Chinese whispers

Long considered the undisputed growth engine of world trade, China’s economy recently experienced a slowdown so painful that the country’s entire growth model was contested – with renowned British economist Will Hutton going as far as labelling it a “giant Ponzi scheme” and an edifice waiting to implode.

What had happened? During the first week of trading in 2016, a range of ‘circuit breakers’ were triggered that the Chinese government had installed to protect the local stock market from overheating. But instead of providing investors with peace of mind, the mere imposition of them ended up inciting panic.

“The way a circuit breaker works is that it shuts down and closes the trading day if the market is down by a specific per cent,” explains Forbes business journalist, Kenneth Kim. “In China, stock markets already use daily price limits. So, if I’m a somewhat clueless individual investor, and one day I see that local regulators suddenly install circuit breakers in fear of a market crash, then naturally I’m going to panic. And this is exactly what happened.”

The local market almost instantly went into free fall when China opened for business again in January, and as valuations continued to drop over the coming fortnight, many of the world’s key markets followed suit. At the time, several analysts went as far as predicting a repeat of the 2008 crash should the knock-on effects of the Chinese stumble not be contained.

Once the dust settled, however, many an expert came out saying the plummet could have been predicted, with the government having broadcasted for some time that it was hoping to transition from a state-led investment and manufacturing economy to one more dependent on services and consumption.

“Investors in China’s stock market took fright in the New Year, with falling share prices only another turn of the screw,” Hutton commented in an outspoken piece for The Guardian, published in mid-January. “The only surprise is that nobody saw through it all earlier (…). There needs to be wholesale change in economic thinking.”

Although markets have since stabilised, analysts from around the world are now trying to predict what China’s next move will be, with many struggling to apply established thought patterns to describe the increasingly volatile US$11-trillion economy at the very heart of the Asian continent.

The answer could come from the central government itself, which has recently embarked on a long-term change management journey that will see the failed circuit breaker system removed and economic policy re-focus on stability and internal growth – even at the cost of setting yet another GDP growth record. In fact, Chinese Premier, Li Keqiang, recently pointed out that a slower growth rate than in the past would be acceptable as long as enough new jobs were created.

The problem is to retain the international community’s trust during the transition phase and don’t let incidents like the January rout play in the cards of China’s critics. According to official government data, the country’s economy grew by 6.9 per cent in 2015, compared with 7.3 per cent the year before. While that’s in line with Beijing’s official growth target of “about seven per cent”, critical observers fear the figure could be inflated and that real growth may be much weaker.

“[Following the stock market crash,] investors are once again on crisis watch – a familiar posture since Chinese growth peaked at 12.1 per cent in the first quarter of 2010,” says Angus Grigg of the Australian Financial Review. “The flawed attempt to cap stock market falls earlier this year and a poorly communicated yuan policy has investors seeking cover and blaming China for everything from low oil prices to the turmoil on global equities markets (…). But if the fall-out can be quickly contained then the Chinese economy hardly looks like the sick man of Asia.”

According to Grigg, there is sufficient data to suggest the Chinese transition towards a consumption-based economy is already well underway, regardless of the January jolt and resulting insecurity. “As the National Bureau of Statistics (NBS, ed.) reported, retail sales grew at an annual rate of 11.1 per cent in December, confirming China as the world’s best consumption story,” he says. “At the same time Fixed Asset Investment, which is basically infrastructure and property construction, expanded at 10 per cent in 2015.”

While that’s half the level of two years ago, Grigg says it should still provide comfort Beijing is continuing to support growth as the economy is refocusing on the service sector and private consumption. “Rising incomes will help this transition,” he explains, pointing out that China’s average per capital urban income hit US$4,740 (circa €4,345) in 2015, up 8.2 per cent over the previous year.

According to Julian Evans-Prichard from Capital Economics in Singapore, it should only take “a few more months of good data” for business sentiment to turn around and investors to realise the turmoil across Chinese stock markets has not polluted the economy – and with it the country’s historic transformation process.

Experts like Evans-Prichard agree this would be good news for the commercial road transport industry, which could be one of the main beneficiaries of that development as more domestic consumption is likely to boost internal freight movements across all industries.

Imports of agricultural goods are also poised to rise, according to Gordon Orr, a director emeritus of McKinsey – placing increasing pressure on food transporters to create safer and more efficient supply chains. In fact, Orr is also expecting branded, processed foods to take off in China in the short term, which would add to the upscaling pressure as corporate supply chain requirements would filter through to local transport businesses.

The downside of a change to a more service-oriented growth model – and a potential roadblock for the transport community – is a slowdown in the traditionally strong manufacturing domain. Services already make up 50.5 per cent of the Chinese economy (from 48.1 per cent in 2014), while manufacturing now accounts for just 40.5 per cent of it. “The closely watched manufacturing Purchasing Manager’s Index (PMI, ed.) remains below 50, which indicates deterioration, leading to talk that the country may be nearing the end of its time as a manufacturer for the world,” says Orr. “[But] let’s be clear: manufacturing is not about to become irrelevant in China. However, the country is evolving toward extremes of performance – the truly awful and the genuinely competitive.”

Orr says while some manufacturing sectors in China have “massive overcapacity and many mediocre producers”, the country also has successful innovators in many industries, providing ample opportunities for supply chains to grow and mature. “By aggressively adopting what we might consider Western concepts – lean and modular design, scaled learning, agile manufacturing and intelligent automation – many companies are combining low costs with aggressive innovation [and] their skills are spreading widely across China’s manufacturers,” he concludes, leaving little doubt that the maturation of road transport will continue in line with the country’s economic transformation.

As a result, a suite of road transport regulations are currently under review in Beijing, with the central government hoping to soon be able to launch a revised and modernised set of heavy vehicle standards that are able to cope with China’s evolving economy.

According to Mats Harborn, Vice President Asia & Pacific at the International Forum for Road Transport Technology (IRTT), the new directive is likely to affect both masses and dimensions of heavy commercial vehicles in the People’s Republic. “Technically such standards have existed for decades, but now is the first time that they will be written in a truly meaningful way,” he says. “[The difference is that] the Government will now ensure strict enforcement.”

According to Harborn, the updated standards must be regarded as an almost revolutionary step forward for the Chinese transport and logistics industry, as well as for truck and trailer manufacturers operating in the country. “The two starting points when writing the new standards have been efficiency and the creation of a level playing field,” he explains. “Efficiency begins with standardised loading pallets, which are still not widely used in China but form the basis of all dimensional standards in the world.”

Harborn says with rising labour costs due to the evolution of domestic manufacturing, the transport and logistics industry, too, is expected to be automated rapidly, which would require standardised loading platforms so that storage systems, forklifts, trailers and packaging dimensions are aligned.

“That journey starts now in China and it will pick up speed as we move along. Soon heavy vehicles will be produced according to standards that will make them an integral part of a unified transport system.”

With the Government planning to strictly enforce masses and dimensional standards for road transport vehicles, operators will now have to compete by providing better service and being more innovative, Harborn adds, not by “bending and breaking” rules. He explains, “In a level playing field scenario, OEMs will have to provide improved and competitive equipment. For example, with the maximum gross vehicle train weight reduced from 55 to 49 tonnes, equipment will have to be made lighter so as to maintain high legal payloads.”

According to local journalist Ellen Hua, however, issues around the implementation of the new standards are arising already – even before they have been officially announced. While semi-trailers are currently limited to a maximum length of 16.5m in China, the reality can see them extend to 22m or even 27m, she says. “[In the past], Chinese authorities have technically enforced the law by fining carriers. However, provinces and municipalities across China have applied rules differently, often granting licences to equipment even though it violates national standards,” she adds – pointing out that the alignment process will be complex and long-winded, with overloading the main issue to be addressed.

In line with the nation’s economic transformation, Hua says there will be a transitional period of about two years to implement the new standards, with a host of potential obstacles waiting along the way. “A number of factors will influence how quickly vehicle logistics companies in China will be able to change their equipment, including costs and the capacity of rail and waterway logistics,” she says. “Equipment manufacturers’ production capacity … will be another factor.”

However, she adds there are “clear opportunities” for equipment manufacturers – especially locals who have recently produced for export markets only – now that the government is re-focusing on local consumption and planning to invest more into infrastructure.

According to China expert Orr, the key to seizing these opportunities is to continue reading the signs of change. “The reality is that China’s economy is made up of multiple sub-economies (…). Some are globally competitive, others fit for the scrap heap. In your China, are you dealing with a tiger or a tortoise? Your performance in 2016 will depend on knowing the answer to this question and shaping your plans accordingly.”

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