Chinese financial crisis a warning to the logistics sector

The logistics sector is so large and so central to the world’s economy that any macro-economic trend has a particularly strong effect upon both the sector’s structure and its business cycle. Furthermore, its exposure to the economy in China is particularly high. Therefore, the events that have taken place over the past few days in China must be of concern to any logistics service provider exposed to world trade.

China has experienced a minor financial crisis. Last week, the country’s central bank reduced the quantity of finance available to financial institutions. This resulted in a degree of panic as ‘private’ banks and other loan-making institutions scrabbled to refinance their short-term loans. Therefore, short-term interest rates shot-up. The move was interpreted as an attempt by the central bank to reduce the growth in credit in the economy, something which has been expanding at an extraordinary rate over the past five years.

The Chinese banking system is overwhelmingly state-owned and therefore it is likely that a banking collapse in the classic sense will not arise. However, that just displaces the problem elsewhere. Those who have been sceptical of the quality of Chinese growth over much of the past decade suggest that it represents the inevitable end of an unsustainable economic trajectory. If they are right, it implies a change of the rate of expansion and the nature of the Chinese economy.

The implications of such a change for the logistics sector would be enormous. Possibly the first effect would be on the volume of imports to China both by air and by sea. A large proportion of this trade is for re-export as assembled products, for example in electronics or household goods. Yet the consumption of both Chinese industry and the private consumer is still substantial. The most recent figures from Drewry shipping consultants shows that imports from Europe to China by container saw no growth in the opening months of 2013. Any fall in confidence would suggest an even weaker container shipping market.

The effect on airfreight is likely to be even greater, as the displacement of Chinese demand would drive up inventory levels, therefore depressing demand for airfreight both in and out of China. The effects on bulk shipping would possibly be the most painful of all. Already in an unhealthy state, any interruption to the Chinese building frenzy will hit the demand for iron ore and other metals badly.

On the optimistic side, any problems in the Chinese economy are likely to continue to drive down the price of oil. That is, if you are not involved in oil and gas logistics.

The timing of any Chinese credit collapse and its consequent effects on the wider economy will be hard to estimate. The Chinese State intervenes to a huge degree in its own economy and it is likely to use every weapon in its extensive armour to avoid any crisis.

Nonetheless, the present gyrations on the Chinese money markets are an urgent warning sign to all those in the logistics sector that the picture of continuing emerging market growth and a mild recovery in the developed economies is not one that can be banked upon.