The Iron Silk Road Bubble

Andreea Brinza | 6 June 2017

If one image has come to define the Belt and Road Initiative (BRI), China’s ambitious, amorphous project of overseas investment, it’s the railway. Every few months or so, the media praises a new line that will supposedly connect a Chinese city with a European capital. Today it’s Budapest. Yesterday it was London. They are the newest additions to China’s iron network of transcontinental railway routes spanning Eurasia. But the vast majority of these routes are economically pointless, unlikely to operate at a profit, and driven far more by political need than market demand. In that, they’re representative of the BRI as a whole — far more driven by China’s need to promote its image, and to pander to domestic political interests, than to meet commercial demands.

The myriad trade routes that once made up the ancient silk roads were driven by raw commercial need. Traders made the dangerous journeys across steppe, mountain, and desert because of the prospect of riches. That’s not the case today. Chongqing-Duisburg, Yiwu-London, Yiwu-Madrid, Zhengzhou-Hamburg, Suzhou-Warsaw, and Xi’an-Budapest are among the more than 40 routes that now connect China with Europe. Yet out of all these, only Chongqing-Duisburg, connecting China with Germany, was created out of a genuine market need. The other routes are political creations by Beijing to nourish its relations with European states like Poland, Hungary, and Britain.

The Chongqing-Duisburg route has been described as a benchmark for the “Belt,” the part of the project that crosses Eurasia by land. (The “Road” is a series of nominally linked ports with little coherence.) But paradoxically enough, the Chongqing-Duisburg route was created before Chinese President Xi Jinping announced what has become his flagship project, then “One Belt, One Road” and now the BRI. It was an existing route reused and redeveloped by Hewlett-Packard and launched in 2011 to halve the time it took for the computing firm’s laptops to reach Europe from China by sea.

Chongqing-Duisburg could have been an example of how to create a profitable route. But instead it became political fodder. The first railway was logistically developed by HP, but the development of the routes that followed has been driven by the Chinese government. A new brand, China Railway Express, has been created as an umbrella for the 40-something Chinese routes. While the branding was a good move, expanding the number wasn’t.

Unlike the HP route, in which trains arrived in Europe full of laptops and other gadgets, the containers on the new routes come to Europe full of low-tech Chinese products — but they leave empty, as there’s little worth transporting by rail that Chinese consumers want. With only half the route effectively being used, the whole trip often loses money. For Chinese companies that export toys, home products, or decorations, the maritime route is far more profitable, because it comes at half the price tag even though it’s slower.

The Europe-China railroads are unproductive not only because of the transportation price, as each container needs to be insulated to withstand huge temperature differences, but also because Russia has imposed a ban on both the import and the transport of European food through its territory. Food is one of the product categories that can actually turn a profit on a Europe-China land run — without it, filling China-bound containers isn’t an easy job. For example, it took more than three months to refill and resend to China a train that came to London from Yiwu, although the route was heavily promoted by both a British government desperate for post-Brexit trade and a Chinese one determined to talk up the BRI.

Today, most of the BRI’s rail routes function only thanks to Chinese government subsidies. The average subsidy per trip for a 20-foot container is between $3,500 and $4,000, depending on the local government. For example, Chinese cities like Wuhan and Zhengzhou offer almost $30 million in subsidies every year to cargo companies. Thanks to this financial assistance, Chinese and Western companies can pay a more affordable price per container. Without subsidies, it would cost around $9,000 to send a 20-foot container by railway, compared with $5,000 after subsidies. Although the Chinese government is losing money on each trip, it plans to increase the yearly number of trips from around 1,900 in 2016 to 5,000 cargo trains in 2020.

So why has Beijing decided to open so many unproductive routes, subsidized by local Chinese governments? Because the Globalization 2.0.””>BRI is not just an economic project but Beijing’s main soft-power initiative, helping China promote itself as a leader of what the government terms “Globalization 2.0”. By attracting as many countries as possible in this project, Beijing can legitimize its position as the new champion of free trade and globalization, thus positioning itself as a global power. So, while the railways themselves might not be economically profitable, the hope is that they will generate goodwill, respect, and influence for China.

Perhaps even more importantly, the project is the pet scheme of Chinese President Xi Jinping. That makes raising objections to projects politically risky and throwing money at the BRI an easy way to build domestic political credit. During the recent Belt and Road Forum, the Chinese internet was filled with promotional songs featuring the BRI but interlined with Xi’s speeches. Not only did these songs drive home the idea of China as a leader and savior of globalization, but they linked the BRI with Xi’s name, demonstrating the needed loyalty. Meanwhile, Beijing was covered with posters proclaiming the dedication of various local governments and state-owned enterprises to Xi and the BRI. Combine that with the traditional short-term thinking of Chinese provincial officials, whose main goal is to bulk up the figures before they move on to another post, and it’s no surprise that size, not profitability, is a priority. Eventually the losses may be cushioned by strategic plans to transform the BRI into a locomotive of China’s external policy.

It’s not the first time that China has tried to mimic a genuine success story for political ends without taking the market’s needs into account. Right now, a whole new city is being built near Beijing along similar lines. Like the railways that vainly imitate HP’s Chongqing-Duisburg route, the Xiongan new area aims to replicate the successful 1980s and 1990s creation of Shenzhen and Pudong in China’s trade-orientated south. But Xiongan is located far inland in the northern province of Hebei, unlike Pudong and Shenzhen with their easy oceanic access.

And Xiongan is just the most recent of China’s 19 “new areas” attempting to replicate Pudong’s success. Most of the other new areas haven’t succeeded in replicating Pudong’s success because they were created out of the desire of the local government, not out of market demand. Pudong’s and Shenzhen’s successes happened because they offered unique possibilities at a time when China was opening to the world and because of their fortunate location near Hong Kong and Shanghai. That model is not imitable today, especially far from the ocean.

Like the BRI, Xiongan is intended to strengthen Xi’s image. Xi, whose father oversaw Shenzhen’s designation as a special economic zone, is well aware that the economic miracle of Shenzhen is tied to the legacy of former Chinese leader Deng Xiaoping and his reform policies. By creating a great city from scratch and a new direction for China’s foreign policy, Xi may be looking to cement his own place in history.

As with the state-owned “zombie” enterprises that lose money but are kept alive by the government, the BRI’s railways may survive thanks to Xi’s patronage. But these zombie routes are unlikely to ever thrive. If it actually wanted to concentrate on trade, China would be better off creating two or three main routes that connect transportation hubs in cities like Chongqing, Zhengzhou, Yiwu, Duisburg, or Lodz in Poland, instead of multiplying dozens of rail routes just for the sake of connecting cities that lack valuable bilateral commerce. This way, the Belt would have a solid economic foundation that generates not just headlines but real growth.

This article has been published by Andreea Brinza in Foreign Policy.

Photo Credits:  DHL containers in Switzerland (Flickr/Deutsche Post DHL); Railway tunnel (Pixabay/Tama66)


Andreea Brinza

Andreea Brinza is a researcher and the Vice President of RISAP. Her interests are related to the geopolitics, geostrategy and geoeconomics of the Asia-Pacific region and especially China. Her research focuses on the Belt and Road Initiative.

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