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China’s New Silk Road: Railway to Europe

History buffs will recall that the Silk Road was an ancient network of trade routes that connected the Eurasian continent from east to west, spanning from China all the way into Europe.

While the camel caravans of the historical route are long gone, China is breathing new life into the tradition of the Silk Road.

In October 2013, Chinese leader Xi Jinping unveiled a 21st century version of the ancient route known as the Silk Road Economic Belt and 21st Century Maritime Silk Road.

The goal being, to tie Chinese companies and, ultimately, its economy to the international market via countries all along the route – from Central Asia to Europe. China plans to do this through massive infrastructure projects throughout Central and Southeastern Asia, along with Eastern Europe.

In effect, this new Silk Road is at the core of China’s blueprint for its financial diplomatic strategy.

Building ties along the new Silk Road makes sense since, according to China’s Ministry of Commerce, a large percentage of the country’s trade volume is with countries along that trajectory.

Many U.S. diplomats in 2013 fluffed off Xi’s vision as mere rhetoric. However, infrastructure projects are already underway in Pakistan and Iran, and now details of another key part of China’s initiative are surfacing.

Trade From East to West

China will build a major transcontinental cargo rail service that’ll eventually connect every province and key city in China with every major country in Europe with important trading posts in between.

Europe is China’s largest trading partner, with a third of Chinese goods exported throughout the continent. Trade volume between China and the EU is valued at more than $600 billion per year. This sum is expected to top $1 trillion by 2020.

And don’t be mistaken – this is not a single-serving relationship, either.

China’s growing middle class has developed a taste for European goods such as wine, cheese, chocolates, and a number of other Western luxury goods.

Already, trains have arrived in places like Madrid, Hamburg, and Tehran in order to more easily access such imports.

In the meantime, as the necessary railways are being developed, Chinese freight trains are using Russia’s Trans-Siberian railway for part of the journey.

The new Silk Road route will, upon completion, take a more southerly route through Central Asia, Iran, Turkey, and the Balkan states. Chinese leaders plan for this strategic economic link to be built within five to10 years.

Silk Road Map

Chinese Logic

Shipping goods by air is too expensive, and shipping by sea is too slow.

It’s only natural that the Chinese have resorted to a more dependable and cost-effective means of trade: the train.

Time and cost are becoming increasingly crucial factors to a growing number of industries, such as the automotive, technology, fast fashion, and food trades. It’s the reason why firms like United Parcel Service Inc. (UPS) are already using the current China-Europe rail link to move goods within and between the two continents.

Shipping items via freight train saves about 65% when compared to shipping by air.

And the time saved is impressive. Shipping items overseas from China’s east coast to Germany often takes about 30 days by air or by sea. Shipping by rail, however, can cut down that time by 50% or more. Not to mention, the chokepoint of the Malacca Strait is avoided altogether when post travels by train.

Additionally, there’s a logistical motive behind China’s desire to build a new railroad.

Russia and the former republics of the Soviet Union use a different standard rail gauge (1.52 meters) than the gauges used within Europe, China, and other countries (1.435 meters). That typically means cargo has to be switched to another train every time a border is crossed within the old Soviet empire.

By establishing its own route with a 1.435 meter standard oil gauge, China will surpass the Russian railways in terms of preference due to their compatibility with European trains.

China Cementing Ties

Furthermore, China has lots of financial firepower to build out this new railway.

Predictions have China using the Asian Infrastructure Investment Bank (AIIB) in order to fund at least part of this strategic rail project.

The AIIB is already busy funding parts of the new Silk Road in Pakistan, Tajikistan, and Kazakhstan.

China’s new Silk Road is smart diplomacy. The route will span over 65 countries and 4.4 billion people – that’s a huge amount of potential buyers and shippers that would be able to utilize the railway.

By funding and building crucial infrastructure throughout the Silk Road, China will be generating not only the business but the goodwill of its neighbors on the Eurasian landmass.

Plus, it will keep its industries and labor force busy during construction.

It’s a bit reminiscent of the Marshall Plan in which the United States helped to rebuild Europe after World War II, generating decades of goodwill. If only the U.S. could take a page from China’s new Silk Road and revitalize our nation’s railway industry, perhaps we could enjoy cheaper, efficient international trade with our neighbor, as well.

Wishful thinking.

Good investing,

Tim Maverick

Tim Maverick

, Senior Correspondent

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