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China’s efforts to revive Silk Road trading routes are proving to be a boon for a slightly less ancient mode of transportation: freight trains.
The value of cargo sent between between China and Europe by rail surged more than 140 percent in the first six months of last year, according to a new report from the Center for Strategic and International Studies in Washington. Some 35 Chinese cities are connected to 34 European cities, CSIS said, from Chongqing to Duisburg, and Xiamen to Budapest. A decade ago, none were.
A major driver has been Chinese President Xi Jinping’s signature Belt and Road Initiative, which Morgan Stanley expects to fuel as much as $1.2 trillion of spending on railways, roads, ports and power grids over the next decade. Governments across China have hurried to set up their own rail routes and logistics companies, often paying generous subsidies to make the 11,000-plus kilometer (6,800-mile) journey more attractive.
“Recent growth has been very dramatic. It feels like a new service is being announced every month,” says Jonathan Hillman, director of CSIS’s Reconnecting Asia Project and author of the report. While rail only accounts for 0.9 percent of cargo volume -- and 2.1 percent of value -- shipped between the two markets, Hillman said it was possible that share would double over the next decade.
Political backing from Beijing has helped overcome hurdles that had previously deterred more exporters from choosing 15- to 18-day rail trips over cheaper sea voyages that take twice as long. Chinese subsidies can cover as much as $7,000 per container, or more than half the cost, CSIS estimates.
Trade ImbalanceThat sort of support makes the cost of running half-empty trains back from Europe less prohibitive. China’s massive trade surplus with the region means as much as 70 percent of the transcontinental rail freight goes west.
“China has used the announcement of new routes as evidence that the BRI is succeeding,” the report says. “It is difficult to imagine these routes emerging as rapidly as they have in recent years, without China putting its political and financial weight behind them.”
Electronic products such as HP Inc. laptops and Foxconn Technology Co.-produced iPhones make up about half of China-Europe freight today, down from about 90 percent five years ago, said Wilhelm Patzner, chief executive officer of Far East Land Bridge, a Vienna-based freight forwarder. Home furnishings and appliances like washing machines, vacuum cleaners, as well as Ikea products make up most of the rest.
The freight imbalance may shift as increasingly wealthy Chinese demand more imported meat, fruits and vegetables from Europe, said Ronald Kleijwegt, who manages China-Europe train services at Jusda, a logistics company wholly-owned by Foxconn Technology Group. That trade is held back because of a Russian restriction on imports or transit shipments of European foodstuffs.
The fledgling route could face another potential shock if Chinese government halted the subsidies, Kleijwegt said. To prepare, Jusda is experimenting with using larger containers to reduce costs and become more competitive.
“No one can build a sustainable model based on government support,” Kleijwegt said. “So we keep working to reduce cost points.”
This article first appeared on www.bloomberg.com
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