The river runs deep

Why Maersk is so excited by the Yangtze River’s opportunities

The river runs deep

The Yangtze: according to author Simon Winchester, it’s the ‘river at the centre of the world’

The year 1858 was a particularly humiliating one for Chinese officials. It marked the mid-point of the second ‘Opium War’, and victorious Western forces occupied Guangzhou as well as a series of coastal forts guarding the way to Beijing. The Qing Emperor, preoccupied with putting down a peasant rebellion in the south, decided diplomacy was the order of the day and signed the Treaty of Tianijn.

It was a serious blow to Chinese pride. Western powers won control of 11 new ‘treaty ports’ (which were exempt from Chinese law), and the right to sail the length of China’s most important waterway: the Yangtze River. The privilege was upheld for almost a century by foreign gunships (the last patrols were in 1949).

Foreign trade wasn’t exactly welcome on the river after that, and the Yangtze was effectively closed to foreign ships when the civil war ended (something the British frigate HMS Amethyst found out the hard way when it came under fire from the locals).

Upstream trade remains restricted even today, despite three decades of reform. So why are inland cities suddenly scrambling for foreign investment to build up their Yangtze ports?

One reason is that the once-coveted river trade has been neglected in recent years, as faster-growing coastal ports competed for investment. Ten years of official policy to push companies to ‘develop the west’ hasn’t changed that situation much. But rising wage demands closer to the coast may be finally turning things around.

“Manufacturers can’t raise prices too much,” Cliff Sun, chairman of the Federation of Hong Kong Industries, explained to Bloomberg. “The only choice for them is to move to regions where wages are cheaper.” And that often means westward – along the Yangtze.

With rising oil prices making road transport increasingly expensive (the NDRC put diesel and petrol prices up more than $30 a tonne in October), shippers are looking again at the river as a cheaper way to export from inland provinces. “In the old days, there wasn’t much cargo to be moved,” one Wuhan-based shipper told the newswire. “Now, with manufacturing moving to central and western China, the river is flourishing with ships.”

That trend helped make the Yangtze the world’s busiest river last year, moving 1.34 billion tonnes of freight – more than three times its cargo volume in 2000. Container traffic alone is up 28% so far this year, and it’s thought that a combination of exports and rising domestic demand will keep that trend going.

With business once again booming on the river, Danish shipping giant Maersk is determined to be a part of the resurgence. The world’s largest container shipping company has been building up a significant business helping companies export from the interior. It’s reportedly now the leading container shipper in Chongqing, China’s largest city (see WiC77), despite having to subcontract to local firms on the middle and upper reaches of the river.

Since it’s not allowed to run its own ships that far west, Maersk is exploring another way to profit from the boom: taking minority positions in riverside terminals. “Growth rates are high and concentrated on the river,” Soren Hansen, director of business development for its terminals business, told reporters recently, “so obviously this is a place we really want to be.”

It’s a move that’s welcomed by provincial governments keen to benefit from Maersk’s technological know-how, as well as defray some of the (enormous) costs involved in developing an inland port infrastructure. The State Council (China’s cabinet) recently announced it would spend $24 billion expanding the inland shipping trade along the river over the next decade. Local governments are going to have to find funds to support the central government’s initiatives.

(For example, Hubei Province has said it plans to spend $27 billion expanding the port at Wuhan over five years, and Sichuan Province has spent nearly $300 million this year alone expanding the ports serving Chengdu.)

With so much being built there’s no shortage of choice for investors, although Maersk has had to move cautiously to avoid making a deal it later regrets. It initially had its sights on Chongqing’s Cuntan, the largest bonded port in western China, and a hub for more than 20 cities in at least six neighbouring provinces. Maersk has been negotiating with the Chongqing Port Logistics Group (CPL) for a stake in Cuntan since 2007, and finally signed an MOU in May (that would see it handle 20% of the ports containers).

That should have been the end of the story, but a last-minute policy change saw negotiations shift yet again. Chongqing’s sizeable ambitions can’t be met through reliance on Cuntan alone, so plans to expand it were shelved in favour of developing another port. “Chongqing’s construction focus has shifted to Guoyuan Port,” a government insider told the 21CN Business Herald, “the municipal government decided to… transfer 600,000 TEU of [container] capacity from the third phase of Cuntan Port to Guoyuan Port.”

That means that the city government appears to be angling for an even bigger commitment from the experienced ports operator. “[CPL] hopes that as well as taking shares in Cuntan Port, Maersk also invests in Guoyuan Port and other packaged projects,” another insider explained to 21CN. The problem is that a smaller Cuntan investment is not so attractive to Maersk.

That’s pushed negotiations back, but it’s not likely to stop the firm making one of the first major foreign moves back to the river. And competition from rival ports means there are plenty of other opportunities, says Martin Gaard Christiansen, head of Maersk’s Asian ports business. The company picked Chengdu as the site of its new global logistics service centre last year, so the nearby ports of Yibin and Luzhou could be next.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.