finnorno3| Huatai Securities: Looking at the path of China's manufacturing industry to sea from changes in freight rates

Zhitong Financial APP learned that Huatai Securities released a research report saying that international freight rates have risen rapidly since March this year, and the main contract of the Container Index (European Line) is from March 1 to May 24.Finnorno3The increase of more than 200 per cent has attracted market attention, but the bank has observed that the rise in freight rates for Chinese container exports is diversified, and the year-to-date increase in freight rates for regions such as South America and Africa is even significantly higher than that of European routes. The bank believes that the rise in freight rates also reflects the change in the destination of Chinese manufacturing investment abroad. China's investment in Latin American countries has regained momentum, and the field of investment has gradually extended from infrastructure to more investment represented by "new infrastructure." with the acceleration of Chinese manufacturing going out to sea, it is expected to continue to stimulate the trend growth of exports to Latin America.

The main points of Huatai Securities are as follows:

After the impact of tension in the Middle East in April, international freight rates have continued to rise since May. It is worth noting that compared with European routes directly affected by the Red Sea storm, China's container freight rates for South America, Africa and the United States have risen more significantly, partly boosted by the rebound in import demand from South America, and also reflects the further "diversification" of Chinese manufacturing destinations. Since the beginning of this year, container freight rates for Shanghai's exports to South America, West Africa and South Africa have risen by more than 130%, surpassing the increase in freight rates to Europe.

Specifically, from May 1 to 24, the Baltic dry bulk Index (BDI) rose 6.Finnorno3.5%, of which the Cape of good Hope index rose by 23.5%. According to the analysis of the bank, under the influence of the Red Sea storm, if you detour the Cape of good Hope, it will significantly push up the transport distance and average navigation days of the relevant routes, resulting in a decline in the effective capacity of global shipping. For example, Maersk expects the entire industry to lose 15% of its capacity from the far East to northern Europe and the Mediterranean market in the second quarter, and the European Container Futures (EC) contract has risen more than 50% since May.

The year-on-year growth rate of Chinese exports to Latin America rebounded 14 percentage points to 2.2 per cent in April, while Mexico and Brazil accounted for a further rise in China's export share to 2.5 per cent 1.8 per cent from 2.2 per cent in December 2022. According to the latest data, Mexico and Brazil both recorded high year-on-year growth of more than 20%, which is 6-28 percentage points higher than the overall import growth rate. The warming demand in South America has also led to the deployment of West African transport capacity by shipping companies and the tension in promoting West African shipping lines.

The bank uses Brazil as an example to observe the changes in the categories of China's exports to South America. The number of electric cars exported from China to South America has accelerated significantly since the beginning of this year, and machinery and equipment have also continued to grow at a relatively high rate, partly boosted by the expected export-grabbing effect of tariffs. From January to April this year, Chinese passenger car exports to Brazil increased by 372.4% (a total of US $760 million), most of which were electric / hybrid vehicles, following a high growth rate of 482% year-on-year in 2022 (total US $1.09 billion), according to the Brazilian Ministry of Development, Industry, Trade and Services. The share of Chinese electric vehicles in Brazil has also shown a structural rise-only 0.4 per cent of Brazilian electric vehicles were imported in 2021, compared with 36 per cent as of April 2024, according to Brazilian statistics.

The permeability of new energy vehicles in South American countries such as Brazil is low, and the increase in permeability has accelerated since 2023. On the one hand, the rapid growth of China's automobile exports to Brazil is due to the improvement of Brazil's own electric vehicle penetration.

At the same time, export rush under tariff expectations also partly boosted exports to Brazilian cars: in November last year, the Brazilian Ministry of economy announced that it would resume import tariffs on new energy vehicles from January 2024, covering pure electric vehicles, plug-in hybrid vehicles and gas-electric hybrid vehicles, and will further raise tariffs in July 2024, July 2025 and July 2026, respectively.

In addition to cars, Brazil's imports of machinery and equipment also maintained a high growth rate. Compared with the changes in the amount of imports of major imports from January 2019 to April this year, machinery and equipment and passenger cars recorded increases of 124.5% and 131.1% respectively, both significantly higher than the 44.6% increase in total imports in the same period. Taking into account the further improvement of the competitiveness of Chinese machinery exports after the epidemic, the growth rate of Chinese machinery and equipment exports to Brazil may be even more considerable.

The rise in freight rates also reflects the change in the destination of Chinese manufacturing investment abroad. China's investment in Latin American countries has regained momentum, and the field of investment has gradually extended from infrastructure to more investment represented by "new infrastructure". With the acceleration of China's manufacturing industry going to sea, it is expected to continue to stimulate the trend growth of exports to Latin America. According to the Center for Global Development Policy at Boston University, investment in the power industry accounted for 71 per cent of Chinese mergers and acquisitions in Latin America between 2017 and 2021. Chinese investment in infrastructure in Latin America appears to be accelerating. According to LDA (Leadership for the Americas), a think-tank, China's FDI to Latin America in recent years has increasingly focused on manufacturing sectors, including telecommunications, financial technology and energy transformation, which accounted for nearly 60% of investment in 2022. For example, China's BYD announced plans to build a factory in Brazil worth about 4.5 billion yuan, and Huawei set up new data centers in Mexico and Chile. According to the bank's analysis, the acceleration of Chinese enterprises going out to sea has led to the export demand of China's raw materials and semi-finished products. According to the calculation of Liu Xiaoguang et al. (2014), China's direct investment in the host country can still significantly promote trade between China and the host country, even excluding the economic size, infrastructure level, distance from China and other factors. On average, the stock of outward direct investment increased by 10%, with a 2.1% boost to exports and imports and 2.9% boost to net exports in the next phase.

Risk hint: geopolitical friction intensifies and economic growth in emerging markets falls short of expectations.

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