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The huge expansion in China's foreign trade, which now exceeds US$400bn a year, has meant a constant challenge on the country's ports to have the capacity to manage the demands put upon them. Whilst the government has invested considerable sums on developing and improving the ports' infrastructure, there is still a huge need to expand capacity still further. Foreign investment is sure to play a bigger part in future.

Ports are bound to be important to any country that has a coastline of 18,000 km, a further 14,000 km of coast around its islands and three main rivers which thred like arteries through the heart of the country. And so they are with China.

China has over 300 main hub ports, of which 200 are sea ports and 128 are open to foreign vessels. There are 45 ports with one or more 10,000dwt berths and 496 deepwater berths of 10,000dwt class or above. Some 38,000 foreign-flag vessels enter and leave Chinese ports each year. Last year, China's main sea ports handled 1.3bn tons of cargo, 13 per cent more than in 1998, and the top 10 river ports handled a total of 175m tons of cargo, a 11 per cent increase over the same period last year.

China's ports also play an important role, particularly in the absence of adequate road and rail facilities, in transporting goods around the country; around two-thirds of all sea-borne cargo is domestic, a significant 29 per cent of which is coal.

The five leading ports, through which the bulk of China's port handling capacity is concentrated, are: Shanghai, China's largest port by volume handling 60 per cent of all incoming/outgoing goods; Dalian; Qingdao; Tianjin, second largest container port and fourth largest coal-handling port; and Guangzhou (Huangpu).

Other major ports include: Qinhuang-dao, China's largest coal-handling port; Ningbo, China's second largest port and predominantly large bulk cargo; Xiamen, one of the pilot ports for direct shipping with Taiwan; and Shenzhen, rapidly taking up capacity from Hong Kong. The major Yangtze river ports are Wuhan, Nanjing and Chongqing.

In 1999, 20 deepwater berths were built along China's coast, which increased the handling capacity by 17.9m tons. There were 35 river berths completed with increased handling capacity of 8m tons.

All ports in China except Qinhuangdao (which continues to be managed centrally, by the ministry of communications) are either run by the local government or in a joint management between the MOC and local authorities (the provincial or municipal ports administration bureau). Each port, both coastal and river, relies on revenues from operations for their maintenance. The ports also have autonomy on many issues related to construction, material supply, port planning, labour and remuneration.

However, it is the MOC which sets policy on how much individual ports can charge both in port fees and on the level of taxes. In practice, for international business, all ports levy at the same rate, but for domestic business the local ports administration bureau can set its own fee rates. The transfer, handling and storage charges are set by the local ports administration bureau, but they must be reported to the MOC.

The trend is towards ever increasing commercialisation. There has been simplification of bureaucratic procedures, further deregulation, the restructuring of port ownership into public shareholdings and the separation of ports' regulatory and commercial functions. Last year, for example, Xiamen Port (Group) Co was established to handle the commercial operations of the port of Xiamen, while the Xiamen port authority continues to administer the operators and developers of port facilities.

Financing port development
Investment in China's ports infrastructure has lagged significantly behind growth in traffic, resulting in inadequate handling capacity. Faced with severe congestion at all main ports during the mid-'80s and early-'90s, China embarked on an ambitious infrastructure programme to expand port handling capacity. The strategy was to raise funding from several different sources.

Firstly, from central government. For the current five-year plan (up to the end of this year), the central government earmarked US$6bn towards upgrading ports and waterways.

In addition to state finance, the central government permits owners and local g
overnments, through the levy of "port construction fees";, to raise funds for developing port facilities.

Aid is a third source of finance. The World Bank first lent to the ports sector in 1983, lending US$69m to build container berths in Shanghai, Tianjin and Huangpu. Bringing matters up to date, the World Bank is lending about the same amount towards the development of 10 container stations/depots in and around Tianjin. It was Japan that funded part of the building of coal terminals in Qinhuangdao and Rizao.

China's domestic companies are a fourth source of finance for port expansion and renovation. China Ocean Shipping Company is to build COSCO International City in Taicang (on the lower reaches of Yangtze River). China Merchants Holdings (International) is increasing its stake in Shekou container terminal.

In the future, international capital could provide a fifth means of finance. Ningbo Beilun Port is moving closer towards a listing in Hong Kong, which could raise as much as US$20 m.

Foreign Investment
Foreign investment is regarded, as one might expect, as a crucial means of helping China to realise its development plans for its ports. Regulations permitting foreign participation were first introduced in 1986, and further incentives followed six years later. Foreign investors can participate in port construction and in a variety of other activities such as stevedoring and warehousing.

The first Sino-foreign joint venture port operation was set up in 1987 between Nanjing International Container Handling Company and the US-based Encinal Terminals. The largest joint venture terminal operation is Shanghai Container Terminals, which was established in 1993 between Shanghai Port Authority and Hong Kong-based Hutchison Whampoa Group and now handles the bulk of Shanghai's container traffic.

Further joint ventures have been set up including: Yantian container terminal with P&O Ports (Australia) in Shenzhen; Dalian container terminal set up in July 1996 with the Port of Singapore Auth-ority in Dayaowan; and in Qingzhou port in Fuzhou (Fujian province). The Oriental Sealand (US) joint venture in Tianjin port was officially opened and went into operation in January 1999; the foreign partnership includes New World Development of Hong Kong. Most recently, P&O has completed a joint venture agreement with the Qingdao Port Authority to construct and manage a new container port (Regions, page 9).

Guangzhou is seeking foreign partners, in particular, for its dangerous cargo terminal, for its oil terminal and for its raw chemicals terminal. It is already in negotiations with a potential partner for its container terminal. There are also plans to build a new Yn2bn marine passenger port in the eastern part of the city to replace the old passenger wharves, all of which have been closed except Da Shadou passenger terminal. Here again there may be scope for foreign investment since the local port authorities are looking to build a coach station, an urban bus terminal and a commercial district.

Bonded and free trade zones have been set up in 16 coastal and river ports to encourage foreign involvement in warehousing and distribution. In practice, though, warehousing remains a very restricted area for foreign companies; poor warehousing facilities are a major constraint in the development of a distribution network for many foreign investors.

It remains the case that foreign investors are limited to having minority stakes in China's ports. This will continue to act as a check on foreign interest, but this restriction is slowly being relaxed. For example, as from next January foreign companies will be allowed to own a majority stake in warehousing and two years after that will be able to have sole ownership of warehouses.

Who gives approval for any given project depends on how much is to be invested and the overall size of the project. The State Development Planning Commission (SDPC) approves those port projects with a total investment equal to or above Yn200m (£15m) or with designed scale equal to or above 1m tons. Anything below these limits can be approved either by the MOC or by the local government.

Ports with multilateral and/or foreign government loans offer more scope for participation by foreign consultants and equipment suppliers. Projects in this category include Qinhuangdao and Yangpu (Japanese OECF and World Bank loans) and Fangcheng, Xiamen and Yantai (Asian Development Bank).

Most other projects funded by China (China Development Bank) offer less opportunity for foreign involvement. However, for joint venture developments, such as the Shanghai and Shekou container terminal projects, the main procurement decisions are likely to be taken by the joint venture board with more flexibility to take on foreign consultants and to specify foreign suppliers.

In theory, bidding for port projects should cover both design and construction. But, in practice, it is mainly construction which is procured through national/international bidding. All port equipment must be put to out to international tender, especially for World Bank, Asian Development Bank and Japanese OECF-funded projects.

The MOC and local port authorities are extremely keen to encourage foreign participation in the areas of management and operations. But it remains a difficult area to set up successful cooperation and requires a very long-term view of the market.

In the UK contact:
Simon Rodwell, Export Promoter
Tel : 0044 1223 83677 • Fax : 0044 1223 836900
Geoff Thomas, British Trade International
Tel : 0044 20 7215 4615 • Fax: 0044 20 7215 4666
Capt Brian Tayler, Director General, British Marine Equipment Council
Tel : 0044 20 7928 9199 • Fax: 0044 20 7928 6599

In China contact:
Kerry Brown, First Secretary (Commercial)
Email: Kerry.Brown@peking.mail.fco.gov.uk
Debbie Shi, Commercial Representative
Email: Shi.Dong@peking.mail.fco.gov.uk
Tel 0086 10 6532 1961 • Fax 0086 10 6532 1939