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Ups and downs along the New Silk Road

The Belt and Road Initiative (BRI) is a gigantic, visionary project with both pros and cons for the countries involved.

TEXT: Jan Hökerberg
PHOTO: iStock
10 JUNE, 2019

Just a few years ago, rail freight was not really an option for companies sending goods between China and Europe. Freight forwarders would use sea or air freight for almost all of their shipments.

“Since then, we have witnessed a substantial increase in rail freight,” says Stefan Holmqvist, managing director of the freight forwarding firm Norman Global Logistics Hong Kong.

“The number of routes has grown fast, services have become better, the lead times have become shorter and costs have decreased. Our rail freight business has grown by several hundred percentage points over the past couple of years and we have set up a department in Shanghai that exclusively handles rail shipments,” he says.

In May 2011, two years before President Xi Jinping announced the BRI, or the New Silk Road as it is also called, a rail route opened between Chongqing and Duisburg in Germany, marking the start of the China-Europe cargo train service.

Boosted by the BRI, the international rail network has since then been expanding rapidly. In 2018, China sent a record 6,300 cargo trains to Europe.

A total of 48 Chinese cities have launched 65 freight-train routes, reaching 14 countries and more than 40 cities in Europe in 2018.

“This rail network means that 100 million people in Europe are now connected by land transportation with an area that hosts 60 per cent of the world’s population,” says Holmqvist.

“Freight by sea and air still dominate by far but we expect a huge growth in rail freight in the coming years,” he adds.

126

The number of countries in the world that have endorsed the Belt and Road Initiative.

The BRI is a gigantic, visionary project that aims to link China with Asia, Europe and Africa through ports, roads, airports, pipelines and other infrastructure projects.

The BRI is hailed by its advocates as a project that enables faster connections between Asia, Europe and Africa through modern infrastructure and enhancing trade through cooperation and connectivity.

It is also argued that it will provide a more flexible approach to development projects than through traditional, often bureaucratic, multilateral development programmes.

“Belt and Road is an idea and a platform, rather than a treaty-based organisation. While the rules-based Western approach is scrupulous, the China way is realistic, given its target partners are mainly developing countries that may not meet the requirements of strict treaties or other high standards,” Chen Fengying, former head of the World Economy Institute och China’s Institute of Contemporary International Relations, told the the South China Morning Post.

Some even maintain that China is the only country in the world that offers a blueprint for global development and the tools for execution that provide a chance for the poor third of humanity to get access to basic infrastructure, such as electricity.

When political leaders and heads of state from 37 countries met at the second Belt and Road Forum for International Cooperation in Beijing during three days in April, China announced that the six-year old project has now been endorsed by 126 countries and regions and 29 international organisations.

“I did expect the BRI to become a very important and prioritised initiative for China, and the growth in terms of the number of countries officially involved is a clear sign that they managed to push for it accordingly,” says Karine Hirn, partner at asset manager East Capital, who has followed Chinese investments both domestically and abroad for many years from her base in Hong Kong and previously Shanghai.

“At the same time, one has to realise that China has clearly upped its agenda in terms of economic involvement overseas even if some projects would probably have happened regardless of the BRI,” she adds.

focus_Holmqvist

Our rail freight business has grown by several hundred percentage points over the past couple of years.”

Stefan Holmqvist, Norman Global Logistics

The BRI has also been met with scepticism, not only in Western developed countries but also in Asia.

Critics have pointed out that the BRI projects could lead to debt traps for developing countries and that the main purpose is to create a vehicle for China to gain global political influence and pursue domestic political goals.

“So-called debt-trap diplomacy is creating vulnerabilities and dependencies for some countries that could become unsustainable in the near future,” says Hirn.

“A big part of the risk is actually in the books of Chinese banks, most of them are state-owned enterprise (SOE) banks, but which often happen to be listed on the stock market and we will probably have to add this to the already long list of concerns regarding Chinese banks’ opaque accounting and loan-book quality,” she says.

A number of big BRI projects have been stalled or failed, often due to financing problems.

In Sri Lanka, the Chinese state-owned enterprise China Merchants Group took over the Hambantota port on a 99-year lease after Sri Lanka could not repay the loans.

In Pakistan, a close Beijing ally, the government is trying to reduce borrowing from China for the multibillion dollar China-Pakistan Economic Corridor (CPEC) project, which aims to connect the Xinjiang Uyghur Autonomous Region in western China with the Pakistani port of Gwadar through a network of roads and railways as well as pipelines for oil and gas.

The Malaysian project East China Rail Link (ECRL), viewed as a major part of the BRI, was stalled when Prime Minister Mahathir Mohamad returned to power in 2018 and called the project “unfair”. However, it has now been revived at two-thirds of the original cost, or around US$5 billion.

China’s only BRI project in Indonesia so far is a US$6 billion 142km high-speed rail connecting the capital Jakarta to the city of Bandung, launched two years ago. The project has been criticised for lack of transparency and has been delayed due to land acquisition uncertainties.

So-called debt-trap diplomacy is creating vulnerabilities and dependencies for some countries that could become unsustainable in the near future.”

Karine Hirn, East Capital

There is also a criticism, or disappointment, from the Western business community in Asia that contracts largely go to Chinese companies since the projects are so huge and Chinese contractors already dominate the world market when it comes to infrastructure projects.

Most Swedish companies could probably not win a BRI project on their own, but rather as an integrated participant in a syndicate.

“A long-term investment in building a relationship with Chinese governmental bodies and state-owned enterprises is required to get a place at the table when these projects are put on the menu,” says Hirn.

The Swedish trade and invest council Business Sweden concludes in a report, published in March 2019, that the vast majority of large-scale BRI infrastructure projects have been carried out by Chinese contractors, most of them state-owned – see also www.dragonnews.se/opinion.

“It’s a fact that it’s mainly Chinese companies getting the contracts,” says Hirn. “Chinese workers are used and Chinese banks are financing the projects, hence providing limited direct economic benefits locally. During my last trip to Sri Lanka, this was obvious from the fact that only Chinese workers were labouring on a construction site for a dam project, without even a single sign for workers in any language but Mandarin. We are far from seeing a perfect inclusion model for development projects.”

Hirn also mentions, as another example, travelling around in Kazakhstan last year and being surprised to see how suspicious and sometimes openly negative many Kazakhs were to the very idea of receiving investments and financing from Chinese companies and banks.

Connecting China with the Pakistani port of Gwadar is one of the BRI’s flagship projects.

Italy was the first Group of Seven country to sign up for the BRI initiative, defying opposition from the US, Germany and France.

Sweden, meanwhile, has chosen to hold off on endorsing the BRI. In a 2017 report by senior research fellow Mikael Weissmann and analyst Elin Rappe at The Swedish Institute of International Affairs (UI) the authors concluded that the actual impact of the BRI in Sweden “is so far very limited”.

The report said that “Swedish officials are often highly cautious, maintaining a wait-and-see policy. While also cautious, members of the business community are cautiously optimistic and have been more actively following BRI-related developments, seeking out avenues for potential business.”

China’s relations with emerging markets and developing countries is not only about the BRI. The continent where it all started is Africa. At the turn of the century, China launched a new Africa policy and to date, China has participated in a huge number of African infrastructure projects in almost every African nation.

China surpassed the US in 2009 to become Africa’s leading trading partner.

China has focused on securing long-term supplies of oil and other raw materials that are needed to sustain its industrialisation. Chinese companies are also investing in Africa in the infrastructure, manufacturing, telecommunications and agricultural sectors.

Over the past two decades, China has helped to meet some of Africa’s infrastructure financing needs and is now the single largest financier of African infrastructure, financing one in five projects and constructing one in three, according to a report by the professional services firm Deloitte.

Chinese enterprises have completed and are building projects that are designed to help add to or upgrade about 30,000km of highways, 2,000km of railways, 85 million tonnes per year of port throughput capacity, more than 9 million tonnes per day of clean water treatment capacity, about 20,000MW of power generation capacity, and more than 30,000km of transmission and transformation lines.

“There are concerns about China’s interests in Africa, with criticisms often ranging from China’s self-interest to the nature of the financing and increasing indebtedness of African economies. But abundant Chinese funds at a time when African countries are looking for alternative sources of development finance, and the global appetite and capacity of Chinese construction firms, could be a win-win combination for China and Africa,” writes Hannah Edinger and Jean-Pierre Labuschagne of Deloitte.

Facts about the BRI

  • The Belt and Road Initiative (BRI) was announced by President Xi Jinping in 2013 as a global trade strategy based on the ancient Silk Road trading route. Its goal is for it to be completed in 2049 and is part of Xi’s Chinese Dream vision, according to which China will become a fully developed nation by 2049, the 100th anniversary of the founding of the People’s Republic.
  • The BRI aims to develop a new land-based Silk Road Economic Belt focused primarily on Eurasia and a 21st Century Maritime Silk Road by promoting economic cooperation across Asia, Africa and Europe.
  • The focus is on infrastructure for which China is providing massive financing to the participating countries.
  • The Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund, the Shanghai Cooperation Organisation (SCO) Bank, and a number of other relevant bilateral and multilateral economic initiatives, also form the economic backbone of these initiatives.
  • The ancient Silk Road was an important network of international trade routes between China and the Mediterranean Sea that emerged during the Han Dynasty around 130 BC. It enjoyed a history of almost 1,600 years, linking the ancient cultures of China, Persia, Arabia, Greece and Rome.