K&N grows in China, but is economic growth sustainable?

Kuehne & Nagel has become the first global logistics provider in China to be allowed to conduct business through a wholly owned subsidiary. Its 100% owned Shanghai operation has been awarded a Class A forwarders license by the Chinese authorities. After a period of 12 months, the company believes that this license will be extended to the rest of Kuehne & Nagel’s operations in China.

The company sees the primary benefit of this license as the ability to operate more flexibly without consulting a joint venture partner, which to date has been the only way to operate in the country. Kuehne & Nagel will be able to provide international freight forwarding services as well as warehousing, packaging and distribution. Kuehne & Nagel is already present in 12 locations throughout China and following the award of the license intends to increase its investments.

Kuehne & Nagel’s focus on China comes at a time when the market is continuing to expand rapidly with some express and logistics companies experiencing growth rates of up to 40% a year. However some economists are beginning to strike a note of caution over whether such strong growth can be maintained.

Their main concern lies with the undervaluation of the Chinese currency, the Yuan. For the last 10 years this has been pegged by the Chinese authorities at a constant rate with the US dollar. Since this arrangement was initiated the Chinese economy has grown significantly which would normally have led to a strengthening of the Yuan if it had been allowed to float freely. By maintaining its rate at a low level (some believe around 40% of its ‘true’ value), Chinese exports have become much more attractive to foreign companies. It has also made imports to the country much more expensive, acting, in some people’s view, as a de facto barrier to trade.

The result of the weakness of the yuan has been increased international pressure, especially from the USA, for re-valuation. China runs a huge balance of trade surplus with the US and many US manufacturers would like to see measures such as tariffs and quotas imposed on Chinese imports to re-address the balance. In a run up to a presidential election, this pressure is likely to intensify.

In response the Chinese government has made it clear that it sees the trade imbalance as only temporary. It believes that trade has been one of the single biggest drivers behind the transformation of China into a huge market, the main beneficiary of which has been the US. Any re-valuation would carry significant risks that could burst its economic bubble with serious repercussions for the global economy as a whole. However despite these concerns any major problems are likely to be in the medium/long term. Whilst China’s economy grows at 10% and its annual industrial output at 23%, companies such as Kuehne & Nagel, UPS, TNT and their peers will continue to significantly invest in the region to take advantage of the exponential growth in volumes and an improving business environment.