China's shipbuilding rush holds dangers.
It has been about one year since China adopted its shipbuilding stimulus plan. Apart from pledges to support Chinese shipbuilders financially, the stimulus plan focuses on the necessity to control overcapacity in the industry.
Looking back over the past year, the warnings about excessive capacity seem to have been neglected by some. Regardless of the gloom lingering in the global shipbuilding industry, some local governments in China continued to be obsessed with plans to create shipbuilding bases in their jurisdiction.
An official in central China's Hunan province, for example, earlier expressed the ambition to turn the province into a world-renowned shipbuilding base. Another province in central China even sets the goal of achieving 100-million DWT ship output in the coming years. Although shipyards have already criss-crossed the southeastern provinces of Jiangsu and Zhejiang, some local governments were still giving encouragement to the industry.
Under the shipbuilding stimulus plan, government authorities, including land, maritime, environment and financial departments will not accept applications for the building of new shipyards or berths. Some local companies, however, built the shipyards or berths before getting permission, falsifying the fact that they had already had such facilities.
The urge to build more ships is mostly driven by administrative forces, rather than the market.
Statistics from the China Association of the National Shipbuilding Industry (CANSI) show China's ship output totaled 36.54 million DWT in January to November 2009, up 41 percent from the same period in 2008. New orders came to 22.94 million DWT, down 61 percent. Order books at the end of November amounted to 188.96 million DWT, down 7.7 percent from the start of the year. Besides this, 65 percent of shipyards received no new orders over the 11 months.
The figures have set the alarms bells ringing about overcapacity and lack of demand in the shipbuilding industry. But why the rush for more ships?
As is well known, the shipbuilding industry involves massive investment. It serves the local governments' interest by creating jobs, generating taxes and boosting the Gross Domestic Product (GDP) growth.
The high investment levels involved also means a lot of shipbuilders borrow large sums from banks. If delivery problems occur, both the shipbuilders and the banks will suffer losses.
It is improper for local governments to push the industry, said Bao Zhangjiang, a researcher at the China Ship Scientific Research Center.
The shipbuilding industry still has its woes, he added. Blind investment in the sector will eventually backfire when market conditions in the industry worsen, he warned.
Bao urged local government officials to respect the rule of the market in developing the shipbuilding industry.
Along with these developments, China's shipbuilding increased 47 percent in 2009. Despite global economic crisis, China increases its share in the global market with 40 percent growth rate and replaced its place with South Korea by reaching largest order numbers.