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Sept.7, 2015

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14 THE JOURNAL OF COMMERCE SEPTEMBER 7.2015 COVER STORY PERHAPS NO GREATER evidence of China's downturn over the past year can be found than at sea, where speculation is rampant that the two state-owned ocean carriers, China Shipping Container Lines and Cosco, will merge to create the world's fourth-big- gest container shipping operator. Talk of a potential merger has swirled through the industry since late July, after trading in the two companies was sus- pended on the Hong Kong and Shanghai stock exchanges and the carriers said they were discussing a "material event." Although Beijing hasn't made a formal statement, the central Chinese govern- ment apparently ordered the two carriers to draft a preliminary merger plan. A five- member team, led by China Shipping Group Chairman Xu Lirong, reportedly is planning the merger, according to multiple sources close to the deal who were quoted by Chinese and foreign media. The merger would create the world's fourth-largest carrier with a f leet of 1.5 million TEUs, or 8 percent of total global capacity, according to Drewry Maritime Research. It also would be the largest car- rier of Asian exports to the U.S., based on data from PIERS, a sister product of The Journal of Commerce within IHS. The merger also would give retailers and other beneficial cargo owners one fewer major carrier to choose from, and could increase pricing. "It's not the kind of development that we are going to applaud," said Bruce Carlton, president and CEO of the National Industrial Transportation League, the largest U.S. shipper group. "Customers like to have as many choices as possible, and taking a net player out goes against that direction." Carlton added that he understands why the two money-losing carriers might be looking to merge. Shippers may hope that a newly formed carrier might be more financially stable and give better service, but such a merger wouldn't solve carrier problems with overcapacity in the market, he said. The linkup, though, speaks as much to the political and economic changes rippling through China than it does to the increased pressure on container lines — even state- owned ones — for profits. China Shipping Group, the conglomer- ate controlling CSCL and China Shipping Development, was created in 1997 to gal- vanize its larger sibling, Cosco, to become more competitive. It worked to a degree. CSCL attracted more employees with knowledge of shipping, rather than govern- ment appointees with little experience, an expert on Chinese freight transportation policy told The Journal of Commerce. In response, Cosco also stepped up its game, but Beijing realizes now that more must be done to shake the two carriers from their financial malaise, the expert said. Specula- tion of a merger rises every time the two carriers partner, whether that's on cabo- tage services or in the sharing of expertise. A merger would fit into China's larger effort to reform and modernize state- with what we (ideally) want," Huf bauer said. "And when the economy does nicely, the trade deficit widens, which it is doing. But whether that will become a second level of irritant (for the TPP) remains to be seen." A group of congressmen and others regard the bilateral trade deficit with China as one of the great weaknesses of the U.S. and see China's weak currency as a major factor in the erosion of the U.S. manufac - turing base, Hufbauer noted. This includes Donald Trump, who views China's yuan devaluation as a major bone of contention between the two countries. But he cautions against assuming the initial devaluation provides clear evidence of a Beijing-based plot to undermine the TPP. Some scholars and officials in China may view the TPP "as some sort of hostile U.S. diplomacy" aimed at limiting China's lever- age in determining the trade agenda of the next several years, Hufbauer noted. But he has recently sensed "a real warming toward the revisions in the TPP" text among many Chinese. There's a belief, he says, that China will join the pact in a second phase and that the reforms the deal engenders will be very good for China. "Three or four years ago, there was quite a lot of hostility to the TPP," he noted. "Now there is quite a bit of sympathy to TPP, with the thinking that this will be a platform for what the Chinese see as free-trade area of Asia and the Pacific. I'm not inclined to believe the conspiracy theory, but I know it's out there." Certainly, China is busy building its own trade links with the rest of Asia. Its One Belt, One Road initiative, for example, aims to create a modern Silk Road trade route link- ing central, west and southern Asia with China. That initiative is very infrastructure- oriented, Hufbauer added. "I don't think that clashes with the TPP, which is more about the rules with which you organize the trading relationships, although some people would see it as a possible competition," he said. For all its implicit risks, devaluation of the yuan has some positives for U.S. consum- ers of imported Chinese goods. "I am quite happy to see China producing and export- ing more, because they have contributed a lot to the economy that way," Hufbauer said. Other things being equal, a cheaper cur- rency makes Chinese goods available at lower prices in foreign currencies. Unfortunately, with the economic pie growing at such a slow pace, "the political perception is that if your exports grow, mine will shrink." JOC Contact Alan M. Field at By Mark Szakonyi ROILING THE WATERS A Cosco-China Shipping merger threatens further market upheaval in global shipping trades "CUSTOMERS LIKE TO HAVE AS MANY CHOICES AS POSSIBLE, AND TAKING A NET PLAYER OUT GOES AGAINST THAT DIRECTION."

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