URSABLOG: Shifting Winds

Leafing through the recent OECD economic outlook, I came across a rather alarming scenario, albeit theoretical. It said that a one-year decline of 3% in domestic demand (relative to baseline) would result in, amongst other things, a reduction of world trade volumes by 1.25%. If, however, the slowdown was accompanied by tighter global financial conditions then the effect would be greater, reducing world trade volumes by almost 2.75%. This would be catastrophic for the world shipping markets if the same numbers showed up in goods as well as services. Such is the continual threat of higher for longer inflation.

It is just as well that high inflation is not a big deal in China. In fact the opposite is true, with deflation rearing it’s head again, and the Comsumer Price Index there falling 0.2%. A significant proportion of this however is driven by fast falling port prices. The pork market has cycles of its own, and boom and bust volatility aggravate the CPI, especially if prices are falling at the same time as inflation. You may say that at least high inflation will not dampen demand growth. I would reply that domestic demand is weak anyway, which is one of the reasons that inflation is not high. 

The International Monetary Fund is more optimistic, forecasting that economic growth in the form of Gross Domestic Product in China would increase to 5.4% in China, a revision of their previous forecast of 5%, and indeed above what the Chinese government themselves think, also 5%. Members of that government headed to Hong Kong this week to reassure delegates attending an investor conference there. Addressing top executives of the world’s leading financial institutions, they said that they weren’t too worried about their economy. This is how the  Financial Times reported it:

He Lifeng, China’s vice-premier and a powerful Communist party official overseeing China’s economic and finance affairs, said in a pre-recorded message that China would achieve its official growth target of 5 per cent this year. 

“You may ask me, are you worried?” said another official, Zhang Qingsong, deputy governor at the People’s Bank of China, who attended in person, on China’s economy. “Not too much,” he told the event….  

Zhang said China’s economic fundamentals were stable and its government debt was “lower than [in] many other advanced economies”. Many of China’s largest developers have defaulted on their debts, prompting calls for a sector-wide bailout. But Zhang described this as “a natural selection and market-clearing process”.

“Having said that, we need to carefully manage the pace to avoid a sharp downturn and unintended consequences . . . I prefer to let the market play its role, but do policy adjustments if necessary,” Zhang said. “We are quite optimistic about the future of China’s property market.”

Well, they would say that wouldn’t they? Sorry for being cynical about this, but the leading economic officials of the world’s second largest economy are hardly going to start saying “yeah, looks pretty bad doesn’t it, and we don’t really know what to do.” 

Some officials who perhaps should know better, like Wang Jianjun, vice-chair of the China Securities Regulatory Commission, the market watchdog, were even more gung-ho, saying that the domestic debt and equity markets were “full of opportunities right now…It’s never too late to catch the China train — you can still ride the dragon to heaven.” This is rather unfortunate wording: I wouldn’t recommend anyone to start chasing dragons. It may produce an immediate high, but the consequences are never happy. 

And the numbers – especially coming from itself – are hardly to be trusted. The late Li Qiang, the most recent Premier who died suddenly recently, said of Chinese GDP figures that they were “mostly man-made.” The rest of the numbers I have quoted above are forecasts and have the benefit of not colliding with reality yet. 

A 3% drop in Chinese demand is not beyond the realms of possibility. In fact it happened between 2014-2017, a time not to be remembered with much fondness by many in the shipping industry, unless they were buying dry bulk carriers in 2016 and did not sell them until at least 2022. And I think it is still a very real possibility that demand will continue to be poor, even if it does not decline absolutely. 

The Chinese property market continues to be in crisis, and whilst as Mr Zhang may say that this is a “natural selection and market clearing process” it also carries with it the loss of very real wealth, not just to investors and bond holders of Evergrande and the like, but to the very real buyers of those properties these developers were supposed to be building for them. The disappearance of this money will not generate robust domestic demand any time soon, however cheap pork prices get. 

But the real worry for me is that whilst China remains so important to us in shipping, we can’t even take for granted that things will remain the same. The container market is suffering at the hands of a long predicted post-pandemic slump, exacerbated by over supply and tepid consumer and industrial growth during this period of high inflation which all signs point towards being longer than many would like. The tanker market continues to enjoy the fruits of fragmented supply routes brought about by geopolitical stresses, but when the largest car market in world is buying new electric vehicles – with what money they have spare – how long can this last? And anyway, how will the current state of current affairs develop? 

The dry bulk market, surviving but not thriving, seems to be betting on a hope that trade demand growth will catch up with limited and finite supply. Most players expect a difficult few months but bet on this gradual increase in fleet utilisation to tip the market into a better second half of next year. I do not share this optimism. 

And my lack of optimism comes from the real political situation in China. The bet on a market boom at the beginning of this year failed to materialise because Chinese consumers did not go crazy once they were released from lockdown. Some of this is down to the property developer crisis, and the lack of fiscal support or stimulus, whatever headlines were generated by piecemeal monetary tweaks. China has a new playbook and will not go back to the old one. 

It is a playbook where in most political matters it is retreating behind the great firewall, where greater controls are being placed on individual and public life, where the economy is being managed along party lines. It is all very well to talk of natural selection, but how will animal spirits thrive when their every move is being scrutinised and channelled down Party lines? The Party leadership is not very interested in letting markets and communities – both heavily interconnected of course – work things out for themselves. 

Turning up at an international finance conference and saying it’s all ok at the same time as new anti-espionage and data laws are introduced that actively discourage foreign investment is disingenuous. Restricting data flows out of China, and threatening with imprisonment under vague laws those that are bringing investment into the country does not sound much like a dynamic and fluid free market is being given much of a chance. 

If this sounds pessimistic, then sorry, I didn’t mean to ruin the start of the week. But for anyone with a television, computer or a smartphone that occasionally looks at the news will know that the world is changing, and alarmingly quickly. What seemed impossible even a few years ago is now fact, and the speed of accepting this new status quo – as opinions and then actions change – should prepare us for the highly improbable. 

Once we embrace that, we can embrace good and bad scenarios that we would never have imagined before. Here’s a few: war on a large scale can now break out at any time; breakthroughs in decarbonisation and other technologies can be developed at lightening speed even as extreme weather occur with greater frequency; relationships that seem rationally impossible can actually develop, bloom and deepen in the face of conventional wisdom. We don’t have to keep on living and hope that it will all turn out well. We can take action to work and live in this world, and prepare ourselves accordingly. A 3% drop in Chinese domestic demand may seem highly unlikely from where we are now, but that does not mean it should be dismissed. In fact, it is not even a worse case scenario. Join the dots: work for the future and prepare to protect yourself for the arrival of the winds of fate. It may turn out better or worse than you expected, but you do not know when they will come for you. 

Simon Ward