A rare sense of stillness envelops the white, butterfly-shaped office building that stretches over the gates of the Lanzhou New Area free-trade zone. A bunch of workers wander around aimlessly, a few cars and bicycles pass by, but the whole area shows no sign of commercial activity on a chilly, sunny early March morning. Wrapped up at the end of 2015, investors are still in the process of setting up operations in the zone.
Lying along a transit corridor heading west, this isolated, wind-battered stretch of land in the outskirts of Lanzhou, the capital city of China's north-western Gansu province, is gearing up to become a major industrial and trade hub in Beijing’s grand vision of marching westwards along the trade routes that once made up the ancient Silk Road. Business has yet to catch up, but change is already happening.
“Lanzhou has turned from a closed city into an open, export-import-oriented location,” says Feng Xiping, vice-general manager of state-owned oil service firm LS Group.
Formally announced by China's president, Xi Jinping, in a speech in 2013, the Silk Road Economic Belt initiative has been in the making for much longer as Beijing has increasingly looked westwards to secure growth and stability for its isolated and lesser developed western provinces. The move has also been aimed at increasing China's influence over central Asia, a highly strategic region that contains vast hydrocarbon and mineral resources as well as key transit routes to the Middle East and Europe. The initiative has gained increasing momentum since Mr Xi’s 2013 speech, bearing fruit on both fronts.
“The Silk Road Economic Belt gives Xinjiang a historic opportunity,” says Chen Yongming, deputy director-general of the Development and Reform Commission of the Xinjiang Uygur Autonomous Region, China’s western-most province and one of the most important pieces of the Silk Road jigsaw.
State investment across the province grew to Rmb1073bn ($165.7bn) in 2015, from Rmb354bn in 2010, propelling the region's annual economic growth to reach 10.7% in 2015, against a national average of 6.9%. Most of the new investment went to projects strengthening connections with central Asia, such as Urumqi’s international airport, one of the 18 airports being upgraded across the province, where a new pavilion serving international flights mostly bound to central Asia and the Middle East increased its overall capacity threefold.
Meanwhile, lured by China's vast riches, dozens of countries have embraced the narrative of a modern Silk Road. “Connectivity is the key word here,” says Wang Wen, the executive dean of the Beijing-based Chongyang Institute for Financial Studies. “China wants to push connections, to use a modern Silk Road to respond to the needs of a rising China. And many countries [want] Chinese support. These countries need development, and China can provide them with it.”
Chinese investments, loans and grants have displaced Russia’s long-established economic influence in central Asia. China’s total trade turnover with the five central Asian republics (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) was $50bn in 2014, up from only $1.5bn in 2001, according to figures from the Chinese National Bureau of Statistics. Also in 2014, Russia’s total trade turnover with the region was $29bn, according to the country's Federal State Statistics Service.
Energy imports are the key reason behind China’s increasing trade with central Asia. State-owned China National Petroleum Corporation has bought stakes in some of central Asia’s most promising oil and gas resources and linked them to western China through a network of pipelines that were rapidly laid down. Today, China is the largest buyer of Turkmen gas, a position Moscow had held for decades, and directly controls about one-third of oil production in Kazakhstan.
Stretching the silk
But the role of central Asia goes much beyond oil and gas supplies. China has turned westwards to make central Asia an overland transport link with the Middle East and Europe – the Silk Road Economic Belt. Beijing has also focused on sea routes, and outlined its vision for a 21st century Maritime Silk Route Economic Belt embracing south-east Asia – the combination of both initiatives forms the One Belt, One Road, or Belt and Road, initiative. Some 30 countries have already signed memorandums of understanding within the framework of the Belt and Road initiative. Private firms are following suit.
“We are expecting [our trade] volumes to keep growing in the years to come,” says Wanxu Dong, general manager of Russian-German joint venture Trans Eurasia Logistics. TEL operates five freight trains a week between Duisburg in Germany and Chongqing, a key trade destination in central China, along the 11,179-kilometre Yuxinou railway. In 2012, when the service was launched, it operated one weekly train. TEL-operated trains take about 15 days to reach Europe from China, versus 24 to 34 days by sea. Rates for a 40-foot container range between $4000 to $5000, about twice as much as sea shipping, but much cheaper than air freight. The Chinese government is both directly and indirectly subsiding the TEL service, which otherwise would be twice as costly, according to Mr Dong.
Despite recent growth, volumes at the Chongqing’s intermodal terminal – which marks the start of the Yuxinou railway – are still 30% below total capacity, according to figures from operator CRIntermodal. In fact, most of the new infrastructure hastily built around western China seems to be operating below full capacity. Trade between China and Belt and Road countries has flourished, but has yet to reach full potential due to physical barriers across the region, and neighbouring countries are not developing their infrastructure at the same pace as China.
An example of this is found in a dry port on the Kazakh side of Khorgos, a special economic zone at the border between China and Kazakhstan, which still lacks gantry cranes allowing transshipment operations, forcing TEL to take a more northern transit route through the central Asian country. In a region containing many geographical barriers, poor infrastructure makes overland trade expensive, to the extent that a Chinese trader in Khorgos admits he is still importing Georgian wine via sea, instead of using much shorter land connections.
Besides, “it’s not just about building bridges, but also destroying barriers”, according to Clemente Cappello, CEO of investment management company Sturgeon Capital, who was speaking at a conference in February, when referring to the often time-consuming procedures of customs clearance across the region.
China is increasing its efforts to bridge existing barriers. Beijing has set up the $40bn Silk Road Fund and the $100bn Asia Infrastructure Investment Bank (AIIB). Investment in planned and ongoing Belt and Road projects could total Rmb1500bn in the coming years, according to HSBC estimates.
And the Belt and Road initiative has become even more strategic now that Beijing is taking action to rebalance its overgrown domestic economy. “In the past 10 years, China has developed too quickly, and now the country wants to export its overcapacity,” says Mr Wang at the Chongyang Institute.
From this perspective, the dozens of bilateral agreements signed as part of the Belt and Road initiative give Chinese companies preferential access to foreign markets. However, these opportunities are “likely to be too small to be macroeconomically meaningful”, David Dollar, a senior fellow at the Washington, DC-based think tank the Brookings Institution, stated in a 2015 paper. In steel alone, China will need $60bn a year of extra demand to absorb extra capacity, three times as much as AIIB’s maximum annual investment capacity, Mr Dollar estimates.
Some independent Chinese observers even publicly questioned the meaningfulness of commitments in countries with poor track records in terms of governance and security. Blind to such criticism, a horde of modern day Chinese Silk Road travellers – made of diplomats, energy and construction companies, bankers and traders – is already on the move. They have a long, bumpy journey ahead, but they will not stop until the warehouses in Chongqing, Lanzhou and Urumqi are working at full capacity.