VZCZCXRO7962
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0443/01 0511259
ZNR UUUUU ZZH
O 201259Z FEB 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2438
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 03 BEIJING 000443 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, READE, 
VENKATARAMAN, KEMP, MILLER, MALMROSE 
DOC FOR MELCHER, SAUNDERS; LORENTZEN AND SHOWERS (5130); HEIZNEN 
(6510) 
 
E.O. 12958:  N/A 
TAGS: ECON EWWT EIND ETRD CH
SUBJECT: CHINA ANNOUNCES SHIPBUILDING SUPPORT PLAN 
 
REF: (A) Beijing 151; (B) Beijing 326; (C) Beijing 425 
 
This cable is Sensitive But Unclassified (SBU) and for official use 
only.  Not for transmission outside USG channels. 
 
¶1. (SBU) SUMMARY.  China's State Council announced a shipbuilding 
industry support plan on Feb. 11, the fifth of ten such plans for 
key industries designed to help sectors hit hardest by the economic 
slowdown.  The plan includes a three-year moratorium on approval of 
new shipyards, but observers doubt industrial capacity will level 
off for several years.  An initiative to promote industrial 
consolidation may be difficult given the growing role of regional 
and privately owned firms.  Measures to enhance firms' research and 
development capabilities and to offer export credits to foreign ship 
buyers will be watched closely for signs of subsidies.  Conversion 
of shipyards to repair facilities may be a gesture to help private 
shipbuilders, but the bulk of the plan appears aimed at large 
state-owned firms.  With the industry heavily dependent on exports, 
there is some concern domestic measures may not be enough to make up 
for the fall in external demand.  Chinese shipyards have strong 
order books, but they have not been forthcoming about the status of 
those orders in the wake of an economic downturn that has torched 
many other deals.   END SUMMARY 
 
¶2. (SBU) The State Council approved a new support plan for the 
Chinese shipbuilding industry on Feb. 11 - the fifth of ten plans 
for key industries.  (See reftels for reporting on autos, steel, 
textiles and machinery.  Reporting on other sectors is forthcoming.) 
 The announcement emphasized that the shipbuilding industry is 
important not only because it supports the nation's transportation 
infrastructure, but also the development of the related steel, 
chemicals, machinery, and information technology industries.  The 
plan seeks to maintain existing ship orders; support development of 
the industry by reducing risk; limit new capacity and strengthen the 
position of large shipbuilders; accelerate indigenous innovation and 
increase the added value of projects; and develop maritime 
engineering projects in addition to traditional shipbuilding. 
 
¶3. (SBU) As announced, the support plan will seek to: 
(1) provide credit and financial support to large shipbuilders and 
shipping companies to stabilize existing orders, fulfill contracts 
on time, and arrange for purchases of abandoned ships; 
(2) accelerate scrapping of old ships and single-hulled tankers to 
stimulate demand for new ships; and develop ocean-going, 
special-purpose, engineering and repair ships and expand market 
share of hi-tech ships and maritime engineering equipment; 
(3) support the research and development (R&D) efforts of firms for 
maritime engineering equipment, such as self-rising platforms and 
motors and engine systems; 
(4) support the expansion of the ship repair business via current 
facilities, especially for large vessels, special purpose ships and 
maritime engineering projects; and regulate development of the ship 
scrapping sector; 
(5) encourage mergers and acquisitions among ship-building 
enterprises and alliances of up and down-stream suppliers and 
provide guidance to small and medium-sized shipbuilding enterprises 
on business structure; and 
(6) strengthen technical innovation to upgrade indigenous technical 
capability, optimize and upgrade cargo and container ships and oil 
tankers, and raise R&D ability in high-tech, high value ship design 
to meet domestic needs for energy-saving vessels and maritime 
engineering projects. 
 
A MORATORIUM ON NEW CAPACITY 
---------------------------- 
 
¶4. (SBU) Specific measures included a three-year moratorium on the 
approval of new ship-building projects and capacity expansion 
through 2012.  Other details include expanding bank credit for 
buyers of exported ships; special credit lines for domestic purchase 
of ocean-going ships through 2012; drafting policies to encourage 
early retirement of old ships and single-hull oil tankers; arranging 
a special fund for technical innovation; and supporting the R&D 
efforts for hi-tech ships and maritime engineering projects.  The 
measures did not include a change in rebates of value added tax 
(VAT) for exports, since shipbuilding already receives the maximum 
17 percent. 
 
INDUSTRIAL STRUCTURE:  HOW DID WE GET HERE? 
------------------------------------------- 
 
¶5. (SBU) China's shipbuilding industry has been dominated by two 
state-owned conglomerates:  China State Shipbuilding Corporation 
(CSSC) and China Shipbuilding Industry Corporation (CSIC).  A second 
tier of firms includes shipyards affiliated with the largest 
 
BEIJING 00000443  002 OF 003 
 
 
state-owned shipping companies - COSCO, China Shipping and Chang 
Jiang.  With rapid growth, the industry developed a third tier of 
new firms: (1) provincial and municipally-owned shipbuilders; (2) 
large-scale private firms, such as Rongsheng Heavy Industries; and 
(3) nearly 3,000 "shatan" or beachfront shipyards, up tenfold from a 
decade ago.  In mid-2008, it was Rongsheng from this third tier 
which shocked the industry with a huge order for 12 bulk cargo 
vessels from Brazilian iron ore exporter Vale do Rio Doce.  The 400K 
DWT ships will be the largest ore carriers in the world and the 
largest ships ever built by China. 
 
¶6. (SBU) Overall, 2008 was a good year for the China shipbuilding 
industry.  According to Cao Yousheng, Vice-Chairman of China 
Shipping Industry, the country had 28 million DWT of finished 
production in 2008, double the level in 2006 and equivalent to 30 
percent of the world total.  The industry received 58 million DWT of 
new orders during 2008 (down from a peak of new orders in 2007), and 
exports surged 60 percent over 2007 to $19.1 billion.  Booked ship 
orders overtook Japan for the first time, and shipbuilders' profits 
rose 50 percent to USD 4 billion. 
 
INDUSTRY NOT FORTHCOMING ON ORDER STATUS 
---------------------------------------- 
 
¶7. (SBU) But with 80 percent of production exported, the industry is 
highly dependent on external demand.  The economic slowdown began to 
hit the shipping industry in mid-2008, and reverberated through the 
shipbuilding sector as charters were taken out of service and 
leasing companies began to cancel or delay ship deliveries.  Chinese 
shipbuilders and shipping companies were reluctant to publicly 
reveal cancelled orders, in some cases over concerns about upcoming 
IPOs or struggling stock prices in an already weak market.  By early 
2009, Singapore Pacific Basin Shipping reported that 382 ship orders 
had been cancelled worldwide, with China accounting for half or 
roughly 20 million DWT, and new orders had practically come to a 
halt. 
 
HOW MUCH CAPACITY IS TOO MUCH? 
------------------------------ 
 
¶8. (SBU) As with other key industries, China's shipbuilders have 
been rapidly expanding capacity.  The 2006 National Medium/Long-Term 
Plan for the Shipbuilding Industry set the goal to become the 
world's largest shipbuilder by 2015.  State-owned companies had 
access to cheap credit, provincial and municipally-owned firms 
received local government support, and in a growing market private 
firms expanded using down payments on new orders.  Given the long 
lead times on such facilities, even with the announced moratorium on 
new approvals it may take years for production capacity to level 
off.  A Shanghai analyst noted the expansion curb would only control 
capacity in the medium to long-term.  China's current capacity is 
estimated at 60 million DWT, more than double 2008 production. 
 
ROAD AHEAD STILL HARD TO EVALUATE 
--------------------------------- 
 
¶9. (SBU) Guangzhou Shipyard and CSSC shares both rose 10 percent on 
news of the support plan.  According to China Shipbuilding Industry 
Association, booked orders had reached 205 million DWT in 2008, 38 
percent of the world total.  The industry expects 20 to 30 million 
DWT in new orders in 2009.  While these figures appear to indicate a 
healthy buffer to weather the downturn, the lack of transparency 
makes it difficult to assess the industry's true status.  China's 
rapid growth came from bulk cargo and container ships, which are 
bearing a larger share of cancellations.  2009 orders are likely to 
favor oil tankers, especially very large crude carriers (VLCC), a 
field where China does not have a strong advantage.  Private 
shipbuilder Rongsheng announced a USD 2 billion IPO last August, but 
this February said the deal has been delayed indefinitely.  The 
company reassured markets that its USD 1.7 billion deal with Vale 
had not been cancelled. 
 
¶10. (SBU) COMMENT.  The latest support plan again raises a lot of 
questions.  Some provisions appear to be at cross purposes, namely 
accelerated scrapping of old ships while promoting the ship repair 
business.  Money may not be enough to achieve technical innovation, 
and both government support for R&D and the new export credits will 
be closely watched by foreign competitors concerned about subsidies. 
 .  Industry consolidation makes economic sense, but the state-owned 
sector is already highly concentrated and it will be hard to force 
mergers of third-tier producers.  It will take more than a 
moratorium on approvals of new facilities to address shipyard 
overcapacity.  Reports that this is yet another boost to the steel 
industry are doubtful since domestic shipbuilding consumes only five 
to six million tons of steel per year, while China produces nearly 
 
BEIJING 00000443  003 OF 003 
 
 
500 million tons.  END COMMENT. 
 
PICCUTA