China?s aid to shipbuilders may prolong the agony

The Chinese government may force state-owned shipping groups to buy more vessels as foreign carriers scrap orders, according to Steve Man, an HSBC Holdings Plc analyst in Hong Kong. That risks increasing costs and overcapacity among shipping lines grappling with a collapse in global trade.

“They ?encourage,? but my thinking is it?s more of a directive,” said Man. “It hurts every player in the industry and creates excess capacity that will take longer to absorb after an upturn.”

A collapse in shipping rates led to a worldwide 95% decline in new vessel orders in March, according to Clarkson Plc, the world?s largest shipbroker. In response to the drop in demand, China is drawing up plans to aid state-owned China State Shipbuilding Corp. and China Shipbuilding Industry Corp. that will likely force state-owned shipping groups to pick up orders abandoned by overseas shipowners, driving rates down further, analysts say. “The major overhang for the shipbuilders is potential cancellations,” said Andy Meng, an analyst at Morgan Stanley. The “key message” in the government plan “is to protect order backlogs at the state-owned shipyards.”

Meng estimates as many as 60% of existing orders in China may be cancelled over the next two years.