COSCO accesses huge new funding

On the one hand the container shipping sector is rationalising whilst on the other the Chinese state appears to be pouring money into container shipping lines.

The China Ocean Shipping Company, or COSCO, which is a Chinese ‘State-owned Enterprise’ announced on the January 11, 2017, on its Chinese language website that it had “established a long-term cooperation mechanism […] with the China Development Bank with the objective of serving “the national strategy of ‘all the way along the way’, ‘marine power’ and ‘manufacturing power’ and ‘deepening reform of state-owned enterprises’”. This appears to refer to the ‘One Belt One Road’ concept that the Chinese government has for developing Central Asia and linking China to markets in Europe.

The agreement seems to provide funding through “various types of financial products”, possibly to a total of CNY180bn, although there is some mention of “co-financing”. This a huge amount of money, roughly equivalent to US$26bn. The implied time scale of the deal is over a period of the next four years.

From the outside it is hard to understand what such a vast quantity of funding could be used for. Certainly, finance is often a highly political activity in China and it is quite possible that the funding may not even take place. However, it does appear that the Chinese government is looking to pull COSCO into its programme of strategic initiatives, with the largest of these being the ‘One Belt One Road’ project. The problem is that the latter is a land transport project and COSCO is a shipping and container terminal company. Therefore, the target is the similar project that the Chinese government is embarked on in the port sector, buying and building terminals on the sea route from China to Europe, through South East Asia, the Middle East and the Mediterranean.

Bearing in mind the size of the sum involved this would suggest the construction of very substantial port infrastructure on the route, as well as, presumably, investment in container shipping. Yet the market for container ports, let alone container shipping, is over supplied. If only part of this lending facility were accessed the implications for the entire container sector would be significant. It is also tempting to think that in the short-term a debt fuelled COSCO will grasp the opportunity to buy some distressed container shipping assets.

Source: Transport Intelligence, January 24 2017

Author: Thomas Cullen