There has been much talk lately in the offices of Cargo Facts and Air Cargo Management Group (ACMG, Cargo Facts’ parent) about the economic situation in China, and its potential impact on the air freight and express industry.
There are a few things that seem obvious and indisputable – “facts” if you wish, although “facts” is not quite the right word.
- The Chinese government devalued the yuan by 2% against the dollar.
- The Chinese stock market has taken a beating (here is a quick summary)
- There is widespread suspicion that China’s economy is not growing as fast as the government’s statistics say that it is.
- The US stock market also took a dive, based on fear that “economic contagion” would spread from China and infect the world economy, but has since recovered.
The problem, in our offices at least, is that we are not economists. We may know our way around the air freight industry, but we do not have a sophisticated spy network in the Finance Ministry in Beijing. And we probably would have trouble understanding the results even if we did.
We are, however, on the mailing list of The Economist, and once a week receive a note from that publication’s chief economist Simon Baptist. In his open letter this week, he addressed the very problem we have been debating here at Cargo Facts/ACMG: what is happening in China? Here’s what he had to say:
When I talk to business people about China, especially in Asia, there is a lot of skepticism about the growth numbers. Everyone’s individual experience seems to be that things are certainly not growing to the same extent as the 6.9% that the EIU [Economist Intelligence Unit] is forecasting for GDP growth in 2015. We have been looking into this issue, and our conclusion is that the slowest growing sectors of China’s economy—like heavy industry and export manufacturing – are among the ones that foreign investors are most exposed to. Industrial sector value-added in July was only 6% higher than the previous year, while electricity consumption—taken by many as a barometer of the health of the economy—was up by only 1.3% in the first half of 2015. So where, then, is the growth that gets us up to this 6.9%?
The answer lies in the services sector. Even more so than is usual, data on the services sector is patchier in China than for manufacturing and heavy industry. Nonetheless, growth in many service sectors has been strong, with financial services, hospitality, transport, telecoms and e-commerce all growing above the national average rate. That’s not to say that there are no problems—the financial sector, in particular, is at risk of a slowdown in the latter parts of 2015, owing to market turmoil and questionable government intervention—but it is part of the transition of China’s economy that we have been watching for the last decade and will continue to watch for at least the next one too.
Okay, so he didn’t directly answer our basic question, which was about the impact of the changes in the Chinese economy on the air freight and express industry, but he did sprinkle a few dots that we can try to connect.
- Export manufacturing is down. First, this is not a function of the Chinese economy, but rather of decreased demand from economies elsewhere. If Europeans are not buying as many smartphones as they once did, it is not because China is no longer making them. Rather, it is the other way round – China is not making as many smartphones as it used to, because Europeans are no longer buying them. However, regardless of the cause of the decline in export manufacturing, less goods made for export means less need for shipping those goods by air.
- China’s service sector is growing strongly. Among other things, this means that Chinese citizens still have jobs, and are still buying things. And in China, more than anywhere else, these purchases are made online. This has translated into explosive growth in the express industry (see our recent post on Alibaba and the Cainiao network for more on that).
Our takeaway from all of this is that while problems in various economies worldwide have led to a slowdown in demand for longhaul air freight, the growth of consumerism in China is driving growth in the domestic and regional express industry.
Of course, this could all change tomorrow. A real tanking of the Chinese economy could lead not just to a slowdown in express demand, but to political unrest, which in turn could… well, let’s not go there. On the other hand, if Europeans wake up tomorrow full of confidence in their political and economic future, demand for international air freight will blossom.