The planet’s most populous country is spending $1tn on infrastructure to open up trade with Asia and Europe. Will the world ever be the same again?
Wade Shepard & Andy Plowman
25 September 2017
The New Silk Road is a vast network of interconnected, complementary initiatives to further develop, enhance and integrate economies of the Eurasian landmass, from the east of China to the west of Europe. It covers 70% of the world’s population, 75% of energy resources and 70% of GDP.
This trans-continental integration is multi-faceted, including physical, political, financial and social elements. Physically, it is an emerging network of highways, railways, pipelines, logistics hubs, special economic zones and commercial centres. Politically, it consists of bilateral and multilateral trade deals, transportation pacts and customs agreements, as well as the further informal interlinking of preexisting unions such as the EU, Commonwealth of Independent States (CIS) and Association of Southeast Asian Nations (ASEAN) with China. Financially, it is a playground for the likes of the Asian Development Bank, World Bank and the newly formed, China-led Asian Infrastructure Investment Bank. Socially, it is a mechanism that will create new jobs, education opportunities and “human-to-human” exchanges by connecting parts of the world previously isolated from each other.
The New Silk Road is not an economic union, treaty organisation, trade pact or even a free-trade area. It is a network of complementary development initiatives spearheaded by countries whose mutual interests align over the deeper integration of markets from China to Europe. The idea of reviving the ancient Silk Road trading routes has been around for at least 20 years. The Chinese Ministry of Science and Technology held a conference on the topic in 1996; Kazakhstan’s president Nursultan Nazarbayev has been talking about silk roads and land bridges throughout his 27-year reign; Azerbaijan held a Silk Road revival conference in 1999; while Terespol, on the Poland and Belarus border, has been printing maps showing the town directly connected to Beijing by a bold red line for the past 20 years.
But the biggest development for the New Silk Road concept came in 2013, when China’s President Xi Jinping announced plans for two complementary trade initiatives: the Silk Road Economic Belt and Maritime Silk Road. “The potential result of OBOR [One Belt, One Road] is an intensification of trade flows across Eurasia to a level of significance not seen since the decline of the original Silk Road more than 500 years ago,” says Frans Paul van der Putten, Senior Research Fellow at Netherlands-based thinktank the Clingendael Institute.
This initiative promises the funding and political will to turn the dream into a reality. It would essentially become a political and economic framework to guide more than $1tn of Chinese investment across a network of land- and sea-based trade corridors from China to the north, west and south. What separates China’s vision from the others is it has the appropriate level of financial backing; the political will and international clout of a superpower behind it; and it combines other related initiatives and absorbs existing projects retroactively.
These initiatives are ultimately complementary, as the new roads, railways, logistics hubs, special economic zones, customs agreements and transportation pacts can often be seamlessly plugged into each other and used by participants throughout the network.
“The [New] Silk Road is going to create a win-win situation because of its inherent interdependence,” suggests Taleh Ziyadov, director general of New Port of Baku at Alat, Azerbaijan – and phase one is now open. “If I have good roads, good rail, good ports, and if Turkmenistan or Kazakhstan or Georgia doesn’t, then I’m in trouble. All these developments are going to further harmonise our processes, our infrastructure, and all steps will be taken to incorporate Eurasia with us.”
Development is now booming along the New Silk Road (see interactive map). Activity in the west of China is meeting that of central Asia – which, in turn, is linking with projects in the Caucasus and Europe. A giant free-trade zone on the China/Kazakhstan border at Khorgos is open for business. The Western Europe-Western China Highway from the east coast of China to St Petersburg, is nearing completion. Work continues on the China-Pakistan Economic Corridor. Sri Lanka’s big development projects, which include a deep-sea port and an entire financial district, are being integrated into the Maritime Silk Road. Upgrades to the railway line from Baku, through the Georgian capital Tbilisi to Kars in Turkey, commence in early 2017. The Anaklia deep-sea port in Georgia will soon break ground. Meanwhile, facilities in Poland, Belarus and Germany are being expanded with additional trans-Eurasia capabilities. The New Silk Road is happening – for real, this time.
However, even as the infrastructure is being built, hundreds of billions of dollars are being invested and dozens of inter-governmental trade agreements are being signed, there are still road blocks. The first is that there remain glaring political bottlenecks along the trade corridors between China and Europe. The ongoing territorial dispute between Azerbaijan and Armenia is a cause of trepidation that is limiting investment in the region. The Russian-backed breakaway state Abkhazia in what was once western Georgia severs what would otherwise be a prime north-south trade route. China’s partnerships with Pakistan, Bangladesh and Sri Lanka have not gone down well in India, which has stifled the participation of Asia’s second-largest emerging market. Russia’s ongoing standoff with Ukraine has resulted in sanctions that have been one of the largest barriers to trade along the most established routes of the New Silk Road. All this is in addition to the fact that essential corridors of the initiative traverse insecure terrain in countries such as Afghanistan and Pakistan.
“Stability in Eurasia is the Achilles’ heel of the initiative,” says Moritz Rudolf, Research Associate at Germany’s Mercator Institute for China Studies. “Beijing is neither willing nor capable to protect its investments abroad or guarantee stability in the region.”
A second obstacle is whether the countries of the New Silk Road have the patience and ongoing financial backing to engage in mass-infrastructure building, which tends to present long-term returns on investment. Because much of this development is financed via loans, some countries may find their efforts to build up their economies leading them into a debt trap. This was the case in Hambantota, Sri Lanka, where loan repayments on billions of dollars of infrastructure kicked in before the projects started producing adequate returns, which led to a deep-sea port and airport being handed over to Chinese companies in exchange for debt relief.
“Infrastructure investment has low and slow returns. It takes at least three years to build a 100km highway with three or four bridges,” says Ong Keng Yong, former Singaporean Ambassador. “Political developments are fluid and quick-changing. It is a challenge to hold things steady and tap the positive yield.”
The third issue is that a drastic paradigm shift will be required to motivate the private sector to jump into the New Silk Road endeavour. While governments can pump billions of dollars into building roads, railways and special economic zones, if private firms cannot be convinced of their profitability, then it is all for nothing. Foreign investors need to be assured that Azerbaijan and Kazakhstan are serious about logistics and are no longer mere mono-faceted oil states; that trans-Eurasian rail transport is just as punctual and secure as shipping by sea or air; that the Caucasus region is secure and the threat of war minimal; and that Russia and China will abide by the rule of law in the event of disputes.
Part of enacting such a shift, of course, is whether the above parameters prove to be true – and if they do, if anybody is willing to believe it.
A $3bn project split into two phases. China is funding 85% of the $1.6bn cost to upgrade 160km of Hungarian track, which will be carried out by a Chinese-led consortium and Hungarian State Railways. Finance for the 185km Serbian section will be provided by China Exim Bank. Journey times between the cities will be cut from nine hours to three.
Chinese shipping company Cosco has been managing the port since 2009, investing millions in upgrading the facilities. Last August it bought a 51% controlling stake in the port’s operating company for €280.5m, with an option to acquire a further 16%, €88m stake in the next five years.
A textbook One Belt, One Road project, given that Georgia sits on the shortest route from China to Europe and benefits from preferential trade agreements with a host of countries, including the EU. Construction of the $2.5bn port and free industrial zone is scheduled to complete in 2020. What makes the project interesting is the government’s decision to award the tender to the Anaklia Development Consortium – a partnership between Georgian investor TBC Holding and US engineer the Conti Group – over a Chinese bidder.
In February 2016, a cargo train made the 10,000km journey from China’s east coast to Iran’s capital, Tehran, in 14 days. The journey time could come down further when future rail upgrades in the central Asian states are complete.
The first phase of a planned high-speed rail link between Moscow and Beijing, the Russian and Chinese governments announced a joint funding agreement to construct the 770km line in September 2015. China will provide around $6bn of debt and $2bn in equity as part of the deal. Once completed in 2020, Chinese trains travelling at 400km/h will blast passengers between Russia's capital and Kazan in 3.5 hours.
Kazakhstan is spending $2.7bn on upgrading its rolling stock, repairing track and constructing new lines, with the backing of China. The railway would be standard gauge, allowing Chinese trains to travel through a 'dry port' on the Chinese border at Khorgos, to the Caspian Sea at Aktau. Completion of the line allows a more direct connection between China and Turkey, but the long-term success of the route depends on stability in the Caucasus region.
Built at a cost of $7.3bn by China National Petroleum Corporation (CNPC), three pipelines run 1,833km from Turkmenistan, through Uzbekistan and into China via Kazakhstan, supplying up to 55bn m3 of gas a year. China signed agreements with Uzbekistan, Tajikistan and Kyrgyzstan in 2013 to build Line D, which could boost supply to 85bn m3 a year. Construction of the pipeline began in 2014 but has hit delays. Uzbekistan blames technical issues, but reduced demand for gas from Beijing has also been cited as a factor.
A massive logistics and manufacturing hub on the Kazakhstan/China border, adjacent to a rail link to the Caspian Sea and the 8,445km Western Europe-Western China highway. Dubai-based DP World runs the dry port with Kazakh state railway company KTZ, which secured $600m of funding from China’s Jiangsu province in 2015.
A project of new roads, railways and pipelines between the two countries. Several of the most expensive schemes are energy related: coal mines and coal-fired power stations in Tharparkar near Islamkot ($5bn); a gas pipeline from Gwadar to Nawabshah ($2bn); power plants at Karachi’s Port Qasim ($2bn); and a hydropower dam in Karot ($1.7bn). Projects in the corridor stand to benefit from around $50bn of Chinese funding. One other crucial element is Gwadar Port. China is spending more than $1bn upgrading the facility, with another $2bn being committed by the port’s operator, China Overseas Port Holding Company. Importing oil to China through Gwadar would cut the distance it travels from 12,000km to 3,000km and bypass the territorially disputed South China Sea. That Beijing regards the idea of piping its oil through the powder-keg of Kashmir as the less risky of the two options, shows how seriously China views its energy security.
The 472km first phase of this project, a line between Nairobi and Mombasa, is nearing completion. China Exim Bank funded 90% of the $3.8bn cost, and the principal contractor is China Road and Bridge Corporation. Once all phases are complete, the line will connect Kigali in Rwanda, Kampala in Uganda and Juba in South Sudan to the coast.
China Harbor Engineering Corporation is funding and developing the port area into Colombo Financial City. After a host of delays and legal wrangles, construction of the $1.4bn project has resumed.
China is building a $6bn, 470km high-speed line from Kunming to the capital of Laos, Vientiane. The project will connect both countries with Thailand, where Beijing has agreed to fund a $23bn programme of rail upgrades running through Bangkok and on to Malaysia. Meanwhile, an agreement to build an $11bn, 350km high-speed line between Singapore and the Malaysian capital, Kuala Lumpur was signed by the respective governments in 2016.
The Russian and Chinese governments signed a deal in 2014 to develop the fields and pipeline required to supply 38bn m3 of gas to China each year, but the project has become mired in wrangles between the two state-run operators, Gazprom and CNPC. The former is having difficulty financing the scheme’s $55bn price tag, while the latter will only agree to funding if Gazprom allows Chinese contractors to tender for the work. Furthermore, the agreement was signed at a time when a gas price of $300/m3 made the cost of the project viable.
Like most good ideas, One Belt, One Road – China’s key international strategic project – is both simple and based on extremely powerful forces.
Asia has long been home to the world’s fastest growing economies in percentage terms. But it is now also the centre of the world’s greatest economic growth in absolute dollar terms. In 2007-15, China and India alone accounted for $8.4tn of GDP growth, compared with the US’s $3.6tn. China and India are also the world’s most rapidly urbanising regions.
An area of rapid economic growth therefore exists in China, large parts of south-east Asia, and India, while the world’s largest reserves of energy and raw materials are in the Middle East, central Asia and Russia. Together, these make the land mass stretching from China to the Middle East, and countries to its north and south, the world's fastest growing economic region.
Globalisation has not quite overtaken the influence of local geography. A strong tendency to connect economically still exists on a continental scale. But compared with the North America’s NAFTA area and the EU, Asia’s networks are still underdeveloped. China, though, has the financial resources and construction capabilities to aid development of the entire region – from which China itself gains.
One Belt, One Road is China’s strategy to use its new strength to create a 'win-win' scenario of interconnected economic development across very large parts of Asia.
Dr Wang Wen Executive Dean of Chongyang Institute for Financial Studies at Renmin University of China, and the keynote speaker at the 2017 Annual Summit of the World Built Environment Forum.
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