Roughly 1000 years ago, traders from east and west exchanged goods along a centuries old network of routes ranging from eastern China all the way to Western Europe. They traded silk, porcelain, and spices in exchange for wool, gold, and silver. And more than merchandise travelled along the networks. The constant movement and mixing of populations brought about the transmission of knowledge, technology, cultures and religions. There were many established routes and methods of transportation; camels plodding through the desert and ships navigating along the coast. Today, we refer to this trade network as the ancient Silk Road.
In present times, China is rolling out an ambitious initiative to build a modern silk road. The new Silk Road will consist of transportation and logistics infrastructure to facilitate overland and maritime trade-routes spanning China, the Middle East, Africa and Europe, and is officially named the Belt and Road Initiative (BRI). The Belt refers to the land-based “Silk Road Economic Belt” leading westwards from China, while the Road describes the oceangoing “Maritime Silk Road” navigating from China throughout South-East Asia, along the Indian Ocean to the African coastline. Some 65 countries are directly connected to the Belt and Road Initiative. The maritime routes will be fostered by the construction of ports, warehouses and connections to overland transport in strategic locations. Land transport will be carried out by an extensive rail-network, parts of which are already operational, while others have to be upgraded or have yet to be built.
Of course China is planning to fund this ambitious undertaking through a number of routes: the recently established Silk Road Fund, the Chinese-led Asian Infrastructure Investment Bank (AIIB), direct investments from China’s large foreign exchange reserves, the China Development Bank and several of its largest state-owned banks. While the infrastructure investments for BRI are estimated to be as high as $900 Bn, only a fraction of this number has been pledged so far.
The money is used to pay for projects or provide loans to the countries in which the infrastructure will be built. Given the source of the funding, it is perhaps not surprising that most construction contracts are allocated to Chinese firms, including those that are outside China. As an example, companies such as China Railway Construction Corporation (CRCC, Ticker: 601186) and China Communications Construction Corporation (CCCC, Ticker: 601800) are involved with railway projects in Malaysia and West Africa, as well as building key ports in Pakistan and Sri Lanka. CRCC’s new overseas orders jumped 26% YoY in 2016. But construction and operation of ports, rails, bridges and tunnels is only part of the undertaking. Along with the new rolling stock, renewable energy production plants are needed. One of the first projects of the Silk Road Fund is a $1.6 Bn hydropower project in Pakistan on the China-Pakistan Economic Corridor, linking China to Pakistan’s seaports. Clearly, the One Belt One Road theme is much wider than just a one-sector theme.
Will the new infrastructure deliver on its promise of stimulating trade across the Eurasian continent – also between countries other than China – or is this a state sponsored scheme to export Chinese overcapacity in the construction sector? Transport by train from China to Europe is much more expensive than by ship. However, the train route is faster, taking only between a third and half the time the ship takes for the journey. Plus inland distribution is easier. For the network to function efficiently, trade has to flow both directions, and some European producers are already excited at the prospect of sending their goods east, for example agricultural produce. If infrastructure, sustainable operation, economic viability and trade policy come together for all parties involved then there is the prospect of mutual and shared gains from trade and strengthening political and cultural ties for a region spanning 4 billion people. And a new chapter will be added to the centuries’ old history of the Silk Road.
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