Platt Perspective on Business and Technology

China and its transition imperatives 21: an August 17, 2015 update concerning the explosions at Tianjin

Posted in macroeconomics by Timothy Platt on August 17, 2015

This is my 25th installment, counting supplemental update postings, to a series on China and its most recent Party and government leadership transition, looking back over the past two years and more since that formally and officially took place and to now and China’s current situation, and forward. See Macroeconomics and Business, postings 154 and loosely following, and that directory’s Page 2 continuation for other postings to this series. And most recently and of particular relevance to this posting, I have added three updates to this series concerning China’s recent and still emerging economic crisis, with supplemental posting Part 19.5, a more regularly scheduled Part 20 and with supplemental Part 20.5. I offer this series installment as a direct continuation of these most recent three series installments, doing so under the impetus of recent and still developing news stories.

I begin this posting by noting some predictive points that I offered in Part 20.5 of this series, which I repeat here as a basis for further discussion:

• So far at least, essentially all of this economic downturn has been contained within China itself, as the businesses and investors that have seen their valuation and wealth start to collapse have primarily all been in China.
• And for many if not most of those companies involved, even if they are publically traded, that has primarily been carried out strictly within China itself and through China’s own stock exchanges.
• True, this series of events does raise a significant risk of impacting on the global money market valuation of their currency, and this has to have impact on the global perception of the valuation of Chinese publically traded businesses whose shares are more actively traded on a more global range of stock exchanges. And this will impact on international trade with China. But the real impact of much of this would be delayed at least for now, and in principle would be minimal if China’s current emerging economic challenges could be rapidly reined in.

In the past week, China has significantly devalued its currency (the Renminbi) three times. On the positive side for their economy and for their government and Party leadership, this means goods manufactured in China can now be acquired much more cheaply internationally, improving their balance of trade. But this will also make foreign goods more costly in China. And of more immediate impact and importance, this means that debt held by Chinese businesses that are due payable in US dollars and other foreign currencies has suddenly effectively increased and for all Chinese businesses involved. And collectively, private sector Chinese businesses owe a great deal of foreign debt that they cannot simply pay off in devalued Renminbi at the new exchange rates that they would trade at. This, I add, comes at a time when businesses in general in China are already being challenged by the economic pressures of a falling overall economy there, and by a reduction in public trust there from China’s stock market collapse.

• China’s citizens, and particularly members of their emerging middle class have lost a great deal of personal wealth from the bubble burst of their stock markets, and from their government’s still largely ineffectual actions taken in response to that, including governmentally mandated secession of all initial public offerings, and mandated stock market closings when their market-wide stock price indices have fallen by more than a set trip-wire level in a single trading day.
• But any transfer of wealth to their citizens as a result of this currency devaluation with its potential for increased export trade, will have to trickle down through their business sector first, and through their government regulatory systems and bureaucracies as well before any of it can have impact upon the man and woman on the street.

And expressed need on the part of China’s leadership to take rapidly recurring steps in devaluing their currency, coupled by the fact that this cannot have anything like a rapid positive impact on their citizens have to at the very least be raising cautionary concern in China as to the wisdom and effectiveness of Party and government policy making and its implementation. All of these rapidly successively emerging downward shifts collectively serve to limit government and Party in its range of options for moving forward, and in its effectiveness in doing so – and in its perceived effectiveness, where appearance can easily become the defining reality.

And this brings me to some key wording from that third here-repeated bullet point from the top of this posting:

• “But the real impact of much of this would be delayed at least for now, and in principle would be minimal if China’s current emerging economic challenges could be rapidly reined in.”

And this brings me to a wildcard development that first erupted just a few days ago as of this writing, and that is still developing news as I write this: the massive explosions and fires, and toxic chemical releases that have just taken place at China’s Port of Tianjin. In order for China to reap trade benefits from its currency devaluations, it has to be able to actively trade, shipping out its goods to foreign markets without delay or hindrance of any sort and at a consistent, reliably high volume.

• This means its shipping ports have to be fully functional and actively connected into their nation’s supply chain systems,
• So they can coordinate arrival of goods from their manufacturers, with ship loading for delivery of those products to foreign ports and to their foreign customers,
• And with smooth effective transit of those cargo ships in and then back out of those ports again.
• I simplify a great amount of detail here, but the key point that I would raise here, of this complex processing and delivery system can be readily noted and even from just this brief systems description:
• China has a window of opportunity in which to effectively act if it is to gain benefits from its rapidly serially repeated currency revaluations,
• That outweigh the costs of those economic disruptions – and any sudden significant centrally mandated currency devaluation is automatically a significant economic disruption.
• And now one of their largest and most active ports for exporting goods has just been challenged by disaster.

I have yet to see anything in the news linking the still so recent events at Tianjin to the unfolding news concerning China’s economic downturn, but as a matter of basic due diligence it is probably prudent to at least consider the possibilities there. And I begin by at least briefly noting the critically important role that the city of Tianjin and its port play in China and in sustaining its overall economy.

Tianjin is one of five specially designated National Central Cities, along with Beijing, Shanghai, Guangzhou and Chongqing. Together, these five cities constitute leadership role models for the modernization of China as a whole, and in essentially all aspects of that country’s development: infrastructure development definitely included.

Economically, the five National Central Cities generate a combined gross domestic product (GDP) of the equivalent of over 1.3 trillion US dollars annually (1.361 trillion dollars in 2013 and more in 2014.) Tianjin itself directly contributed $234 billion of that in 2013 with their port and its shipping capability playing a critically important role in distributing export goods that are produced both there, locally and from farther away, including from Beijing: only 72.7 miles away by intercity rail. The Port of Tianjin is in fact the largest and most active shipping terminal in Mainland China and its effective ongoing functioning is essential for China’s economic wellbeing.

The details as to what happened on August 12, 2015 in Tianjin’s dockside port facilities are still emerging (see Tianjin Explosion Creates Logistical Hurdles in Chinese Port City for an August 14 news piece that was first published by the Wall Street Journal, and 2015 Tianjin Explosions for a Wikipedia entry on this that will be recurringly updated as more is learned. But data coming out of this event as of now indicate that the explosions in this port had a combined force equivalent to the detonation of between 25 and 30 metric tons of TNT. A large expanse of warehouse and other facilities was heavily damaged or completely destroyed, with the total loss of over 8 thousand new cars that had been waiting for loading onto ships as just one relatively minor but readily visible indication of what transpired. Total export inventory lost is still being determined but it is almost certainly going to reach the equivalent of at least several billions of US dollars. But more importantly, this was a toxic chemical release event too, with among other things the release of over 700 tons of sodium cyanide into the environment. And for longer term consequences, this event caused a great deal of damage to a wide range of essential shipping infrastructure resources, at least some of which will take months to restore. To put what happened here into perspective, the blasts from these explosions were sufficiently forceful to shatter windows several miles away from their epicenter and the explosions themselves were directly observed from space, with a combined blast radius of up to two miles (see, for example: Deadly Tianjin Explosion Seen from Space.) These explosions were even visible on weather satellite imaging with its lower image resolution capability.

I am going to end this discussion here at this point, but will continue it with a next series installment in about ten days, and both to offer detail updates on this specific disaster and to more fully discuss how this event impacts on China’s economy as a whole. Meanwhile, you can find this series and all of its postings at Macroeconomics and Business as postings 154 and loosely following for Parts 1-12 and for a supplemental posting: Part 12.5. And see Page 2 to that directory for a second, continuation supplement Part 12.6 and for Parts 13-19, and for here-cited Part 19.5, Part 20 and Part 20.5. And you can find other, China-related postings and series at those directory pages, and at Ubiquitous Computing and Communications – everywhere all the time too.

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