Cablegate: Economic Slowdown Hits China's Transport Sector

VZCZCXRO5686
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4679/01 3640337
ZNR UUUUU ZZH
P 290337Z DEC 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 1638
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHFR/AMEMBASSY PARIS 4482
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC

UNCLAS SECTION 01 OF 02 BEIJING 004679

DEPT OF TRANSPORTATION PASS TO SMCDERMOTT, JSZABAT

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EWWT EAIR ETRD CH FR

SUBJECT: ECONOMIC SLOWDOWN HITS CHINA'S TRANSPORT SECTOR

REF: BEIJING 4615

THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION. PLEASE HANDLE ACCORDINGLY.

1. (SBU) SUMMARY: China's maritime transport and civil aviation
sectors are beginning to show signs of stress from the global
economic slowdown. After nearly 10 straight months of double digit
growth this year, November port volumes were up just 2 percent over
the previous year. Shipping companies have cut rates dramatically,
putting serious pressure on their profitability, and resulting in
informal cancellation of orders to ship builders. In the aviation
sector, the Civil Aviation Authority of China (CAAC) encouraged
airlines to cancel aircraft orders to cope with the slowdown in
traffic growth. Two of China's big three carriers have received
government cash infusions and are reportedly looking for more, and
at least one private airline suspended passenger service. At
present, Boeing China reports no cancelled or delayed orders. But
as China's export engine slows from the fall in foreign demand, the
transport sector which links China's people and business to the
world can serve as a useful bellwether of change. END SUMMARY.

Port Volumes Slow Considerably, Shippers Feel the Pain
--------------------------------------------- ---------

2. (SBU) Signs of an economic slowdown are beginning to be felt in
China's port system. Preliminary Ministry of Transport (MOT) data
for November 2008, indicate port cargo volumes rose just 1.9 percent
over the previous November. Between January and October 2009,
year-on-year (YOY) port cargo volumes had been increasing at between
9 and 23 percent. On a month-to-month basis, cargo volume fell 3
percent in September, 1.4 percent in October, and 5.1 percent in
November, to just 460 million tons. Foreign trade cargo growth
slipped to 5 percent (YOY increases) in September and October, after
consistently posting a 20 percent growth rate. On the air cargo
side, Beijing Capital International Airport announced a 17.8 percent
drop in cargo in November.

3. (SBU) Industry sources report that the shipping industry in China
has been seriously affected by the global economic downturn.
Shipping companies American President Lines (APL) and COSCO have
both seen a significant decline in business in recent months.
Representatives of the two companies told EconOff they both recently
cut their capacity for trans-Pacific trade by 20-25 percent. The
APL representative said Shenzhen and other southern ports have been
hardest hit but ports in northern China "also feel the pain." He
reported that APL ships from China are 70-80 percent full and that
the price per container for Asia-Europe routes has dropped from a
high of USD 2,500 in 2006 to less than USD 1,000 today, a price that
is barely profitable. He also noted that some shipping companies
have cancelled orders for new ships in spite of financial penalties.
The COSCO representative predicted that shipping companies will
face tough times for the next two years. He said some smaller
shipping companies face the danger of bankruptcy, although he noted
that COSCO can weather the storm because of huge profits from the
last five years.

Cancelled Ship Orders are Hidden...
-----------------------------------

4. (SBU) Singapore's Pacific Carriers reports that the drops in
international trade and worsening business climate for shipping
companies have resulted in some 382 cancelled ship orders worldwide,
totaling some 20 million deadweight tons. Of these, the company
estimates, more than half are to Chinese shipbuilders, yet there
have been minimal public announcements here of such cancellations.
In an early December Caijing Magazine article, China Shipping
Industry Economic Research Center lead researcher Bao Zhangjing
stated that even when orders have been cancelled or delayed,
shippers and ship builders are unwilling to admit it. The article
quotes an unnamed Zhejiang shipping company executive's description
of informal renegotiation of delivery terms which allow shipping
companies to postpone or soft cancel orders, and avoid losing the
20-30 percent down payment. They are then able to resume
construction contingent upon an industry recovery. Such soft
cancellations help shippers limit losses, and both shippers and
builders can avoid a negative impact to stock prices or their access
to credit that a more public acknowledgement of the downturn would
pose.

...Yet Airlines "Encouraged" to Cancel Aircraft Orders
--------------------------------------------- ---------

BEIJING 00004679 002 OF 002

5. (SBU) On December 9, the Civil Aviation Authority of China (CAAC)
"encouraged" airlines to cancel or defer new airplane deliveries in
order to cope with the decline in passengers caused by the global
financial crisis. China Southern, China Eastern Airlines and
Shanghai Airlines quickly announced they would review upcoming
aircraft deliveries based on passenger demand. China Southern,
which operates China's largest fleet, added that they could trim
capacity without cancelling orders. Flag carrier Air China
announced it would not change its 2009 deliveries. A Boeing
spokesperson confirmed that the company has not yet received any
cancelled orders or delays. An analyst at CITIC China Securities
anticipates airlines won't cancel orders unless they have no other
choice, and will first reduce capacity by other means. (NOTE: Some
industry source's have observed to Embassy commercial officer that
the CAAC announcement was largely intended to target Airbus in
retaliation for French President Nicolas Sarkozy's official meeting
with the Dalai Lama. END NOTE.)

6. (SBU) CAAC's December 9 measures also include a refusal to accept
applications for new airlines before 2010; introduction of lower
fuel prices, taxes and fees continued support for mergers in order
to reduce spending and improve stability; subsidies for 100 air
routes to remote areas, and a RMB 10 billion fund to support
building air safety facilities. CAAC hopes these measures will
enable the industry to maintain 10 percent growth in 2009. The
government has already made good on reducing fuel costs, cutting jet
fuel prices 32 percent on December 18 (reftel). The State-owned
Assets Supervision and Administration Commission (SASAC) conducted a
management shuffle among Air China's parent company, China Southern,
and China Eastern. The changes are expected to pave the way for a
possible China Eastern and Shanghai Airlines merger.

In "Interesting Times," Go for the Direct Subsidy
--------------------------------------------- ----

7. (SBU) China Southern Airlines and China Eastern Airlines each
received cash infusions of RMB 2.3 billion (USD 235 million) from
their respective holding companies to help the airlines cope with
recent losses due to weakening demand. China Southern's funds came
directly from a Ministry of Finance (MOF) subsidy to its parent
company. China Eastern will reportedly seek an additional RMB 10
billion (USD 1.5 billion) in capital injection from the MOF and the
State-owned Assets Supervision and Administration Commission
(SASAC). Air China, although in better financial condition, is also
reported to be interested in an injection of funds. All three major
Chinese airlines are expected to post net losses this year. China's
nascent private airlines sector is finding it more difficult to
weather the downturn. In an attempt to raise profitability
Beijing's Okay Airways filed to suspend passenger services for one
month from December 15, although the company still operates a cargo
service.

8. COMMENT. Although many transport industry indicators still show
growth, the dramatic slowdown in the pace of that growth is telling
- and is clearly hitting the industry hard. Post anticipates more
grim days ahead, with official statistics ultimately reflecting an
actual downturn in some sectors. As the transport industry is
forced to admit to the reality of the economic downturn, we
anticipate more state-owned enterprises (SOEs) will request
government support, per the airline example described above.

RANDT

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