China’s position as a buyer and producer of seafood has become so dominant that many appear to take it for granted that future growth is assured.
China produced 64.5 million tons of seafood – the figure includes seaweed and fishmeal – in 2018, up 0.19 percent, of which aquaculture accounted for 49.9 million tons, up 1.73 percent on the previous year. Distant-water fishing contributed 3.5 percent of the total volume, at 2.25 million tons.
According to Rabobank, China accounts for USD 14 billion (EUR 12.6 billion) of the USD 153 billion (EUR 137.6 billion) global seafood market. China’s consumption will rise from 61.3 million tons to 70.4 million tons between 2015 and 2025, Rabobank estimates. It also estimates that China’s internal production will go from 64.4 million tons to 70.4 million tons in the same timeframe.
Many Chinese predictions are even higher, but some analysts are beginning to worry that China’s economic outlook is starting to look a lot less certain, and there’s growing uncertainty as to whether these risks are priced into the projections.
While official figures have not yet been released, China’s growth in seafood production in 2019 is not expected to match the 2018 total due to a yearlong crackdown on illegal aquaculture facilities in environmentally sensitive areas. Chinese analysts are projecting continued shrinkage of domestic seafood production growth in seafood imports for 2020. In October, Chinese officials reaffirmed an ambitious target to reduce the total catch taken from domestic waters by three million tons, to 10 million tons, over the next three years. That’s a significant slice of the country’s overall seafood output from freshwater and seawater sources and suggests efficiencies or imports – or both – will have to rise significantly to make up the difference.
China’s slowing economy and mounting debt are also a growing cause of concern for investors and analysts. On the production side, the problem of debt is crimping investment in capacity and in research and development at seafood companies. And worries about the economy might also be affecting consumer confidence.
China vulture funds have been feeding on failed companies lately as corporate defaults have risen. Recent high-profile cases include that of the Tianjin-based commodities trading Tewoo Group. Seafoodsource talked to various economists over the holiday period to get a sense of how things could change in 2020, and the verdict was that economic malaise will worsen in the short-term, impacting Chinese consumption and buying power.
Debt-levels are a massive problem, according to those interviewed. Chinese companies have more leverage and weaker repayment capacity than global peers, according to a study of 3,000 Chinese firms by the French investment bank Natixis. Corporate leverage ratios are higher in China, while profit margins are lower (5.5 percent to 7.7 percent according to Natixis research), which also put the return on capital at 7 percent compared to a global average of 11 percent.
This is putting further pressure on the repayment capacity of Chinese firms. It should be seen in the context of an overall debt-load (both corporate and governmental), which one economist put at 300 percent of GDP, or USD 40 trillion (EUR 36 trillion) in dollar terms.
A debt crisis is particularly bad news in China from a consumption point of view, given the country lacks the kind of welfare system put in place in most Western nations. Such a system acts as a cushion in economic downturns.
Then there’s the confidence problem caused by the Sino-U.S. trade war, which has put a damper of unpredictability over economic activity. Most economists expect China’s GDP growth to fall below the 6 percent threshold for 2019, with GDP having reached 6.6 percent in 2018. That outcome is likely to put downward pressure on the currency, which has already slipped this year against the dollar. A weaker yuan isn’t conducive to growth in imports.
A weaker currency – some projections put the CNY 7.45 to USD 1.00 (EUR 0.90), compared to CNY 6.18 to the dollar early 2018 – will also weaken the local corporate appetite for offshore credit, which had become an option in a tight corporate debt market. This further limits the ability of Chinese companies to spend on expanding or improving their businesses.
A comparative lack of transparency makes it harder to assess the real debt situation at many Chinese companies – even listed ones – as well as in local government financing vehicles. This frustrates a key Chinese goal, and one of its avenues out of current troubles: drawing more foreign cash into its stock markets. The influx of foreign investors into Chinese stocks and bonds through various new access schemes gives China more credit options, but also brings with it increased scrutiny not always welcomed in China.
China’s debt load restricts government’s access to the traditional levers of economic kick-starts. The need to deleverage and stabilize the corporate sector, in turn, limits the ability to turn on credit taps through state-owned banks, the fiscal state’s stimulus method of choice during the financial crisis. Debt also limits the ability to splurge on major infrastructure projects, another favorite economic driver of local governments across China.
There’s some breathing space for China’s seafood sector, however, in the form of increased demand created by the huge hole in protein supply caused by the recent outbreak of swine flu. As a result of the disease, pork prices rose 110 percent in November, and beef, lamb, and chicken prices rose by 11.8 to 25 percent, according to China’s Ministry of Commerce. By contrast, prices for seafood products rose a mere 2.4 percent.
Similarly, a pause on environmental enforcement in some rural regions – apparently aimed to relieve the pressure on hog farmers wiped out by swine flu – has allowed many aquaculture producers to remain in action, thus limiting projected cuts to China’s seafood supply.
Apart from the obvious boost to confidence from a potential trade deal with the U.S. beyond the recently announced “Phase One” agreement, other avenues do exist for China to revive growth. Specifically, the country could put renewed focus on entering new markets and making regulatory reforms. Another avenue for China lies in the expansion of its exports across regional markets. Tmall and JD.com both run significant e-commerce operations in country in Malaysia and Thailand, offering a new access point for Chinese goods.
Free trade deals would likewise increase access to offset sales lost in the United States. China sought to replace the Trans-Pacific Partnership abandoned by the current American administration with the Regional Comprehensive Economic Partnership, but China’s mercantilist approach to trade has worried potential signatories. India withdrew from the pact citing worries about an influx of Chinese goods drowning out its own industry. Similar thoughts are shared by other Asian economies but are often left unspoken, given the compensatory allure of Chinese infrastructure and loans.
So, China has a few escape hatches from the tight spot it currently finds itself in. But it appears few in China – and notably, its economic prognosticators – appear to realize the precariousness of its current economic situation.
Photo courtesy of Hung Chung Chih/Shutterstock