All aboard for the Europe special Belt route crucial to China’s global ambitions

This article is the fourth and final part of a series on China’s Belt and Road Initiative that we are publishing during the 2017 IMF-World Bank annual meetings in Washington DC. We have devoted two articles to the Road element, and two to the Belt element, of which this piece is the second and focuses on the western part of the overland route

  • By Elliot Wilson
  • 14 Oct 2017
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Copyright- Wang jianmin - Imaginechina
On a warm, overcast morning in May, a bright red train set out from Yantian Port in Shenzhen, an industrial city in southern China. It moved slowly, labouring under the weight of 41 freight containers packed with car parts and mobile phones. Its destination: the Belarusian capital Minsk, separated by northern China and Central Asia and the small matter of 9,990 kilometres.

That the send-off went unnoticed in the West was no great surprise. The train was old and a little on the rusty side. When the cargo arrived in Minsk two weeks later, it still had to be unloaded and re-shipped to markets in western Europe. It was not by any measure a speedy process.

Yet the event matters in deep and lasting ways that are not immediately visible. The route, which takes in the deserts of Uzbekistan and Kazakhstan and the rich pastures of southern Russia, lies at the heart of both the old Silk Road, which reached its zenith 750 years ago, and its successor, the Belt and Road Initiative (BRI), China’s grand attempt to redraw the modern trade map in its image.

Very quietly in recent years a number of routes linking China with Europe have opened for business. Chongqing, a megalopolis in the southwest, has a rail cargo service to Germany’s Duisburg. You can hop on a train in Yiwu, an export hub on China’s eastern shores, and hop off a fortnight later in London or Madrid. Another rail service, fiendishly challenging in logistical terms and unlikely to see the light of day before the mid-2020s, aims to connect Shenzhen with the Netherlands via India, Iran, Turkey and southeast Europe.

Fast train to Europe

These routes matter and for several reasons. China has long been keen to find new ways to convey goods to Europe cheaper and faster. Overland freight ticks both boxes. It takes goods 13 days to reach Europe by rail from Chongqing but up to 42 days by sea, according to data from China’s customs ministry. CLSA, a Hong Kong-based brokerage, reckons overland freight costs 40% less per kilometre travelled than the maritime alternative.

It also offers — in theory at least — greater security. This is a serious consideration for China, which fears, in the event of a trade war, being denied access to the Strait of Malacca, a chokepoint in Southeast Asia patrolled by US gunboats. That makes the overland ‘Belt’ portion of the BRI a greater imperative to the Chinese than the maritime ‘Road’, experts reckon. “The inland road is more important than the sea route, where global powers jostle for power and position,” says Alexious Lee, head of China industrial research at CLSA. “Overland, China can leverage existing rail routes via countries that are more friendly and pliable.”

The first point in that statement is certainly true. A total of 29 mainland cities claim overland freight links to Europe; all currently use track that dates back to the Soviet era. (That will change: some new routes are open to business, notably a service linking China with Afghanistan and Tajikistan, while a yet more ambitious project, viewed as a crucial piece in the Belt-and-Road jigsaw, should connect southern China and Iran by 2022.)

Making connections

Another reason these routes matter is, of course, trade. Better rail infrastructure is crucial to China’s ability to ship goods direct to the likes of Germany. But it will also, notes CLSA’s Lee, help to improve regional connectivity. “This is not just about point-to-point trade but about boosting and maximising trade between the countries that lie along” the new Silk Road. So in theory, the BRI will enable the likes of Uzbekistan to boost trade not just with China but also with EU states and its immediate neighbours.

It is easy to assume that China is already an economic powerhouse in Central Asia. That is not the case: in 2015, according to data from the IMF, China accounted for less than 5% of total foreign investment in the region against 14% for the US and 68% for Europe. This is in part due to China’s earlier focus on developing trade links with the West — but also to a deep-seated regional fear of Asia’s new hegemon. Kazakhstan, Central Asia’s largest economy, “doesn’t trust China”, notes Charlie Robertson, global chief economist at Russia-based investment bank Renaissance Capital. “They fear its power and they fear it buying up land and assets.” Russia and China have only recently mended fences after a half century of mistrust and outright hostility.

China’s influence, though, is only likely to grow. Every Central Asian state is a member of the Asian Infrastructure Investment Bank, a newish Beijing-based multilateral. So are the likes of Russia and Mongolia, Turkey and Belarus, each of which has signed a currency swap agreement with China’s central bank.

This points to another piece in the overall jigsaw. Politicians in China view the BRI as crucial to efforts to internationalise the renminbi. Thus, the more business that Chinese firms collectively do in the region the greater the opportunity to settle those trades in China’s currency rather than in US dollars.

Military web

Security is another often overlooked facet of China’s thinking. The country has taken care to draw Russia and Central Asia into its military web, a process that began in 2003 with the launch of the Shanghai Cooperation Organisation, a security alliance. But China also sees the bigger picture. In its eyes, a strong and wealthy Central Asia would be more settled, meaning less upheaval in Xinjiang, a vast province in western China with a large and restive Muslim population. “The idea is that happier people are less likely to burn their own house down,” notes RenCap’s Robertson.

Some regional states may continue to fear China — but that’s unlikely to prevent them from seeking new trade opportunities with their neighbour. Anyway, they have little to lose. Six nations west of China along the new Silk Road have no sovereign credit rating at all, including Turkmenistan and Iran, while Belarus, Mongolia and Ukraine languish at the bottom of the speculative-grade scale.

This presents both a risk and an opportunity. A risk in that any capital lent by China’s chief policy lenders — China Development Bank and Export-Import Bank of China — to regional Belt-and-Road-related projects would likely be paid back over a long period and by sovereigns with little or no risk profile and weak institutions. Moody’s reckons that 40% of all BRI-related lending by Chinese banks in the three years to the end of 2015 flowed to countries with a sub-investment grade credit rating.

And an opportunity in that many of the countries along this stretch of the BRI have substantial financing needs. “Belt-and-Road gives countries a chance to have new infrastructure built and financed,” says Michael Taylor, chief credit officer, Asia Pacific at Moody’s Investors Service in Hong Kong. “If infrastructure succeeds in raising productivity in these countries their ability to repay their debts is enhanced. You can paint a picture where the whole thing is a win-win.”

Two-way trade

It’s important also to remember that trade flows both ways. The new Silk Road offers China the opportunity to export everything from its currency to surplus goods and labour. But it also opens doors to new and willing trading partners, be they sovereigns or corporates. The new rail-freight service that links Shenzhen with Minsk will be jointly managed by DHL Global Forwarding, a division of Germany’s Deutsche Post, and supply chain operator China Brilliant.

Finally, it’s easy to forget the countries that lie at the far western end of the overland belt. China has been slow to target for investment the sovereign states of central and eastern Europe (CEE), mostly because the region is deeply integrated with the supply chains of Russia and western Europe.

This is changing. Last November, ICBC, China’s largest commercial lender, pledged to invest up to €10bn ($11.9bn) into CEE-area projects and corporates, including railways, ports, retailers and technology providers. China’s best friend in the region is undoubtedly Serbia, which it sees as an integral part of the BRI. China has invested an estimated $1bn in the Balkans country, mostly in the form of soft loans, to finance new roads and power plants; last April, China’s Hebei-based Iron & Steel signed a €46m deal to buy a steel plant on the Danube river.

It’s not just Serbia with its long list of shovel-ready projects that stands to benefit from the BRI. A host of new pan-Eurasian railways linking the region with China is a “fantastic” development, says Chris Hartwell, president of the Center for Social and Economic Research, a Warsaw-based think-tank. “The CEE region is at its limit in terms of how much it can export to China. Better access to 1.4 billion Chinese citizens [and billions more given that trade will also flow through China to the rest of Asia], via infrastructure with lower inbuilt shipping costs, is unequivocally a good thing. The process will open up new markets to firms from the likes of Hungary, Poland and the Czech Republic.”

  • By Elliot Wilson
  • 14 Oct 2017

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