Subsidy-dependent Asia-Europe railfreight's best hope lies in Xi Jinping's 'Dual Circulation' policy
 Ambiguity is the key feature of Chinese Communist Party slogans. So it was with "Belt and Road and the latest maxim "Dual Circulation". They can mean anything or nothing, or mean one thing one day and something else another.
Initial fears that "Dual Circulation" meant the Chinese economy was to become more insular were dispelled by none other than President Xi Jinping addressing Shanghai's November Import Expo. He assured all of his openness to foreign investment and having domestic consumer spending carry more of the load than exports once did.
This was welcome news to a big backer of the Asia-Europe railfreight link, Djoomart Kaipovich Otorbaev, the former prime minister of Kyrgyzstan, and professor of physics at both Eindhoven University of Technology in the Netherlands, as well as at Kyrgyz State University.
In his paper to the Russian International Affairs Council, on the near decade old Asia-Europe rail link, he hoped the "Dual Circulation" policy will wean the service from its sustaining subsidies. What sustains Dr Otorbae's hope is Xi Jinping’s intention to develop a more consumer-based economy that will draw more quality goods from Europe to Chinese retail shelves by rail.
Dr Otorbae faces the subsidy issue squarely. The sustainable development of commercial ties with Europe need to depend on market mechanisms, he said, and "subsidies need to stop". The Chinese media reports that state subsidies for European-bound railway traffic was as high as 50 per cent in 2018. However, subsidies were reduced to 40 per cent last year and are about 30 per cent this year. The authorities expect that all subsidies will end by 2022. According to logistics analysts, rail traffic volumes need to reach about 1.5 million TEU to feasibly end government support.
The outcry of 20 years ago, that bulk of Chinese development only benefited coastal regions, was largely answered by the "Go West" policy, through which China has relocated manufacturing in the poorer interior of Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Ningxia, Xinjiang, Inner Mongolia, Guangxi and Qinghai.
"Production plants in these provinces help reduce workforce and material costs compared with the coastal areas. Thus, more companies are relocating to inland regions. Additional opportunities for reducing these plants' logistics expenses are gained through direct rail routes to Europe," said Dr Otorbae.
Rail is more efficient than moving goods to port for shipping to Europe via sea and then once again transloaded to reach the end point. Thus, shipping by sea can increase delivery costs and times.
"Air and sea transport has been disrupted by the Covid pandemic, while railway traffic continues to increase. Twelve years ago, on October 6, 2008, the first demonstration container train ran from China to Hamburg. It was a 17-day trip from Xiangtan, Hunan province. At the time, many people questioned the logic of this approach. But the advantages are clear today. Routes over 11,000 kilometres now directly link about 100 Chinese and European cities," he said.
Rail traffic from China to Europe received a strong impetus in 2011 when the customs union of Russia, Kazakhstan and Belarus was created, he said. The elimination of customs clearance procedures on the borders of these states drastically reduced documentation and logistics expenses and, thus, expedited freight transport services from China to Europe.
Hewlett Packard was involved in the first freight trains from China to Europe. In 2011, it sent container loads of desktop computers, laptops and LCD monitors from Chongqing to Duisburg, Germany. Only a few hundred TEU were moved on this route in 2011. According to Eurostat, the share of freight shipped by rail from China to the European Union was less than one per cent, but rail shipments have seen positive growth since then. Annual railway container volumes between China and Europe grew from 100,000 TEU to 725,000 TEU in 2016-2019, according to Wheeler Management and the Eurasian Development Bank's Centre of Integration Studies.
This impressive growth trend continued in 2020. According to the China Railway, the number of China-Europe freight trains increased considerably in August 2020. An impressive record was set, with 1,247 trains per month or 62 per cent more than in 2019, and August was the sixth straight month with double digit train volume growth year on year. In the first eight months of 2020, 7,601 freight trains, or 44 per cent more than over the same period in 2019, were made via this route.
One of the big drawbacks of the Asia-Europe rail route as thought to be the transfer from the standard gauge to the Russian one. But that obstacle was overcome by engineering technology, while so-far insurmountable delays have come from EU regulations. "With the introduction of new technology in Khorgos, the time needed for transloading containers from one train to another has decreased from several hours to as low as 47 minutes," said Dr Otorbae.
"It turns out that the European railway network is obsolete and has basic constraints that reduce its capacity. Logistics problems make the Polish border the main bottleneck. European railways limit freight volumes and increase operational expenses. An average Russian train has 71 standard wagons, but EU regulations limit train length to 43," he said.
"There are the reasons behind the significantly increased freight rail traffic on the China-Europe route. First, the Chinese economy is becoming more competitive, and the country is thus exporting more to European markets.
"Second, China is exporting more expensive goods than can justify the cost of faster rail shipping over sea shipping. Third, the Chinese government has been relocating production inland and has been focusing on the development of the landlocked central and western provinces that facilitate cheaper and faster rail traffic to Europe," said Dr Otorbae.
"Fourth, the people of China are becoming more affluent; more consumers want expensive, high-quality European goods, including wine, food and cars. Again these products justify faster but reasonably priced deliveries to the Chinese market. Fifth, the establishment of the Eurasian Union has facilitated the free movement of goods, and logistics management companies now have access to reliable, fast and cost-effective rail shipping.
"Most analysts believe that container volumes will continue to increase in the near future. Experts from the Eurasian Development Bank estimate that, given the current infrastructure, maximum rail freight volume from China to Europe will amount to about two million TEU annually. This shipping mode will then reach a practical capacity, where still lower rates will be needed to expand freight volumes further.
"Overall, there is every reason to believe that the Eurasian railway revolution will continue in the near future. The factors for developing the New Silk Road continue to fall into place," Dr Otorbae said.
Beyond the above technical improvements, expanding the capacity of current routes and building new routes, including a new and shorter southern route from China to Europe via Kyrgyzstan, Uzbekistan, Turkmenistan, Iran and Turkey, will definitely add to these successes, he said.
But much depends of Xi Jinping's "Dual Circulation" policy. We have seen how "Belt and Road" failed to live up to its best hopes. Having China become a self-generating consumer-led economy as the United States has been on Beijing's wish list for years, but it has never reached the desired outcome to the extent needed to bring Asia-Europe railfreight to the point where it can be weaned from subsidies upon which it still depends. |
