Market Overview

Port Report: China's 'Hawaii' Is Cosco's Newest Port Of Call

Port Report: China's 'Hawaii' Is Cosco's Newest Port Of Call

Chinese shipping giant Cosco was last weekend given, for free, 45 percent of the equity of ports and shipping operator, Hainan Shipping Holding. Cosco's not just getting a freebie though. The equity transaction is part of a bigger plan to create a new center for China-World shipping and trade. That would include logistics services, integration of existing port resources and the creation of a new free trade port.

Hainan Shipping Holding owns and operates three main ports on the northern side of the tropical island of Hainan, off the Chinese coast in the South China Sea. It also owns a ro-ro and ferry shipping operator. The structure of the deal is a little bit complex with a series of interlocking shareholdings in a set of nested subsidiary companies.

Simply put, the island's government controls about 40 percent of Hainan Port Holdings, Cosco Shipping holds another 45 percent and "other shareholders" hold just under 15 percent. Hainan Port Holdings owns Shenzhen Stock Exchange-listed coastal ro-ro and ferry shipping company, Hainan Strait Shipping Co. Hainan Port Holdings also owns and operates three ports on the northern coast of the island, Haikou (also sometimes called Xiuying), Macun and Yangpu.

According to statements that have been issued by several Chinese state entities, plans afoot include "strengthening" the port of Yangpu, boosting the capacity of port services and also coverage of the major ports along the coast of China. Furthermore, Beijing wants to develop trade routes linking south east Asia and Europe via Hainan. Action to this end is underway as, according to Cosco, its first international container liner route to/from Hainan began at the end of 2018. An expansion of "one-stop" logistics, warehousing and other services are planned. It is hoped that such services will support the Hainan Shipping Exchange and the construction of a "Hainan Bonded Marine Fuel Oil Supply Center". The aim is to "promote the integration of the Qiongzhou Strait" (the strait between Hainan Island and the mainland) with "high-speed, efficient, high-quality strait transport".

Meanwhile, according to a statement released on the Shenzhen Stock Exchange late last week by ship and port operator, Hainan Strait Shipping Co, there are a further couple of reasons for the free transfer of equity.

Firstly, China wants to integrate Hainan's ports, of which there are two major facilities, a third less-busy port, and several minor ports. Cosco has signed an agreement with the various government entities in Hainan to do just this. The second aim is to help speed up the development of the busiest port, Haikou, and the second-busiest port, Yangpu.

Geographically, Hainan is in a good spot to serve the China/South China Sea trade and possibly the Indian Ocean and the Asia-Pacific trades. Hainan's westernmost point is about 150 miles to the east of Vietnam on the Asian mainland. The well-known Chinese city of Hong Kong is about 260 miles to the north east.

Beijing has had its eye on developing Hainan for a while. Technically, Hainan has been a special economic zone since former leader Deng Xiaoping declared it as such back in 1988. And the island has been developing economically since then. Jump forward in time to April 2018 and China's current leader, President Xi Jinping, declared that the whole island would become a free trade zone. That makes Hainan one of the world's largest free trade zones, if not the largest. To put that in perspective, Hainan has an area of about 13,668 square miles. That's about 48 times bigger than Singapore (279 square miles) and about 8.6 times bigger than Dubai (1,588 square miles).

The purpose of the designation of Hainan as a free trade zone is to encourage reform of the Chinese economy, to help open China to the rest of the world through increased market access, to promote the island as an attractive investment environment and to help expand bilateral trade.

"Hainan will become a showcase of China…a beautiful business card with a style, a Chinese style, and a Chinese image… [Hainan's] free trade pilot zone should focus on institutional innovation, give greater reform autonomy… accelerate the formation of a rule of law, internationalization, and then facilitation of the business environment and fairness…" President Xi said in his speech of April 2018.

FreightWaves spoke to Dr Hans Hendrischke, Professor of Chinese Business and Management, at the University of Sydney for insight.

"Free trade zones fit into the liberalizing Chinese economy. They provide access to finance. And bonded ports allow money and external companies to come in. Other Chinese free trade zones were small and didn't have much of an impact. They had no scale or volume to allow investments to a greater scale and big state companies are supposed to expand. Hainan overall is a success story over the long run. It's in a privileged geographic position with links to Vietnam and other countries in the region," Hendrischke said.

When asked whether Hainan is a commercial rival to Singapore or Hong Kong, Hendrischke wasn't keen on the comparison.

"That's a long shot; it's too early to tell. It's easy to say but there's no proof yet," he said.

President Xi also wants Hainan to emerge as a major maritime center. In the April 2018 speech, he asserted the necessity of the island developing marine capabilities, industries, maritime economy, and marine technologies. He also declared that a free trade port should be constructed.

Currently, Hainan currently only handles a tiny volume of China's overall cargo throughput. From January to April 2019, all Chinese sea ports (i.e. excluding inland river ports) together handled about 4.30 billion tons of cargo, according to official Chinese government data. A metric ton is equivalent to 2,204.6 U.S. pounds. Of that total, about 1.38 billion tons are categorized as foreign trade goods. So foreign trade goods are about 32.10 percent of the total in the year to date. On the container side, China as a whole has handled 82.27 million twenty foot equivalent unit international shipping containers.


And how does Hainan currently rate in all that? The whole island of Hainan, between January to April 2019, had a total throughput of 69.94 million tons of cargo. Hainan handled about 1.6 percent of all of China's seaport throughput. About 12.43 million tons of Hainan's total cargo throughput is classified as foreign trade goods, which is about 17.77 percent of Hainan's total. But, compared to the national volume of foreign trade goods, Hainan's foreign trade volume is just less than 0.9 per cent of the national total of foreign trade goods.

There are three ports on the island of Hainan with noteworthy cargo volumes. These are Haikou, Yangpu and Basuozhen. There are several other ports but they have comparatively small volumes.

Haikou handled 46.42 million tons of cargo from January to April 2019, which accounts for about 66.4 percent of Hainan's total cargo throughput of just under 70 million tons in the year to date. Yangpu handles far less cargo overall and so it takes second place with 16.23 million tons handled in the year to date.

But Yangpu handles far more foreign cargo volumes, about 9.62 million tons compared to Haikou's foreign cargo volumes of 1.31 million tons in the year to date. So Yangpu handled about 77 percent of Hainan's foreign cargo compared to Haikou's 11 percent. Haikou also handled about 640,000 twenty foot equivalent units worth of shipping containers in the same time frame while Yingpu handled 200,000 TEU.

There is, however, a major expansion underway for Haikou. Growth at the port of Haikou is quite severely restricted by the presence of the city of the same name. The existing Haikou container terminal in the heart of the city has a shoreline length of 786 meters and can today berth two box ships simultaneously. But a new US$2.43 billion (RMB 16.8 billion) port with a ten meter draught is to be built at Ma Village about 46 km to west of Haikou. The new port will have a total quay length of 3,450m, berths for nine box ships, and it will be able to handle 6.2 million TEU. The facility will have a total land area of 3.2 million square meters.

The third most important port is Basuozhen and it handled 5.02 million tons of cargo between January to April 2019, which is about seven percent of Hainan's total. Of that throughput, 1.29 million tons is categorized as foreign goods.

The other minor ports, of which there are at least three on Hainan, handled 2.16 million tons of cargo, about three percent of the total, in the year to April 2019.

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Image sourced from Pixabay

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