Trouble at sea

Shipping debacles sees two Chinese firms at loggerheads in London courts

Henna w

Lap of luxury? The Henna liner was impounded, bringing an unscheduled end to its passengers’ trip

Captain Charles Boycott would never have guessed his surname would become part of the fabric of the English language. A land agent in Ireland, Boycott provokedfury over rents in 1880 and Irish politicians encouraged locals to ostracise him. In practical terms this meant that no one would work in Boycott’s fields or at his house. Local shops and businesses stopped selling to him. The postman refused to deliver his letters.

As such, it was the first example of a ‘boycott’ – a term now used repeatedly to describe the shunning of a place, a person or a thing.

And the latest example could involve the South Korean island of Jeju. A spokesman for HNA Tourism, a Chinese cruise liner, told CCTV last week: “We will boycott tourism business to Jeju unless the South Korean relevant units apologise to all the relevant passengers and promise that no similarly adverse events will occur again.”

The event that riled HNA Tourism was the impounding of its cruise ship The Henna by a local court. On September 13 the liner was forbidden to leave the Korean port, causing consternation among its 1,659 passengers and major embarrassment to its operator.

HNA says it is the first time that a tourist liner has been seized in maritime history and that the passengers were essentially held “hostage” by Korean authorities.

The whole palaver must have come as a shock to the well-heeled passengers on The Henna. The shipmade its maiden voyage in January and is claiming to be China’s first luxury cruising vessel. Since May it has sailed regularly between Tianjin and Jeju.

What makes the case more interesting is that it doesn’t involve any Korean entities. The Jeju court was petitioned to impound the liner by Chinese firm Shagang Shipping. This is where it gets a lot more complicated and HNA’s righteous indignation begins to lose some of its lustre.

First off, some background on the warring Chinese parties. On one side is HNA Group, an entity we first mentioned in issue 52. This sprawling conglomerate began in aviation (via Hainan Airlines) but now straddles eight industries, employs 120,000 people and has assets valued at Rmb360 billion ($58.8 billion). Somewhat hard to categorise, the company also acts as the investment arm of the provincial government of Hainan, where it is based. One of its businesses is Grand China Logistics, which in turn owned (past tense deliberate) Grand China Shipping, the firm at the heart of the dispute.

On the other side is Shagang Shipping, an offshoot of China’s biggest private sector steelmaker Sha Steel (see WiC31). In 2008 it began leasing ships to Grand China Shipping, with HNA Group providing guarantees that the shipper would fulfill its repayment obligations.

Back then, Grand China Shipping harboured vast ambitions. By 2015 it wanted a fleet of 200 ships, helping it become one of China’s top three dry bulk carriers but also putting it on the map as one of the world’s top 20 cruise line companies. However, the spectacular cratering of the shipping industry saw its grand plans unravel. Similar to local giant Cosco, Grand China was soon locked into high charter rates but struggling for business in a weak commercial climate (for coverage of Cosco’s travails, see WiC201).

Faced with heavy losses, Grand China then seems to have opted for a ‘can’t pay, won’t pay’ strategy. It stopped paying its monthly rent on the Dong-A Astrea in 2010, which led Shagang to bring legal proceedings in the UK. The 21CN Business Herald reports that an attempt at arbitration in London favoured Shagang but that no payments were forthcoming. In March 2011 a capesize vessel belonging to HNA was impounded in India and three weeks later, Grand China paid the owed rental. The capesize vessel, Bulk Peace, was subsequently released, but four months later monthly payments to Shagang ceased again.

So another ship was seized: this time the tanker GC Guangzhou, which was held at a port in South Africa.

Shagang continued to pursue litigation through the London and Hong Kong courts (but not in China, which might strike some as odd given that both parties in the dispute are Chinese). In November last year Shagang received a sixth verdict from the London Maritime Arbitrators Association, which awarded it $58.38 million in compensation for arrears.

The dispute rumbled on. Shagang says that only $15 million of the compensation sum was subsequently paid, so it sued afresh in the UK for HNA to fulfill its guarantee obligations on behalf of Grand China. It also engaged lawyers to pay close attention to HNA Group’s assets entering the world’s major ports. Ultimately this led to the seizure in Jeju.

Shagang is not alone in taking legal action against Grand China Shipping for unpaid rent. 21CN reports that 10 major ship owners from Norway, Greece and elsewhere have also been pursuing the firm for arrears.

The process has been slow and expensive, with a Shagang Shipping director lamenting to 21CN that it has spent “the past three years in uninterrupted debt collection to recover the huge losses to the company”. In response, HNA Group has sought to distance itself from the situation by claiming to hold just 10% in Grand China Logistics, Grand China’s parent. Grand China Logistics has tried to cut its own links to the failing shipper, selling it to a company registered in the Marshall Islands for the not-so-grand sum of $1. The chances of getting any cash out of Grand China now look a lot slimmer.

This still leaves the legal question of HNA Group’s guarantees, which were inked back in 2008 when relations between the Chinese parties were far more amicable.

It would seem that Shagang views the guarantees as its best option for recouping the monies owed. That might explain why it acted so dramatically in Jeju. And by embarrassing HNA Tourism it brought the debt debacle into the public eye. The credible threat to HNA is that other cruise liners may be seized in other ports. That’s not the sort of news likely to encourage passenger bookings.

HNA Group is mindful of the public relations disaster that’s unfolding and its CEO Li Xianhua has taken to the firm’s official weibo account to apologise to inconvenienced passengers. But Li added that the ship had been seized via “improper practices” and that “HNA Group reserves the right to hold related parties accountable through the legal process”.

© 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.