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China Trends #2 – Large but Not Strong: The Challenges for China’s Domestic Ports

BLOG - 27 June 2019

In the past few decades, we have witnessed a very rapid rise of Chinese domestic ports. This is reflected in the number, size, and capacity of ports. However, the overall development of Chinese ports has focused on quantity rather than quality. Attempts to improve the competitiveness of them have never stopped but the expectations set by the local and national governments have not been met. Along with the issue of unfettered competition among local authorities that is classic in China, there are also issues with management. This leads some to suggest more regional coordination and specialization, and a separation between public port authorities and private management of the terminals.

The development of domestic ports has not only made possible the development of China’s maritime economy, but also serves as a tool for China’s goal to build a globally strong transportation network (交通强国). According to the World Shipping Council, among the top ten world container ports (ranked by the volume handled), seven are Chinese (Shanghai, Shenzhen, Ningbo-Zhoushan, Hong Kong, Guangzhou, Qingdao and Tianjin). Overall, from 1949 to 2018, cargo throughput of Chinese ports has increased by 1434 times. The port blooming phase started from 2001. Official documents [1] issued in 2001 and 2002 ended the involvement of the Ministry of Transport in port planning and decentralization of port approval and management power. Since then, the provincial government and government departments where the ports are located have taken over the port development planning. The decentralization of planning power, as well as the consequences from China’s WTO accession, have boosted port construction and upgrade in the new century. In 1996, the container throughput of the port of Shanghai was still under 2 million TEUs, but it reached 21.72 million TEUs in 2006, and then 42.01 million TEUs in 2018

China’s domestic port competition is, at the low-end, based on merciless resource competition to obtain cargo, supply, distribution channels.

Some problems from this large-scale port construction have gradually become apparent. Chinese ports face the issue of being, as Chinese media reported, "large but not strong" (大而不强). The obsession of Chinese local authorities to build ports, the notion that every coastline has to have its own port (有海岸线的地方就要有建港口), has led to overcapacity and disorderly competition. China’s domestic port competition is, at the low-end, based on merciless resource competition to obtain cargo, supply, distribution channels and so on.The concentration of similar ports in the same region reveals a poor allocation of public resources, and a gap in the development of modern port logistics and shipping services.

Due to the lack of coordination and shared-interests among different posts, Chinese ports were not given the opportunity to take advantage of their full potential. The opinions of a large number of Chinese experts converge on the need for integrated planning at the regional level seen as a way out from the issue of "large but not strong". According to the regional integration, a main port should be chosen and receive more financial and management support, to ensure the creation of a big and strong core port in each region. This integration is supposed to allow each port to "take advantage of each other's strength" (优势互补) and to "harmoniously develop" (错位发展).  Creation of a port chain with a better division of labor will allow the small and less advantaged ports to be included in the whole picture. This also means that some resources, which the stronger ports would have obtained through their advantageous means, will be diverted to the smaller ports. This creates discontent and obstructs the integration process.

The idea of integration is far from new. On 16th January 1996, Premier Minister Li Peng approved the establishment of a port administration committee in charge of integrating the ports of Shanghai, Zhejiang and Jiangsu. This officially marked the beginning of China’s port integration process. However, the best tool to achieve the goal is yet to be found. There are two major tools for achieving integration: market and state.[2] The two function differently and serve different goals. State oversight involves a more complex process, requiring changes in administration, but it has a stronger impact on the regional economy promotion by serving the national strategy. The market is more flexible, as an investment guide that serves the interest of the enterprise. Mao Yanhua, a regional economy expert at the Guangzhou's Sun Yat-sen University, remarked, "Ports are national strategic resources, the development of each port must be in accordance with national interest". Hence, by no surprise, the Chinese case has predominantly used the state means to foster integration. However, state oversight is essential but not enough.

On the administrative level, the management of ports has followed the principle of  "one city, one port, one policy" (一城一港一政), meaning that the local government in charge of port management has the liberty to follow its own bylaws and regulations. Each local authority freely makes its decision (各自为政) and uses the port to serve its own interests. Differences in management model, capacity, development level, as well as competition among local governments [3], have delayed integration and made regional planning hard to achieve. The port reform has also separated government domain from enterprise management. In practice, this division remains unclear. Port operation is often run by local state-owned enterprises and, therefore, under the influence of local government thereby serving the interest of the local government. Rare cases of successful integration, such as the case of Xiamen Container Ports Integration, have happened because the ports to be integrated are under the authority of the same local government, thus there was less conflict of interest.

According to Tang Qiangrong, Director of the Guangzhou Maritime Institute, integration must take into consideration the interest of all parties and seek a balance among them. He adds that a hardline policy pushed by the government and forced acquisitions are not the ideal solution. In the case of China, the government has played a significant role in fostering port integration, yet it is the market that brings in various interest groups. A balance between the state and market is required.

In the case of China, the government has played a significant role in fostering port integration, yet it is the market that brings in various interest groups.

Some initial benefits of integration can be seen. There is a trend of moving away from fragmented competition (分散竞争), and increasing orderly cooperation (有序协同). In recent years, the relationship between supply and demand has reached a more proportional level, and construction investment has experienced six consecutive years of negative growth. To further improve the potential of port development,  one possible solution suggested by Xu Jianhua, a professor,  and Lu Mengzhou, a postgraduate student from Shanghai Maritime University, is to learn from the Landlord Port Model and form its own landlord port model with Chinese characteristics to draw a clear line between the government and enterprise functions. This means that a local authority would authorize a public entity to plan, develop and build the port, and then the terminals to be leased to operators. This way, state influence would stay only at the planning level, while the market environment would lead the operation.

In addition to port competition and management issues, the relation between port and port city is also a question debated by Chinese experts. Port cities enjoy a natural geographical advantage, and cooperation between the port and the port city is in the interest of both. Port and port city should be developed simultaneously, with the ultimate goal to fuse the port and the port city (港城融合). Shi Ting, Chief Engineer of Guangzhou Port Group, summarized the typical characteristic of successful international ports as following: A port should foster production, production should enrich the city, hence both should prosper together (以港促产、以产兴城、港以城兴、港城共荣). That is not always the case in practice. Hebei province has been criticized to have failed to build cities and have social development hand in hand, leading to the problem of  "Big Port and Small City" (港大城小), and in an extreme case, this is called "Big Port and No City" ( 港大无城). The port of Tangshan in Hebei province is a good example. The third Chinese port in terms of cargo throughput in 2018, it connects to the sea a city that still lags behind in terms of economic development.

In conclusion, Chinese ports now need to move from large-scale development to high-quality development, and the key lies in integration. The main challenge is to effectively bind together different interests (利益捆绑). This applies to port authorities and companies, but also to port and port city. Government incentives and involvement will not disappear completely, but at least a re-consideration of the level and method of involvement are required. Successful integration is only the first stage of this process of "becoming stronger".

 

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[1] 2001年下发的《关于深化中央直属和双重领导港口管理体制改革的意见》和2002年下发的《关于贯彻实施港口管理体制深化改革工作间见和建议的函》

[2] Tong MengDa, "China's Ports integration Shifts to Economic Integration(中国港口整合向以经济手段整合转变)", China Ports, No. 1, 2019

[3] "Understanding 30 Years of Chinese Port Development Through Container Transportation (从集装箱运输 看中国港口30年)", Zhongguo Gangkou Jizhuangxiang (China Port Container), 18 November 2016

 

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