NEW YORK — China’s economy has played a central role in ocean shipping for two decades, driving goods exports aboard container ships, fuel imports aboard tankers, and imports of iron ore, coal and grain aboard bulkers. Whenever the global economy flagged over the years, there was China, jumping in with stimulus, saving the day for shipowners.
Now, the era of rapid Chinese economic growth and large-scale government intervention is over, according to Leland Miller, founder and CEO of China Beige Book, a provider of independent data on China.
During a presentation at the Marine Money Ship Finance Forum in New York City on Thursday, and in a subsequent interview with FreightWaves, Miller explained why shipping’s owners, investors and analysts need to recalibrate their thinking on China.
He further predicted that relations between China and the U.S. will continue to deteriorate.
“You can have a Xi-Biden summit and you can have a bunch of pandas come back this way from China, but that’s not going to stop what is happening,” he warned the day after America’s and China’s presidents met in San Francisco.
Miller told FreightWaves that he believes markets are heavily underpricing the risk of an eventual war between the U.S. and China, a scenario with enormous consequences for ocean shipping.
Sentiment missed the mark — in both directions
“The markets are notoriously bipolar on China. Just look at 2023,” said Miller.
“At the beginning of the year, coming out of COVID, everybody was absolutely sure there was going to be a rally and huge economic growth, and of course that didn’t happen. Then the markets flipped in the other direction and by this summer, we were dealing with questions on whether China was collapsing and whether the property market could create a ‘Lehman moment’ for China. Of course China is not collapsing.
“It is amazing how sentiment went from extreme optimism to extreme pessimism and none of it was based on what was actually happening in the economy,” he said.
What was actually happening in the economy was much more nuanced. “There was a sequential recovery in everything but the property — it was better than 2022,” and that economic activity was much weaker than expected but not cataclysmic. “The markets are just getting around to this conclusion months later,” he said.
Numerous shipping stocks have followed the same basic pattern as China sentiment this year: rising sharply in January and February on expectations of a post-COVID reopening boost from China, then falling back starting in March after it became clear that the China boost wasn’t coming.
‘They are not going to push the stimulus button’
China’s much-weaker-than-expected recovery has fueled months of speculation that the central government will pull the trigger on large-scale stimulus, spending its way out of low growth as it has in the past and indirectly subsidizing shipowners yet again.
Shipping analysts continue to highlight stimulus potential. “We are optimistic that Chinese infrastructure stimulus spending and further efforts to stabilize the property market will result in stable Chinese iron ore demand in the coming quarters,” wrote Deutsche Bank analyst Amit Mehrotra on Wednesday.
According to Miller, “There seems to be this belief that Xi Jinping sits in a room and there’s a button that says ‘stimulus’ on it and he’s just sort of circling around that button. And maybe he doesn’t do it today or tomorrow but it’s only a matter of time before he hits that button. Because for the last 20 years, what has China taught us? That they like high levels of growth and they’re eventually going to jam that button down and everything’s going to be OK.
“They are not going to push that stimulus button,” asserted Miller.
“Xi Jinping is no longer worried about high levels of growth. The Chinese economic growth model we were taught to track for the past 20 years is over.”
Lower structural demand for dry bulk commodities
The old model was for high growth, juiced by credit-fueled development in the property sector — “growth for growth’s sake.” The new model, he said, focuses on “slower but healthier growth, making China stronger from within, and distributing wealth more broadly.
“It’s not that growth is suddenly going to die, but it does mean that the economic growth model we grew up with is over. Analysts of China have been much too bearish cyclically [i.e., recent fears of a collapse] but far, far too bullish structurally.”
The Communist Party realizes it can’t take non-productive property development down too quickly, as property traditionally accounts for 25% of the economy. Therefore, it is culling weaker developers by allowing them to fail, then intervening with new credit before a contagion effect ensues. It is a gradual “cull the herd and ventilate” process to reduce property’s importance to the economy, which Miller believes will take over a decade to complete.
“What this means for commodities and metals is that China’s model focused on ‘build, build, build’ is gone, but that doesn’t mean the property sector is going to disappear and a country with 1.4 billion people doesn’t need to build stuff.”
Container exports, auto exports, crude imports
Meanwhile, containerized goods export data tracked by China Beige Book “have gotten really weak to the U.S. and pretty weak to Europe, but exports to Asia have held up quite well. China’s ability to export a lot to its Asian neighbors has continued to ramp up but its ability to keep up high levels of exports to the West is greatly diminished.
“When you look at the political environment, U.S.-China relations are getting uglier and uglier,” Miller added.
“I think the trajectory of the relationship does not just get worse but much worse in the coming years. I would expect more tensions and more export controls. A lot of the companies we work with are diversifying away from a complete reliance on Chinese markets and supply chains.”
Miller told FreightWaves that China’s now-booming automotive exports will be the next big trade flash point.
“The car exports are going to be the story of the next five years, the next chapter that is about to begin, because the EU and U.S. are going to move to ring-fence their markets from the Chinese. It’s going to become another trade war,” he opined.
FreightWaves also asked Miller about the surprisingly high volumes of crude oil China has imported this year, seemingly at odds with its weak post-COVID economic recovery.
“Why are crude imports so much higher if the economy is doing this? First of all, the economy was never as bad as people thought it was. It’s not collapsing. The property sector is not doing well but the rest of the economy is doing better, so you should expect more crude oil [imports],” he said.
“The second thing is that China has done a lot of strategic buying — crude bought at discounts, filling up inventories because they’re worried in terms of the Taiwan stuff. Is this sort of the end of that and will it be tapering off now? Maybe. If this continues for another six to 12 months, then we’ll be scratching our heads.”
War odds ‘much, much higher’ than markets imply
FreightWaves also spoke with Miller about the risk of a future war between China and the U.S. over Taiwan.
A common perspective from shipowners speaking at conferences is that such an event would be so calamitous that they can’t plan for it. There is also the view that fallout for both China and the U.S, would be so severe that it would be a case of “mutually assured economic destruction,” and thus, a deterrent to war.
“I do not agree with that,” said Miller.
“I think the odds of something happening before the end of the decade are much, much higher than the markets are giving credit for. The market understanding of this — that it’s way too damaging so it’s not going to happen — is just wrong.
“If you play economist war games, you can come to the conclusion that it would cost too much financially and there’s no way they’ll do it [invade Taiwan]. One problem with that conclusion is that Xi Jinping does not play economic game theory, and we don’t know what he’s going through domestically and with his military.
“The other problem is that to China, Taiwan is like Texas is to the U.S. If Texas was being pulled by somebody else, we would go to war, the consequences be damned.”
China Beige Book CEO Leland Miller speaks with FreightWaves CEO Craig Fuller at the F3 conference earlier this month.
Click for more articles by Greg Miller
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