China has published a set of guidelines to support and develop its shipping industry, as the world's biggest trading nation looks to secure its supply chains and grows more assertive over territorial disputes in the South China Sea.

China will introduce tax and other regulatory reforms while pushing shipping firms to upgrade and modernise their fleets to build an efficient, safe and environmentally friendly shipping system by 2020, the State Council, China's cabinet, said in a statement published on its website.

"Shipping is a key component in economic development, and plays an important role in protecting a country's maritime rights and economy in promoting exports and industrial development," it said.

The government would also encourage firms to retire vessels early, reducing supply, and develop shipping centres like Shanghai and Dalian to compete with the likes of London in shipping services.

Shares in state-backed China Shipping rose almost immediately, as did shares in Hong Kong-listed China COSCO and China International Marine Containers Group Ltd.

Barclays analyst Jon Windham said the sector - weighed down by overcapacity after too many ships were ordered before the global financial crisis - was sensitive to any good news, even though the government's announcement lacked details.

"There's some potential that there's going to be some policy support, likely in the form of some tax policy," he said.

Heavy losses

While foreign firms such as Denmark's A.P. Moller Maersk have managed to remain profitable by cutting back on costs, China COSCO and China Shipping have suffered heavy losses attributed to the poor trading environment.

China's shipping industry, comprised of more than 240 firms, carried only a quarter of the country's trade and lagged behind other nations in terms of services and crew size, Deputy Transport Minister He Jianzhong told reporters at a briefing in Beijing.

He said shipping firms should improve their corporate structure and costs, and aim to achieve scale to boost their competitiveness.

Last month, the country issued further guidance to support and modernise its shipping industry, saying it would encourage mergers and private investment as well as develop its cruise industry.

These moves come as the global shipping industry has been struggling to recover from a prolonged slump brought on by a glut of ships ordered before the global financial crisis of 2008-2009. That has weighed on freight rates in recent years, resulting in heavy losses at firms such as China COSCO.

The Ministry of Transport laid out how it planned to implement reforms in a document on its website last month, saying it aimed to achieve most of its targets over the next four years. It first published a set of guidelines in September to support and develop its shipping industry.

In the Oct. 31 document, the government said it would conduct research on how to promote mergers and acquisitions between the industry's firms, with a view to encourage specialisation, and would also actively encourage mixed-ownership reform of its state-owned shipping firms.

Finance and insurance institutions would be asked to increase support for the shipping industry to help promote the development of the country's ship leasing and insurance sectors, with the aim of achieving results by 2015, it said.

Foreign companies would also be allowed to set up firms without Chinese joint venture partners in Shanghai's free-trade zone, and qualified Chinese firms would be encouraged to expand their overseas businesses, it added.

China, which is looking to build its first luxury cruise ship with operator Carnival Corp (see box), also aims to build up to three cruise home ports by 2020, and will start cruise transport pilot projects in Tianjin, Shanghai, Fujian and Hainan to expand its local network, the ministry added.

Handouts

China has given four shipping lines, including China Cosco, 1.8 billion yuan ($293.3 million) in subsidies to encourage them to retire and upgrade their vessels, the four companies said.

In December, China announced it would hand out subsidies to shipping lines to replace old models with new and greener ones and to generate orders for its shipbuilders, which have been hit by an order slowdown in a global shipping slump.

China Cosco said it had received 1.3 billion yuan through its controlling shareholder, state-owned China Ocean Shipping Group, to compensate it for scrapping and upgrading old vessels.

Sister company Cosco Shipping said it had received 182.9 million yuan for ship upgrades.

China Shipping Development Co, meanwhile, said China's finance ministry had given it 215 million yuan in subsidies for scrapping 15 ships and China Shipping Container Lines said it had received a subsidy of 40 million yuan.

The companies said they expected the subsidies to have a positive impact on their full-year results.

Despite a pledge to reduce support for industries with overcapacity, the government has suggested it is reluctant to allow large ones such as shipbuilding to wither. It is currently seeking outside support for heavily indebted private shipbuilder China Rongsheng.

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China looks to build first luxury cruise ship with Carnival

China, the world's largest shipbuilder, is looking to build its first luxury cruise vessel with help from cruise operator Carnival Corp and Italian shipyard Fincantieri SpA, as the country looks to expand domestic tourism.

Carnival said it had signed a memorandum of understanding with China State Shipbuilding Corp (CSSC), with the eventual aim of forming a joint venture that would also include Italy's Fincantieri.

China's cruise industry is predicted to become one of the world's largest with 4.5 million passengers by 2020, according to government figures. It has become a top target for firms like Carnival and Royal Caribbean as its fast-growing middle class eyes new holiday options.

Carnival said it would provide ship design and shipbuilding expertise to help create and define the overall specifications for the China-built cruise ship. It said the MoU also included other opportunities, such as the formation of a domestic cruise company.

China's shipbuilding industry, which stormed past South Korea to become the world's largest in 2010, has been hit hard by a prolonged global shipping slump. That has left many of its yards with high debt burdens and a lack of orders.

The government has moved to support the industry, which employs millions of workers, by providing subsidies to encourage shipping lines to order new ships. It has also encouraged yards to venture into building higher-tech vessels, such as offshore equipment.

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Q&A

‘An important step in the right direction’

Tormod Ludvik Nilsen, Wikborg Rein’s Shanghai managing partner, discusses the potential impact of the guidelines on the shipping industry with Shangjing Li

ALB: What impact do you think China's recently issued guidelines will have on the shipping industry?

Nilsen: Over recent years, the shipping industry has bled heavily and is still bleeding due to overcapacity. Unfortunately, this is a problem which is not going to go away overnight. While the new reforms are certainly a step in the right direction, their impact in the shorter term is uncertain. The State Council has, however, shown admirable ambition in pushing shipping firms to upgrade and modernise their fleets. Ideally, this will lead to a far more efficient, safe, and environmentally friendly shipping sector in 2020. But to a large degree, achieving these goals will depend largely on the development of the world’s financial markets.

ALB: Do the guidelines appear to be able to adequately tackle the challenges that the shipping industry is currently facing?

Nilsen: It is too soon to tell whether the guidelines will produce the desired results. We do, however, think this is an important step in the right direction, and that China is taking on an industry leadership role. The implementation of the reforms by shipping companies will be crucial to the success of these directions, and we have seen too little to judge at this stage. Many of the challenges the Chinese shipping sector is facing are caused by low levels of capitalisation in a tough market. Only the global shipping markets can really correct this.

On top of the troubles faced by the traditional shipping sector, the offshore oil and gas segment is now facing its own challenges. For many yards and owners, offshore has been seen as a profitable space for diversification. But the recent fall in oil prices and an increased focus on the offshore sector’s cost levels will also have a downstream impact on the shipping industry, especially for the yards and OSV operators. There is a rising concern from key players in this industry. Perhaps the silver lining here is the reduced cost of bunkers.

ALB: What are the kinds of advice you are currently giving shipping clients, as they deal with the current situation?

Nilsen: The rule of thumb is to deal with any challenges before they materialise in full. We have seen too many cases where inaction has caused problems, which often could have been avoided at a much earlier time. A shipyard or charterer in trouble is often a problem also for a shipowner. We have worked on dozens of restructurings which have ended well for both parties because our clients were able to deal with the situation promptly.

ALB: How effective do you think the guidelines will be in helping Chinese companies, such as COSCO, reverse their heavy losses?

Nilsen: In general, it will depend on how favourable the policies will be for Chinese industry players and how the interaction between state-owned shippers and transporters will be guided. But with the ambition outlined by the State Council, it appears the government is willing to put in place the policies that are needed to increase the profitability of the Chinese shipping industry.

ALB: How will the guidelines impact foreign shipping companies in China?

Nilsen: They will continue to do well, but the competition is likely to increase and the regulatory framework is changing. We have, for instance, been contacted by several international owners and charterers in relation to the new tax rules for non-Chinese resident shipping companies. In this case, tax treaties should, in most cases, exempt taxation on (for example) charter income in China. But these rules and the new guidelines may imply a tougher climate in China for foreign shipping companies.