VZCZCXRO5686
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4679/01 3640337
ZNR UUUUU ZZH
P 290337Z DEC 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 1638
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHFR/AMEMBASSY PARIS 4482
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RHMFIUU/FAA NATIONAL HQ WASHINGTON DC

UNCLAS SECTION 01 OF 02 BEIJING 004679 
 
DEPT OF TRANSPORTATION PASS TO SMCDERMOTT, JSZABAT 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EWWT EAIR ETRD CH FR
 
SUBJECT:  ECONOMIC SLOWDOWN HITS CHINA'S TRANSPORT SECTOR 
 
REF: BEIJING 4615 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION.  PLEASE HANDLE ACCORDINGLY. 
 
¶1. (SBU) SUMMARY:  China's maritime transport and civil aviation 
sectors are beginning to show signs of stress from the global 
economic slowdown.  After nearly 10 straight months of double digit 
growth this year, November port volumes were up just 2 percent over 
the previous year.  Shipping companies have cut rates dramatically, 
putting serious pressure on their profitability, and resulting in 
informal cancellation of orders to ship builders.  In the aviation 
sector, the Civil Aviation Authority of China (CAAC) encouraged 
airlines to cancel aircraft orders to cope with the slowdown in 
traffic growth.  Two of China's big three carriers have received 
government cash infusions and are reportedly looking for more, and 
at least one private airline suspended passenger service.  At 
present, Boeing China reports no cancelled or delayed orders.  But 
as China's export engine slows from the fall in foreign demand, the 
transport sector which links China's people and business to the 
world can serve as a useful bellwether of change.  END SUMMARY. 
 
Port Volumes Slow Considerably, Shippers Feel the Pain 
--------------------------------------------- --------- 
 
¶2. (SBU) Signs of an economic slowdown are beginning to be felt in 
China's port system.  Preliminary Ministry of Transport (MOT) data 
for November 2008, indicate port cargo volumes rose just 1.9 percent 
over the previous November.  Between January and October 2009, 
year-on-year (YOY) port cargo volumes had been increasing at between 
9 and 23 percent.  On a month-to-month basis, cargo volume fell 3 
percent in September, 1.4 percent in October, and 5.1 percent in 
November, to just 460 million tons.  Foreign trade cargo growth 
slipped to 5 percent (YOY increases) in September and October, after 
consistently posting a 20 percent growth rate.  On the air cargo 
side, Beijing Capital International Airport announced a 17.8 percent 
drop in cargo in November. 
 
¶3. (SBU) Industry sources report that the shipping industry in China 
has been seriously affected by the global economic downturn. 
Shipping companies American President Lines (APL) and COSCO have 
both seen a significant decline in business in recent months. 
Representatives of the two companies told EconOff they both recently 
cut their capacity for trans-Pacific trade by 20-25 percent.  The 
APL representative said Shenzhen and other southern ports have been 
hardest hit but ports in northern China "also feel the pain."  He 
reported that APL ships from China are 70-80 percent full and that 
the price per container for Asia-Europe routes has dropped from a 
high of USD 2,500 in 2006 to less than USD 1,000 today, a price that 
is barely profitable.  He also noted that some shipping companies 
have cancelled orders for new ships in spite of financial penalties. 
 The COSCO representative predicted that shipping companies will 
face tough times for the next two years.  He said some smaller 
shipping companies face the danger of bankruptcy, although he noted 
that COSCO can weather the storm because of huge profits from the 
last five years. 
 
Cancelled Ship Orders are Hidden... 
----------------------------------- 
 
¶4. (SBU) Singapore's Pacific Carriers reports that the drops in 
international trade and worsening business climate for shipping 
companies have resulted in some 382 cancelled ship orders worldwide, 
totaling some 20 million deadweight tons.  Of these, the company 
estimates, more than half are to Chinese shipbuilders, yet there 
have been minimal public announcements here of such cancellations. 
In an early December Caijing Magazine article, China Shipping 
Industry Economic Research Center lead researcher Bao Zhangjing 
stated that even when orders have been cancelled or delayed, 
shippers and ship builders are unwilling to admit it.  The article 
quotes an unnamed Zhejiang shipping company executive's description 
of informal renegotiation of delivery terms which allow shipping 
companies to postpone or soft cancel orders, and avoid losing the 
20-30 percent down payment.  They are then able to resume 
construction contingent upon an industry recovery.  Such soft 
cancellations help shippers limit losses, and both shippers and 
builders can avoid a negative impact to stock prices or their access 
to credit that a more public acknowledgement of the downturn would 
pose. 
 
...Yet Airlines "Encouraged" to Cancel Aircraft Orders 
--------------------------------------------- --------- 
 
 
BEIJING 00004679  002 OF 002 
 
 
¶5. (SBU) On December 9, the Civil Aviation Authority of China (CAAC) 
"encouraged" airlines to cancel or defer new airplane deliveries in 
order to cope with the decline in passengers caused by the global 
financial crisis.  China Southern, China Eastern Airlines and 
Shanghai Airlines quickly announced they would review upcoming 
aircraft deliveries based on passenger demand.  China Southern, 
which operates China's largest fleet, added that they could trim 
capacity without cancelling orders.  Flag carrier Air China 
announced it would not change its 2009 deliveries.  A Boeing 
spokesperson confirmed that the company has not yet received any 
cancelled orders or delays.  An analyst at CITIC China Securities 
anticipates airlines won't cancel orders unless they have no other 
choice, and will first reduce capacity by other means.  (NOTE:  Some 
industry source's have observed to Embassy commercial officer that 
the CAAC announcement was largely intended to target Airbus in 
retaliation for French President Nicolas Sarkozy's official meeting 
with the Dalai Lama.  END NOTE.) 
 
¶6. (SBU) CAAC's December 9 measures also include a refusal to accept 
applications for new airlines before 2010; introduction of lower 
fuel prices, taxes and fees continued support for mergers in order 
to reduce spending and improve stability; subsidies for 100 air 
routes to remote areas, and a RMB 10 billion fund to support 
building air safety facilities.   CAAC hopes these measures will 
enable the industry to maintain 10 percent growth in 2009.  The 
government has already made good on reducing fuel costs, cutting jet 
fuel prices 32 percent on December 18 (reftel).  The State-owned 
Assets Supervision and Administration Commission (SASAC) conducted a 
management shuffle among Air China's parent company, China Southern, 
and China Eastern.  The changes are expected to pave the way for a 
possible China Eastern and Shanghai Airlines merger. 
 
In "Interesting Times," Go for the Direct Subsidy 
--------------------------------------------- ---- 
 
¶7. (SBU) China Southern Airlines and China Eastern Airlines each 
received cash infusions of RMB 2.3 billion (USD 235 million) from 
their respective holding companies to help the airlines cope with 
recent losses due to weakening demand.  China Southern's funds came 
directly from a Ministry of Finance (MOF) subsidy to its parent 
company.  China Eastern will reportedly seek an additional RMB 10 
billion (USD 1.5 billion) in capital injection from the MOF and the 
State-owned Assets Supervision and Administration Commission 
(SASAC).  Air China, although in better financial condition, is also 
reported to be interested in an injection of funds.  All three major 
Chinese airlines are expected to post net losses this year.  China's 
nascent private airlines sector is finding it more difficult to 
weather the downturn.  In an attempt to raise profitability 
Beijing's Okay Airways filed to suspend passenger services for one 
month from December 15, although the company still operates a cargo 
service. 
 
¶8. COMMENT.  Although many transport industry indicators still show 
growth, the dramatic slowdown in the pace of that growth is telling 
- and is clearly hitting the industry hard.  Post anticipates more 
grim days ahead, with official statistics ultimately reflecting an 
actual downturn in some sectors.  As the transport industry is 
forced to admit to the reality of the economic downturn, we 
anticipate more state-owned enterprises (SOEs) will request 
government support, per the airline example described above. 
 
RANDT