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The new silk road

China’s One Belt One Road initiative has the potential to encourage rail improvements and boost trade across Asia and Europe 

Key points

• China’s vision of a huge transport network from China to Europe is taking shape.
• China’s ability to finance such a huge project on its own has been questioned.
• The One Belt One Road initiative could encourage countries in Central Asia and Europe to improve their own rail networks.

Is China’s One Belt One Road (OBOR) initiative one MAN’s dream of China’s greatness or a multi-nation initiative that will usher in a new global trading pattern and lift global growth? It is a question that will not be answered for many years. For now it engenders lively – if not acrimonious – debate.

China hawks see OBOR as a Chinese attempt to create a new geopolitical sphere of influence. The doves see it as China’s effort to engender development and, therefore, global public good. It is fair to say that some European countries are sceptical, while Asian countries have generally accepted the inevitability of China’s OBOR ambitions.

Whatever the argument, the reality is that Chinese leader Xi Jinping’s vision is taking shape. Four years on from Xi’s initial Silk Road announcement in 2013, transcontinental freight trains are running regular weekly services from China to Germany and elsewhere, including the UK. Some countries along the route (see map) are building or planning to expand port and rail services to connect with OBOR or, as China now more commonly calls it, the Belt and Road Initiative (BRI). It covers 65 countries along its 12,000-plus kilometres route.

Beijing estimates that the cost of implementing the Silk Road strategy is $1trn (€850bn) initially, rising to $5trn over the next five years. In May, Xi pledged $124bn to the Silk Road Fund, the Chinese vehicle that will finance OBOR projects.

michiel nijdam

The Beijing-based Asian Infrastructure Investment Bank (AIIB) has started approving loans to OBOR projects, and indicates that lending will reach $5bn this year, rising to $10bn next year.

China’s ability to carry the cost of financing the project by itself has been questioned. Chinese banks are overburdened with debt and China’s reserves was being depleted by capital outflows – down $1trn to $3trn today.

It is hoped that public-private partnerships and international financing will fill the funding gap – a role Hong Kong is positioning itself for. In September, Norman Chan, CEO of the Hong Kong Monetary Authority (HKMA), which in practice acts as Hong Kong’s central bank, hosted the latest in a series of seminars, this time in London, to help project Hong Kong as the gateway to OBOR funding,  

Since the late 1970s, says Chan, Hong Kong had played a role as a springboard for foreign capital seeking to invest in China. Hong Kong can and will play this role again for OBOR, he says.

The HKMA has created what is known as Hong Kong’s Infrastructure Financing Facilitation Office (IFFO), an open platform that has already attracted 77 partners, including 14 UK-based institutions, Chan says.

Other partners include Dutch asset manager APG, Australia’s largest pension fund, AustralianSuper, Canada Pension Plan Investment Board (CPPIB), and Korea’s National Pension Scheme, along with global investment banks and fund managers such as Credit Agricole, Brookfield, Blackstone, BlackRock and Morgan Stanley.

Additionally, HKMA’s investment vehicle, the Exchange Fund, announced last month that it will begin allocating capital to long-term infrastructure assets. The sovereign wealth fund has assets of HKD3.9trn (€416bn) as of June 30.

China itself has begun to redirect Chinese outbound capital from certain sectors, such as real estate, to OBOR countries and projects.

Alicia Garcia Herrero, chief economist, Asia Pacific at Natixis Global Asset Management, says Chinese outbound investment to OBOR countries made up almost 56% of its total outbound investment in July – up from 45% a year ago.

In a recent note, she writes: “Europe’s proximity to some of these countries can make some projects more appealing. We should expect private and public European co-financing of BRI projects to increase over the next few years and, with it, European interest (in BRI).”

chinas one belt one road initiative

Michiel Nijdam, Port of Rotterdam’s corporate strategist, says freight trains already carry laptops and other higher-value products from China to Germany.

Hewlett Packard has been the Pioneer in shipping containers of laptops from factories in Chongqing, in inland China, to Duisburg, Germany’s largest inland port.

“Since last year, companies have been able to book their containers on these trains,” says Nijdam. “There are now 30 weekly services, including the Chengdu-Tiulbureg-Rotterdam Express Service.”

From Duisburg, he says the cargo is carried to European ports such as Hamburg, Antwerp and Rotterdam for transportation to other European destinations.

The trains are hauling about 80,000 twenty-foot equivalent unit (TEU) containers (about 12m long) a year. This is expected to rise to 300,000 TEUs a year. Nijdam notes that this is still a small amount compared with the 12m TEUs a port like Rotterdam handles each year.

He says OBOR will encourage countries in central Asia and Europe to work on their own rail networks to improve connections to China.

Nijdam says there will be increased cargo movement from production centres in eastern Europe to western Europe, then to the UK and beyond to the US.

“We are already working on improving rail links to the port of Rotterdam, to southern Germany, Hungary, the Czech Republic and Poland,” Nijdam adds. “We see extension of service as necessary to link our port with these important markets.

“With 80% of cargo going through our port to the rest of the country, Belgium and western Germany, and to a lesser extent, central European regions, our strategy is to improve rail links to our key cargo areas.

“The OBOR strategy fits with our strategy to make Rotterdam a stronger port for central Europe. We are investing only in the port area.

“But we have put a lot of effort into convincing our government to develop dedicated rail links to open up trade corridors linking Rotterdam and the Netherlands to the rest of Europe.”

He says the port authority is spending €150m to build a high-capacity, crossing-free loop to avoid rail bridges in the port.

Observers see a synergy between OBOR and Europe’s own €700bn trans-European Transport Network, the Ten-T strategy, which aims to improve the continent’s transport infrastructure.

But Nijdam says much more needs to be done to smooth the passage of goods across Europe, where customs and other regulations impede the flow of goods.

If these obstacles can be removed, OBOR offers interesting possibilities to Europe. In just one area, agriculture and food, Europe is well positioned to supply China’s growing demand for good quality, fresh food. The specialist agricultural bank, Rabobank, forecasts that China will represent a $1.5trn market for food by 2025.

Rabobank’s global sector head of supply chain Tjard Westbroek says that although China’s population is not growing much beyond 1.4bn, it is not the size of the population but its developing urbanisation and affluence that will increase demand for food.

China’s growing urban and wealthier population will put pressure on water, arable land and production, forcing it to import food. With affluence, the Chinese palate is shifting quickly from subsistence to convenience, and then from long-shelf-life staples to perishable fresh foods and meat.

“Yet, with technological advances in agri-production, European countries like the Netherlands are producing more food than ever. The Netherlands stands behind the US as the world’s largest food exporter,” he says.

Westbroek is hoping the Netherlands will remain proactive, saying that the “incredible potential” of OBOR is unfolding at this moment. “We’re not stepping on this train as fast as we could,” he says.

Asked why this is, he says: “There are a plethora of reasons why it does not fly. One is geopolitical, and Russia, for instance, plays an important role at this moment. Current Russian sanctions on food coming into the country include any food transportation through Russia.”

Although many rail connections go through the country, Westbroek adds, there are plenty of other routes that should be explored, including through Turkey.

As Westbroek sees it, every nation along the OBOR route will have an opportunity to play to its strengths and connections to capitalise on what the Chinese dream can offer.

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