It may not be the best time to be launching a new product in China or targeting seafood exports to the country’s affluent.
At least, that’s the view of analysts at Changjiang Securities, one of China’s leading brokerages, which is predicting “downward pressure” in terms of demand and price growth for seafood in 2016 due to slowing economic growth and tighter corporate entertainment budgets.
China is swimming in a sea of debt, but to get GDP figures moving again the government resorted to the old model of economic growth early this year by prompting the state-controlled banking sector to open the sluice gates. More than USD 385 billion (EUR 346 billion) in new loans were issued in January, five times the figure issued in December. China has opened the credit dam each time its economy slows –that’s largely why nonperforming loans jumped 51 percent year-on-year to CNY 1.27 trillion (USD 196 billion, EUR 176 billion) and while this figure may be understated, it’s part of the debt problem which threatens to unhinge China’s economy and collapse consumer sentiment.
China’s companies, including its food and fisheries firms, are carrying huge amounts of debt which may come back to dog the deals they’re seeking overseas as economic growth at home slows. For instance, COFCO Corp (which has interests in fish feed and seafood retailing), when it took a stake in competitor Noble Group recently for USD 750 million (EUR 674 million), had total debts of 52 times its earnings before interest, tax, depreciation and amortization (EBITDA).
China’s two key problems – corporate debt and slowing growth – are mutually reinforcing. Much of the marketing plans of exporters are based upon urbanisation and accompanying rises in Chinese incomes and the middle class. At USD 13,244 (EUR 11,897) per capita – and USD 8,220 (EUR 7,384) in nominal GDP terms compared to the U.S. average of USD 55,520 (EUR 49,873), according to the IMF – China’s per capita GDP in purchasing power parity is only slightly above the average in South Africa.
A slowdown in GDP growth slows income growth and throws into question many of the projections of growth for Chinese consumption of seafood.
This will affect exporters of seafood, who’ll be forced into a more competitive market place.
COFCO and other similar state-controlled firms are able to borrow further to purchase assets overseas because they have access to China’s state-run banks and the implicit backing of the state coffers. But what happens if the state is overwhelmed with debt? Will it be the case that Chinese purchasing firms will use their newly-acquired subsidiaries as piggy banks to alleviate their own indebtedness? That surely must be a worry for the executives of any of the seafood firms being sought out by Chinese buyers.
On the other hand, Chinese companies are likely to increase their activities in Africa, Antarctica and Latin America – indeed, any territory where fisheries are seen as abundant and exploitable. This will happen as companies postpone costlier and complex efforts to move up the value chain and concentrate on the extractive side of the business they know best. This is bad news for proponents of sustainability in the industry.
But there’s also a downside for African states that have been hoping to tighten protection of their waters while also growing aquaculture. Weaker Chinese demand for commodities mean much diminished public funds for China’s key oil supplying nations like Nigeria and Sudan – and that means fewer funds to better manage and grow these countries’ fisheries sectors.
It’s not all bad news – China’s economy is growing more slowly but from a much larger base. There are still sales to be made. But until Chinese consumers have a better sense of how the country solves its economic problems, the uncertainty will most likely mean a slower and much more competitive Chinese seafood market in 2016.
