China’s “One Belt, One Road” project provides opportunities and rules

Ti Advisor, Ken Lyon, provides his thoughts and analysis on the potential of the ‘Silk Road’ and discusses how the implications of it are more complex and potentially far-reaching than initial speculation would suggest.

The recent news that a direct rail freight service had arrived in Barking, East London, from China via the ancient ‘Silk Road’, generated a flurry of speculation about the potential of this new route. However, the truth and implications of this are more complex and potentially far-reaching.

China has always been interested in the ancient trading routes heading west towards Europe. As it seeks to develop its regions in the west, much of this investment has gone into the province of XinJiang. There has been a massive amount of investment into infrastructure and the extractive industries, but this has been accelerated because of a specific government policy.

In the autumn of 2013, the Chinese President Xi Jinping announced the ‘One Belt, One Road’ project. This is both a strategy and framework to revitalise the ancient trading routes from the east to the west. The scale is massive and the estimated total value of the project will be in the region of US$4 trillion and ultimately involves up to 65 countries along four major corridors.

This project is now spilling over into the adjacent countries of Central Asia (Kyrgyzstan, Tajikistan, Kazakhstan, etc.). A lot of investment and construction has gone into refurbishing and re-energising the old trade routes that criss-cross the region. Obviously opening up these routes into Eurasia and European markets is a natural extension.

However, this is not just about the flow from east to west, there are several pathways, forming a network of trade lanes across the region. The goal is also to boost regional trade and establish an economic zone supported by China. Unlike the existing China – Europe Maritime trade flows from the seaports of the coast, China is investing in trade routes over which it can establish a reasonable amount of direct control. It does this by managing (controlling) how these investments are financed.

Almost all of their investments in central Asia are in the form of Yuan loans and come with strict conditions. The primary one is for the borrowers to avoid acting in a manner that is contrary to the views of Beijing. In return, roads, rail and energy pipelines are constructed or refurbished and modernised. Export deals for energy from the oil and gas rich nations into China are agreed alongside the construction of pipelines and power grids. Most of this is directed via Xinjiang, helping to develop the region in line with the central government development goals.

Logistics operators with expertise in these areas should review these developments as opportunities, as in some countries the lack of logistics expertise is holding back the exploitation of the revitalised routes. But, as with any investments in areas with ‘interesting’ political structures and overtones, one should not be naive in why this is happening. China is quite clear that investment in new projects can be stopped or loans renegotiated on less favourable terms, if the recipients appear to be operating contrary to the interests of China. This is subtly different to trade loans and investments from other pan global institutions such as the IMF, UN, EU and sovereign countries such as the USA.

Alongside the colossal investments the ‘one belt, one road’ programme, the maritime Silk Road trade routes are also the subject of intense investment. Not least in terms of the dramatic expansion of the Chinese navy (PLA(N)) in both size and capability. Informed observers believe that by 2025 they will match, if not exceed the size, scope and capability of the U.S. Navy – currently the world’s largest. Western governments have consistently underestimated the rate of development of the PLA (N) and while they claim to be doing this to protect existing trade routes, it is obvious that other motives are at work.

On a more positive note, the expansion of the Chinese Navy has helped to assist and augment the humanitarian and anti-piracy efforts in the Indian ocean, the Middle East and the Horn of Africa, which is to be welcomed. They have also invested heavily in the development of ports along the route for trade as well as naval support.

In summary, China is expanding trade routes via the development of the ancient pathways and networks of the past. It is also establishing a maritime footprint to support trade flows back into China. It is doing this via direct investment and views these developments as critical parts of the strategy to develop western China and trade into Eurasia, the Middle East and Europe.

Logistics operators can, with caution, provide expertise and assistance in this effort and also exploit these revitalised trade routes to improve supply chains and global business.

One cautionary note though. Information flows will be key to all of these things, and as most people are aware, China has interesting views about the free flow of data and information. Unless they accept that transparency of information is necessary for efficient and effective trade flows, these new roots may struggle to reach their potential.

Source: Transport Intelligence, March 6, 2017

 Author: Ken Lyon