OceanX – a look at China

(What follows is part of OceanX research, written by Ruben Huber, a Loadstar Premium contributor. This content has not been edited by Loadstar Premium.)

I’ve been doing business with China since over 24 years, worked for Chinese companies, lived in China, learned the language, am married to a Chinese, grateful to have many close Chinese friends and travel to the country regularly (any chance I get), considering it my second home. It is never easy to write about China, as it remains a complex country with a multitude of dimensions, and it is even harder in geopolitically challenging times. My admiration of the country and its people might be biasing my perspective and comments, albeit I am trying to look at things from different perspectives, thus I shall be laying out my views of the current state of the nation and share some further reading and content with the intention to provide the reader with a point of view as balanced as possible.

The country boasts a rich history and since the opening up again under Deng XiaoPing in the 1970s, it had an amazing run, becoming the second largest economy in the world and with a throughput volume of 300+ Mio TEU in 2023, the biggest ocean freight market on our planet. The situation of the country and its economy at the beginning of this year of the dragon is not easy. From my view, the country today is caught between internal structural economic issues and international geopolitical shifts, with no easy answers for most of those challenges. Beginning with the internal issues, the overreliance on cheap export-oriented production and overinvestment in the property and infrastructure sector has made much of the growth dependent on those areas. Export production in many sectors has become expensive and is shifting to cheaper locations, accelerated by shifts in sourcing due to geopolitical challenges and resulting duties. Meanwhile the almost unlimited investment spending of some regional governments in recent decades is being shifted from infrastructure towards more targeted high tech industries. An often over-educated youth, that is pushed to academic achievements as a holy grail meets a labor market that is lacking the white collar demand. Thus we see highly educated young talents staying at home and being unemployed, while many blue collar jobs remain unfilled. On the geopolitical shifts, much has been written over rising powers threatening incumbents and how one tries to control the others growth. There are usual two sides of the story and truth is somewhere in between, but no doubt this plays a role. One might add, what I call “poor marketing” into the mix, as the Chinese government often communicates externally, like it communicates internally and what in Chinese language for Chinese ears works well, is not understood in the same way by foreign ears, translated into theirs. However the issue is that those communications and changing of rules and regulations, albeit with certainly positive intention for its people, result in loss of confidence overseas. Something that impacts international relations and not only investor confidence. The lack of frequent international exchanges during the pandemic and the still limited travel, student exchanges, expatriates etc after it, are adding to that issue. All bad for business. The lack of investor confidence is a key issue, especially in a time when many factories come to a time in their lifecycle where investment decisions need to be made. Many of those today then favor other countries and jurisdictions, with some of them aggressively subsidizing to attract investment too.

Looking at any challenge in China, one must always bear the massive scale of the country and its population in mind. Thus when looking at issues like the housing market and the current oversupply, even high estimates, like 80 Mio vacant apartments are not a huge percentage in comparison to the population. Further things are often unevenly distributed, with demand still there is some centers, while massive overinvestment has happened in other places. It certainly does not help that the government becomes more secretive with numbers as soon as any do not look good, something that falls on what I called “ poor marketing” earlier and it certainly does not help confidence, but that’s how things are today. The Chinese governments approach with the Made in China 2025 initiative already prepared for a shift towards higher tech industries, away from cheap export focused to order production and the country has made amazing strides in many of these sectors. Cost-efficient production at scale is one of the economy’s absolute strengths. And even if today there is a lot of debate around deflationary risks from overproduction, we may not forget how this cost-efficient mass production in China and the nation’s ability to scale inventions, has been elevating living standards in western countries for decades. More recently now, the solar industry, wind power and electric vehicle markets are just a few examples in this area. Further, in terms of digitalization of everyday life, the country is far ahead of most of the world. To quote my 13 years old son: “this is the champions league, back home is little league…”. Champions League also describes the competitive environment. Jörg Wuttke the parting head of the European Chamber in China once called the country, the gym for international companies. Not only will the competitors try to beat you on cost and price, but also on service and customer satisfaction. This also extends to our field of shipping, forwarding and logistics. With some still 220,000 freight forwarders in the country, it is one of the hardest markets to compete in. Most international firms still struggle to move beyond “handling” of overseas controlled cargo, as local sales is hard, local relationships difficult to break and customers difficult to satisfy. On the other hand, this hyper-competition of local companies makes profitability a challenge, as there is practically every day someone waking up, willing to invest in growth and acquire business at a loss. A year ago at the beginning of the post pandemic downturn, I would have assumed we would see a decline in market players and unreasonable behaviors fast, but I was mistaken, as even a year later the field remains highly contested. Whilst growth out of China might be slowing, the market is still vast. And with much Chinese investment across South-East Asia and in other growth regions, we see more and more Chinese controlled cargo outside of the country too. Net exports of China, as many forecasts show, are not expected to grow in the coming years, but much of the GDP growth is to be based on local consumption. And consumption is still a power that so far has been seen to a limited degree only, as China is featuring one of the highest gross saving rates in the world (around 45%, vs. below 18% in the US and below 14% in Europe).

Some commentators even argue, the people hold the government hostage by just not spending. This consumption power also makes China the potentially largest import market on the planet. Beyond raw materials for production and energy imports, it is already today a massive import market for foodstuffs, fresh and frozen goods. The cold chain logistics market remains a growth area. Chinese businesses in this challenging environment remain pragmatic. Where in other markets you hear a lot of whining and winching in difficult times, people continue to focus on opportunities. Alibaba CEO Joe Tsai said it nicely the other day: “we can only work on things that we can control.” And he made clear that geopolitics is one, they can not. Thus the new normal of US-China relations for example is a given and businesses have to learn to adapt to it. On the other hand, many new opportunities arise, like for example a booming China-Russia lane, an expanding middle east business and a continuously developing Africa trade. Also a brief word on the highly competitive field of eCommerce, where especially the models of TEMU and SHEIN are making headlines these days. Successful innovations in national eCommerce, are being exported and massive gambles are made to acquire market share. How this will pan out in the longer term, whether loopholes in customs and import regulations supporting these models in destination countries, will get closed down or other barriers erected to stop their advance remains to be seen. However, for now, their volumes keep growing, massive airfreight capacities are chartered, and those volumes are not moving via forwarders, nor independent warehouses and thus pass by our sector. The National People’s congress is just happening and the target of around 5% GDP for 2024 is clear. Thus the 17.52 Trillion USD from 2023 are supposed to grow a further 0.88 Trillion USD this year, which is not far from the size of the Swiss economy. And knowing the people’s willingness to work hard, despite all doubts and challenges, not a market to bet against.