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Standing on the marble floor of the Haitong Securities offices in Renmin Lu, in the seafood processing hub of Dalian, it’s obvious that seafood companies are going through a good period. Stock prices continued to tick upward on Friday 14 June for cultivator-processing giant Zhangzi Dao Group Co Ltd, Zhanjiang Guolian and the Shandong-based Homey group as investors continue to see the positive in rising fish prices and peak summer consumption for seafood over the challenges of a still-sluggish economy.

Investors have been watching as Chinese seafood firms continue to spend heavily on marketing to build a local market. The state monopoly broadcaster CCTV spent several days making a documentary on what it termed “the biggest marine ranch in China” — the film praised Zhangzi as a paragon of technology and sustainable development while also showcasing the large-scale repair of local biological resources guided by government. Part sponsored by local government and Zhangzi Dao, the TV show comes at a time when Guolian has hired Taiwanese pop megastar Zhou Huajian as its celebrity endorser, trying to lift domestic sales.

Investors in China’s seafood companies will be buoyed by a still-solid 7 percent GDP growth and retail sales uptick of 15 percent, but will have to keep an eye on some clouds on the horizon, say experts in Beijing. Several leading economists here consulted by SeafoodSource in the past weeks warn of credit bubbles and very poor productivity performance at Chinese companies. In other words, wages are rising but not necessarily employee productivity.

Seafood firms here have been pouring money into capacity expansion but SeafoodSource visits to seafood processing factories in Dalian and the outlying towns of Changcheng and Dalijia reveal an uncomfortable truth about Chinese industrial economics. Factory bosses say they’re paying 10 percent higher wages each year, but staff is not necessarily any more productive. In fact investment in training appears far down the priority list of executives who have in some cases invested heavily in mechanization rather than staff productivity.

Speaking in Beijing recently, the U.N. Food and Agriculture Organization (FAO)’s chief fisheries statistician pointed to a slowdown in the growth of output from China’s seafood/fisheries sector. Stefania Vannucini pointed to the need for improved productivity as well as more spending on research and development, improved logistics and improved environmental standards. Improved feed conversion rates will also be necessary, she added, suggesting Scandinavia remains well ahead of China on all counts.

While it has dramatically upped agri output and rural incomes, China spends only 1 out of every USD 100 of agricultural output on research and development, compared to 3 out of every USD 100 spent in other member states of the Organization for Economic Co-operation and Development (OECD), according to data provided by the OECD and the Chinese government. Others think it’s time the country started to urgently raise productivity through better training and research and development. “China has to really worry about productivity growth…it’s never been good but now it’s growing even more slowly,” said Bart Van Ark, chief economist at the Conference Board, a U.S. think tank with offices in Beijing.Surges of credit are no longer translating into a climb in GDP growth, in part because cash typically goes to inefficient state-owned behemoths, according to Van Ark.

The answer, Van Ark told SeafoodSource, is to increase access to finance for private enterprises — along with serious reform of the vocational training system here as well as a promotion of research and development over blind investment. “China still enjoys latent potential if it is able to unlock productivity by rationalizing capital investment and unshackling the service sector — perhaps via privatization initiatives,” said Van Ark. Achieving a sustained increase in productivity will require wholescale liberalization of China’s economy, in particular the state-controlled financial markets, stressed Van Ark. State owned lenders have been reluctant to lend to segments of the economy dominated by private entrepreneurs, including the seafood sector.

China however may see its economy stumble before it has rectified its lousy productivity performance. Van Ark fears that rather than giving free rein to private industry, China will instead consolidate the economy by enlarging state firms, creating “zombie” state companies sucking up resources and credit. That could have the effect of dampening economic growth and demand for luxury items like seafood. China can only achieve 7 percent GDP growth per year through 2018 if it reforms, suggest Van Ark. Even then the conference board is predicting 5 percent in the 2019-2025 period as the economy “continues to mature.”

Another of China’s current key economic problems is that the main drivers of the economy — loose credit and huge investments in bricks-and-mortar infrastructure and real estate — is starting to lose its effect as government struggles with overheating real estate prices as local government debt. The ability of rising consumer spending (a cherished state goal here) to take up the slack from infrastructure investment is threatened by the specter of inflation, set to rise again in the second half of 2013, according to Van Ark.

Inflated real estate prices have cut the amount of cash households have to spend on pricier food. Average rents have soared 82 percent in Beijing between 2008 and 2012, according to the Beijing-based 21st Century Business Herald — yet consumer power was on display in Beijing this weekend on the city’s Guijie restaurant street, where customers enjoyed flounder (bimuyu — ‘eyes close together fish’) caught in the Yellow Sea at RMB 80 (USD 0.16, EUR 0.12) per fish. Diners at the giant Ming Hui Fu eatery gripe about food inflation and steep rent increases but concede higher spending power: ten years ago flounder was an expensive fish only for special occasion…now you can eat it every week” explained Li Yang, a restaurant maître ‘d.


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