A worker checks a list on a cargo ship loaded with containers at the Tianjin port in China.Andy Wong/The Associated Press
The collapse of Hanjin Shipping Co., a major South Korean container line, underscores the gloomy outlook for shipping and other logistics providers stuck with considerable excess capacity in the face of faltering global trade.
A leading culprit is the slowing Chinese economy whose once voracious appetite for imports of raw materials and semi-finished goods isn't coming back any time soon – if ever.
Every commodity investor is keenly aware of the painful fallout from the sharp reduction in Chinese demand for oil and base metals.
Less well known is the global impact of Beijing's all-out effort to transform its slowing economy into one focused on domestic consumption, services and higher-end manufacturing exports. The move up the economic food chain includes increased domestic production of the intermediate goods Chinese manufacturers used to routinely import from suppliers in southeast Asia and elsewhere.
China's transition "means it now relies less on ships, planes and content from its traditional trading partners," says Henry McVey, head of global macro and asset allocation with private-equity heavyweight KKR.
As a result of falling Chinese shipments of lower-value goods and the change in its import priorities, "we remain leery that excess capacity in over-built areas such as ships and logistics may not snap back as quickly as the consensus now thinks," Mr. McVey says in a report laying out key themes for global investors.
This includes coming up with "a new playbook" for global trade in light of of China's historic shift.
At the very least, Beijing's efforts at structural reform, which involve slashing excess industrial capacity and construction, herald more misery for the resource sector.
But the good news is that China's version of the "new normal" also opens opportunities for providers of consumer products and services, even as investment-related imports decline.
"We look for both trends to gain momentum in the quarters ahead," Mr. McVey says in his assessment.
Meanwhile, there should no longer be any question about whether China's policy makers have managed to engineer a soft landing after years of outsized growth. They haven't.
Nominal gross domestic product has plunged more than a dozen percentage points since the second quarter of 2011, Mr. McVey notes in his report. That compares with a drop of 3.3 points for real GDP in the same period.
"A decline of such magnitude in nominal terms is a big deal," he writes. "In particular, from the perspective of an owner and operator of businesses, nominal – not real – is what matters, because the revenues that cover overhead, pay employees and hopefully generate a profit for investors are measured in nominal … terms."
Investors who prefer to steer clear of the whole complicated China story still need to be aware of its rapid transformation into a serious world player in sophisticated electronics, environmental, transportation and other industries.
This shift, Mr. McVey cautions, "is likely to increase competition, denting margins of well-known incumbents in key markets like the U.S. and Europe. If we are right, then shareholder returns for publicly traded companies in certain key markets could be at risk."
Just to take a couple of examples, China accounted for 37 per cent of global exports of optical instruments last year, up from 8 per cent at the turn of the century. The figure for telecom equipment was 38 per cent, compared with a mere 6 per cent 15 years earlier.
Not surprisingly, KKR, which tends to take a longer-term view of markets and their prospects, sees an opportunity for private equity and multinationals to team up with expansion-minded Chinese players.
Investors "should focus on facilitating – not fighting – this transition," Mr. McVey writes.