List, Reuters and Foreign Affairs have spent considerable space and time analyzing and forecasting the expected growth rates for China for 2004 and beyond, with some questioning, Is this a bubble? Paul Campbell of COSCO North America spoke in depth about the company s activities in China. He cited statistics that the Chinese shipbuilding sector finished 6 million deadweight tons of ships in 2003, a 2

3 000 Bpd 46% increase from Mr. Campbell also said Chinese ports handled 48 million TEU last year, the largest volume in the world. Bjorn Dingsor of Norwegian Energy Ltd. and consultant for Morgan Stanley spoke next about China s growth for oil. Mr. Dingsor mentioned that if China s growth is sustained, oil companies had better start to drill more since current production will not be sufficient to meet expected growth. Mr. Dingsor noted that China s need for crude, should it reach the levels of US consumption of gasoline, would raise demand by 25 billion barrels per year or 2.5 times the proven reserves of Norway. If China s 1.28 billion people ever reached the level of vehicle ownership that belongs to the United States, (1.9 cars per household), it would deplete known oil reserves. Currently, China s petroleum demand is second only to the US and just about equal to Japan. Its demand, according to the US Energy Information Administration, is 5.26 million barrels per day (mmbpd), with an anticipated rise to 10.9 mmbpd by The graph below shows China s increasing need for imports. Mr. Dingsor concluded that if the economic growth we have seen in China over the last year continues, an energy crisis may be looming. 6,000 Oil Production and Consumption in China 5,000 4,000 Net Importer 3,000 Net Exporter 2,000 1,000 Production Consumption BP Statistics/Poten

4 The Dry Bulk Shipping Effect Anthony Whitworth, chief executive officer of Navios Corp. discussed, Measuring the Impact of China on the Dry Bulk Markets. Mr. Whitworth said China s colossal importing capacity is tempered by congestion in its ports. He spoke about the implications of communism on China s ability to grow into a world economic power and quipped, The Chinese are Communists the way the French are Catholics, taking a line from a journalist for The Atlantic Monthly. In 2003, China consumed 21% of the world s trade aluminum; 25% of its zinc; 29% of its iron ore; 19% of its copper; and 24% of its stainless steel. He cited new demand for Panamax bulk carriers fueled by China s need for coal and agricultural products like soybeans (49 new vessels for coal and 40 for soybeans). The Chinese consumer is driving growth. China surpassed Germany this year in light vehicle sales to become the third largest car market in the world. He said besides port congestion, other factors might conspire to put a kink in China s growth such as inflation and commodity prices influenced by unforeseen circumstances such as terrorist attacks. Robert Shaw, executive vice president and legal counsel of Navios Corp. moderated the next panel called Dry Bulk Markets Panel Discussion, which included Angeliki Frangou, director of Franser Shipping; Calypso Nomikos, director of AM Nomikos Transworld Agencies; Gary Vogel of VOC Shipholdings VC; and Anthony Whitworth. Shipbuilding in China The next panel titled Shipbuilding in China was moderated by Andy Westwood, vice president and regional manager for China for Det Norske Veritas, who spoke about China s orderbook. He said ship orders increased by 2.5 times last year compared with Mr. Westwood spoke of China s plans to develop the world s largest shipyard in Shanghai and plans to build 50% of the world s ships by China has the most shipyards in the world, though most are currently struggling with by poor productivity and inability to meet owners specific requirements. The nation is the third largest shipbuilder in the world behind Korea and Japan. 4

5 Magnus Granrud, director/partner of O-J Libaek & Partners spoke on the Negotiating and Building panel citing China s enormous shipbuilding potential. As an aside, Granrud mentioned that China has many jobs to fill while the US has unemployed workers. Even after Chinese laborers are trained to work in a shipyard and leave to find work in Japan, he said, there are still millions of workers left to replace them. Capt. Graham Westgarth, president of Teekay Marine Services, Ltd. and Chris Williams, director of Graig China Ltd. and Graig Shipping Group also gave their views of the ship building market in China during their panel discussion entitled, Shipyard Capacities & Capabilities: Designs, Risks and Quality. Cross the T s ; Dot the I s The conference then turned to banking, finance and legal issues in China. The next panel titled China Business: Developments in Banking and Financing was moderated by Jim Lawrence of Marine Money International. Peter D. Dicky Yip, chief executive of China business for HSBC spoke about China s developments in financing to support its shipping industry. Mr. Yip said China s involvement in the World Trade Organization since Nov is forcing its legal system to become more transparent to foreign investors. Yip also cited China s GDP growth rate at 7% per year, while expected growth rate is 8% a year. Dagfinn Lunde, a member of the board of DVB Bank AG, also participated in the discussion and said Chinese banks were eager to finance shipbuilding projects. Paul Kontoyannis, director of Investments and Finance Ltd. spoke next about Greek ship orders in China. Greek orders represent 11% of the Chinese orderbook. More than $1.9 billion is committed to shipbuilding in China. Mr. Kontoyannis mentioned a few hurdles to ordering ships in China including communication gaps and the required payment guarantee by a shipowner, which Korean and Japanese yards do not request. Legal Implications J. Michael Cavanaugh, a partner with Holland & Knight, LLP and Derick Betts, a partner with Seward & Kissel LLP spoke on the subject of US - China Maritime and Tax Treaties. Mr. Cavanaugh discussed the US- 5

6 China Bilateral Maritime Treaty. One point he made was that vessel operating common carriers as well as non-vessel operating common carriers; agents and freight forwarders are all required to register in China in order to do business. Mr. Betts discussed the implications of the US-China Income Tax Treaty, which came into effect in Genrong Yu, a partner with the Shanghai-based firm SLOMA talked about Chinese maritime courts during the panel discussion, Encountering Differences in US and Chinese Laws (Finance/Insurance). China has 10 maritime courts in the port cities and along the Yangtze River, he said. The Chinese maritime industry is ruled by the Chinese Maritime Code, which went into effect in Two key points under this code are that: a vessel cannot be arrested under Chinese maritime law, instead, a complainant must bring a court order against a person; and second, in China, shipbuilding, commissions and brokerages fall under the jurisdiction of maritime law, where in the US, such matters fall under contract law. The three venues for maritime arbitration in China are Beijing, Shanghai and Shenzhen. The parties can choose an applicable law and language, as they wish. Nigel Binnersley a partner with Healy & Baillie in Hong Kong, said Hong Kong is a good place for dispute resolution in Asia since China is based on civil law and Hong Kong is based on common law. Larry Rutkowski, a partner in Seward & Kissel, LLP, also spoke on the panel about general rules of doing business in China such as having a lawyer who knows the rules of the land. Will the Bubble Burst? During a lunch break, Dr. Edward Yardeni, chief investment strategist and managing director of Prudential Equity Group in New York, addressed the audience. After a few well-timed political jokes, he reiterated on a serious note the conference s major point that China is an economic force to be reckoned with. Its rural population is picking up and moving into its cities at a rate of 20 million people per year, or a Houston a year. The country is selling a record 5 million cell phones a month and has seen a significant increase in car sales. Dr. Yardeni in the end said the China bubble will not burst until at least the 2008 Olympic Summer Games are over. 6

7 Conference Conclusion The question that remains is whether or not China will have sustained enough growth to carry itself beyond that. At this point, 2008 seems quite far away. For the foreseeable future, the conference conclusion is that China is here to stay. 7