3 worries Chinese seafood firms are facing this summer
Weak global economy and pricing, exchange rate volatility and rising domestic costs: the factors identified by authorities in Dalian for a fall-off in exports in the first half of the year. The city, one of China’s top whitefish processing hubs and increasingly a center for the imported seafood trade, saw exports at 256,000 tons down 0.17 percent year on year – that’s the first drop since 2008. But in value terms exports rose 4.9 percent to USD 920 million (EUR 812.7 million). Imports at 448,000 were up 1.35 percent and up 9.27 in value terms to USD 700 million.
A SeafoodSource poll of a dozen Dalian-based seafood traders at the city’s Heizui Zi wholesale market revealed particular concern over economic growth and currency uncertainty. Asked to list their top worries, a dozen firms (all firms are import-export operations) all appeared agreed on: weak domestic demand, economic uncertainty and the impact of currency fluctuations on their export competitiveness.
1.) Economic Uncertainty: Chinese seafood firms remain cagey about the real direction of the Chinese economy particularly since in 2015 GDP growth slowed to a 25 year low while the stock market fell 50 percent in value. Corporate debt remains as high as 100 percent of national GDP (local government debt is even higher), according to some estimates, limiting the scope for investment.
Data for the second quarter of 2016 showed China’s economy is stabilizing, but some of that pick up is attributable to government lending and stimulus which isn’t sustainable given broader debt problems in China’s banking and corporate sector. The fact that private sector investment grew by only 2.3 percent in the first half of the year shows businesses are worried about economic prospects. Government is failing to deliver on promised market reforms, including numerous pledges to throw more of the economy open up swathes of the economy currently controlled by state enterprises.
China’s economic planners promised again in late July to make financing for private, small firms a priority and a way to boost economic growth. Private investment accounts for 80 percent of Chinese employment but has been sluggish as firms see slumping returns and with a weaker RMB are tempted to invest overseas instead.
2.) Domestic demand: Most of the firms surveyed at Heizui Zi pointed to weak job creation in China as a worry for restaurant sales of seafood. China’s overall employment is shrinking in 2016 according to a monthly index of economic performance put together by government: it puts manufacturing employment at 47.9 (anything less than 50 is contraction) in the first six months. This is starting to hurt consumption of goods and services – hence the latest official reading for the services employment is 48.7. There has been some respite in a recovering real estate sector (62.0 in the official data for the first half of 2016) which is traditionally a generator of spill-over sales in the catering sector.
3.) Currency volatility: Seafood companies spoken to for this article are very worried about the fate of the country’s currency with some expecting a wholesale devaluation that will improve export competitiveness. Such devaluation is also endangering plans to diversify into domestic sales and import distribution business which every other Chinese seafood firm is pursuing right now to diversify and reduce risk.
Most investment bankers are betting on a major devaluation of the Yuan/RMB. Questions over the stability of China’s economy have prompted pressure on the country’s currency with government expending nearly USD 600 billion (EUR 529.9 billion) in currency reserves to defend the value over the past year. The spectre of a sizeable devaluation remains, with government in recent months introducing a slew of policies to coax corporates to bring cash back from abroad in exchange for RMB. Incredibly, the RMB in the early 1980s was pegged at 2.46 to the dollar, rising at one point to 1.50 to the dollar but then dropping sharply by 1994 to 8.62 to the dollar as China sought to boost its export competitiveness. It was revalued in 2005 to 8.11/ but now stands at 6.5. The Chinese central bank manages the RMB’s appreciation or depreciation as it sees fit but currently limits the currency’s fluctuations to within two percent of the dollar. China ultimately wants to be able to settle international transactions in its own currency. The RMB is still only convertible on the current account, for trade, not on the capital account, which is for investment and banking flows. Expect this issue to cause concern for some time.