Shipping

Turning tides

A premier China shipyard has just gone bust

zhejian-ouhua-w

Last Sunday China’s first domestically-built aircraft carrier took to the seas, moving out of its anchorage in the northern city of Dalian and into the Yellow Sea. The still-unnamed ship is China’s second aircraft carrier, the first being the Liaoning, a retrofitted Soviet vessel. This is the new boat’s first trial on the open water, an event that made it the China Daily’s top story on Monday.

The weekend outing was designed to test the effectiveness of the ship’s propulsion system. While the most modern aircraft carriers are nuclear-powered, China’s debutant boat uses conventional engines. It is also much smaller than the largest aircraft carriers in America’s fleet. The Chinese ship has a displacement of 65,000 tonnes, while the USS Ronald Reagan’s displacement is over 100,000 tonnes.

But Hu Wenming, chairman of the China Shipbuilding Corporation, is confident in China’s ability to produce bigger and better ships. His company oversaw the building of the new carrier and he told state broadcaster CCTV: “In the future, if the country wants to develop any type of aircraft carrier, we have the capability to do it.”

According to the South China Morning Post, a third aircraft carrier is already under construction in Shanghai, with a displacement of 80,000 tonnes.

The construction of China’s second aircraft carrier, Hu reports, was a collaborative effort between the defence industry and civilian contractors, with 70% of the companies coming from the civilian sector.

But China’s broader shipbuilding industry is in a downturn. According to Hellenic Shipping News, the number of active yards in the country (meaning those with at least one vessel of over 1,000 gross tonnes on order) has dropped from 391 in 2009 to 112 in April this year. Of those lost, the majority have been privately-held manufacturers. As a result, state-backed yards now account for 40% of the active yards in China, the highest proportion since 2000.

On May 7 one of China’s most famous private shipbuilders, Zhejiang Ouhua Shipbuilding, filed for bankruptcy. The company is based in the city of Zhoushan where, according to Jiemian, over a tenth of the nation’s domestic ship production is based.

Zhejiang Ouhua was founded in 2004 at a time when many firms rushed into the promising shipbuilding industry. Zhejiang Ouhua outfitted vessels for a number of international firms, including Swire, Arkas and CMA CGM, gaining recognition as an internationally competitive builder. One Hong Kong-based shipping expert told WiC the firm made extremely high quality vessels.

Indeed, Ouhua’s reputation was gilded in 2014 when the Ministry of Industry and Information Technology included it in the government’s first whitelist on the industry.

The whitelist was created in response to the central government’s directive to reduce manufacturing surplus in the industry. A place on the whitelist provided each company with some ballast, signifying to creditors that it was a relatively safe bet. However, according to Jiemian, more than six companies from that initially list of 50 have since gone bankrupt.

Zhejiang Ouhua’s difficulties became public last year when it convened its first ever creditors meeting. Bank of China, Agricultural Bank of China, ICBC and Bank of Communications were all in attendance. According to Wallstreetcn.com, the theme of the gathering was “Don’t recall current loans, don’t delay new loans”.

Wallstreetcn.com claims that Zhejiang Ouhua’s debt problems were in part symptomatic of a broader downward trend in the sector, although it contends that the firm also engaged in “blind expansion”.

During its first creditors meeting, the firm had convinced the banks to continue their support. But during a second meeting held a month later, the creditors demanded that the government and its regulators match their financial assistance.

According to Shipping World, an industry news portal, Zhejiang Ouhua was already receiving significant support from the Zhoushan government, in the form of loans, subsidies and guarantees. But the government then withdrew its support and the firm’s line of credit dried up. As of March this year, Zhejiang Ouhua’s debt stood at Rmb6.7billion ($1.1 billion) while its assets were only valued at Rmb5.4 billion, Lloyd’s List reports.


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