On the waterfront

Shanghai Port holds consignments to ransom

Containers are seen at a port of Shanghai Free Trade Zone

Rule of law all at sea over these

The Grand Canal is the world’s largest man-made waterway, stretching over 1,000 miles down the east of China, from the capital, Beijing, to its terminus in Hangzhou. It was an early lifeline of China’s shipping industry, carrying much of the Middle Kingdom’s inland commerce. But its commercial value began to fade in the Qing Dynasty, as steam-powered sea transport – much of it state-owned or foreign – began to thrive. Many private firms went bust. Thousands of jobless sailors became gangsters or joined armed rebellions.

In recent years, the shipping industry in China has again come under threat – although this time from excess capacity and dwindling economic growth – and once more it seems that smaller private-sector shipping firms have suffered the most.

On August 26 this year, Nantsing Container Lines – the biggest privately-operated domestic shipping company in China – told its staff that owing to the “influence of the depression in the domestic shipping market”, the company was temporarily suspending operations.

The plight of Nantsing is typical, National Business Daily reports. When demand for domestic shipping was high, shipping bosses clogged waterways with ships, amassing ever-bigger fleets. Now, thanks to oversupply and a lack of consolidation, these local firms face fierce competition and falling shipping rates.

Whilst private companies such as Nantsing have suffered the worst of the turbulent market conditions, some state-owned shipping firms have been provided with additional ballast by the government.

In March this year, Reuters revealed that the authorities had provided three state-owned shipping companies with close to Rmb2.4 billion ($375 million) in subsidies to keep them afloat. The relief was offered despite promises they would stop aiding industries facing overcapacity.

In an interview last week with CNBC, the chairman of Singapore-based IMC Pan-Asia Alliance Group, Chavalit Frederick Tsao, claimed that the slowdown of the Chinese economy might actually be good for the shipping sector, because it would remove “those crazy people who do not belong in the industry”.

Meanwhile the troubles of Nantsing have had a knock-on affect for Shanghai International Port Group (SIPG), a state-owned port operator. When Nantsing temporarily terminated operations, it defaulted on payments to be made to SIPG. As National Business Daily reports, in response to this threat of lost revenue, SIPG seized over 1,300 of Nantsing’s shipping containers, and began ransoming the contents.

According to reports, SIPG was charging consignors – the rightful owners of the container content – Rmb2,000 to retrieve the goods stored in a small container, and Rmb3,000 for access to larger containers, plus a deposit fee on each. Upstream at Taicang port, which is a member of the Shanghai International Shipping Centre, prices were even higher, at Rmb15,000 and Rmb20,000 respectively.

A Shanghai court ruled earlier this month on behalf of a group of over 20 consignors, stating that SIPG was only entitled to seize Nantsing’s containers, not the goods within. It added that if the consignors came to collect their goods, SIPG should proceed in “accordance with the law”.

Shanghai-based lawyer Yan Yiming explains that the consignors of the goods and Nantsing had an entrustment relationship, but the ownership of the shipments never entered Nantsing’s hands. Therefore, creditors have no right to seize the goods stored inside Nantsing’s containers even though it defaulted.

Although SIPG has acted above the law, its approach may be working. The China Business Daily reports that many of the consignors embroiled in the affair in Shanghai have already paid SIPG’s levies to receive their shipments, showing a lack of faith in the legal system’s ability to safeguard their interests.

It is not unprecedented for state-owned ports to operate in a high-handed manner, and disregard rules and laws.

For example, the explosion on August 12 in the port of Tianjin revealed not only the strength of the state-owned Tianjin Port Group’s grip on the area, but also its willingness to circumvent safety rules regarding the storage of highly dangerous chemicals (see WiC293).

© 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.