The latest Silk Road

Materials World magazine
2 Aug 2016

China is seeking to resurrect the ancient network of trade routes that connected the country to the Mediterranean, via central Asia, with a major investment fund. Rhiannon Garth Jones finds out more. 

The Silk Road, the collective name given to the many trade routes, on land and sea, that stretched from China in the east, through central Asia and onto Cairo and Constantinople [Istanbul], conjures up ideas and images of a global trade economy more than 3,000 years old. People, goods, philosophies, religions, diseases and many other things flowed back and forth across these roads, creating and transforming cities and societies along the way. 

Reviving the Silk Road, with all the connotations of thriving trade that go with it, has long been an ambition of the countries that once hosted it. In recent years, the Eurasian Land Bridge, a railway through China, Kazakhstan, Mongolia and Russia has often been referred to as one such new Silk Road, especially since 2011, when the line was used by a freight service to connect Chongging, China, with Duisberg, Germany. 

China has been particularly focused on this vision. In September 2013, Chinese President Xi Jinping introduced a plan for creating a New Silk Road from China to Europe during a visit to Kazakhstan. In November 2014, it was announced that an infrastructure fund of around US$40bln would support the plan, named One Belt, One Road (OBOR). Since then, China has continued to announce measures to simplify customs procedures and strengthen infrastructure between itself and its neighbours. 

By January 2016, the first train to connect China and Tehran, Iran, had arrived. The head of Iranian Rail, Mohsen Pourseyed Aqayi said, ‘The revival of the Silk Road is crucial for the countries on its route’ and later added that they were ‘planning to extend the railway to Europe in future’.

Hope for mining

OBOR will consist of the land-based Silk Road Economic Belt (SREB) and ocean-based Maritime Silk Road (MSR) to create a modern transit, trade, and economic corridor between Shanghai and Berlin. Traversing China, Mongolia, Russia, Belarus, Poland and Germany, SREB will extend more than 8,000 miles, creating an economic zone that extends over one third of the earth. Xi Jinping has said that it would result in around US$2.5 trillion of additional trade for the countries involved over the next 10 years, and that it would ‘answer the call of our time for regional and global cooperation’.

This is potentially good news for those concerned about the commodities, construction and mining sectors, and particularly the latter – a lot of steel will be needed to build 8,000 miles of railway, among other things. Those industries have been hit by the recent slowdown in Chinese growth, and this project could change that with the huge planned investments into transport and energy infrastructure. ‘It’s a good bet that giant iron mining companies like Vale, that have seen their business fall to a 13-year low, are currently busy figuring how much steel goes into construction of a new, high speed 8,000 mile railroad’, said Robert Berke, an energy financial analyst at Oilprice. ‘If the project is successful, it could very well spark a boom across the entire depressed international mining, commodities, and construction sectors.’

Also among those investments, it has been reported, will be activities and businesses in mining, particularly gold. In July 2016, the state-backed Silk Road fund entered talks with China National Gold Group Corp on a possible joint offer of around US$2bln for Glencore’s Vasilkovskoye gold mine in Kazakhstan. This would be the fund’s first big mining acquisition, and suggests that the appetite within China has not slowed. 

Of course, the mining and minerals trade was always a major component of the goods that travelled along the original Silk Road. Steel, copper, lead, tin, asbestos, gold, silver, glass, precious gems and lapis lazuli were just some of the commodities that went back and forth, meeting demand for both common use and prestige goods in the Roman Empire and Han Dynasty and, later, the Byzantine Empire and Tang Dynasty. Given the scale of existing Chinese investment in mining across the region, such as the Mes Aynak copper mine in Afghanistan, the Taldy-Bulak Levoberezhny gold mine in Kyrgyzstan and the Zarafshan gold mine in Tajikistan, it seems likely that mining will again be a major presence in this new venture.

Falling commodity prices and the recession in Russia have contributed to a 20-year low in growth across central Asia and the Caucasus, meaning China’s intentions are being greeted with enthusiasm by many across the region. The investments ‘will revitalise economic activity and trade in this part of the world’, says Erlan Idrissov, Foreign Minister of Kazakhstan. Chinese companies already own nearly 25% of Kazakhstan’s oil production and account for well over half of Turkmenistan’s gas exports.

Chinese self-interest

Of course, China’s plans to rejuvenate trade and commerce across the region will have a great deal of value for its own economy. Beijing has been using infrastructure projects to bolster its influence among needy nations for some time, most notably in Africa during the first years of the 21st Century. New markets for those projects that simultaneously reduce the costs of transporting goods and secure access to key markets and commodities are clearly in the country’s own interest, especially now that its domestic market is slowing down after two decades of rapid growth. ‘Construction growth is slowing and China doesn’t need to build many new expressways, railways and ports, so they have to find other countries that do’, says Tom Miller of Beijing consultancy Gavekal Dragonomics. ‘One of the clear objectives is to get more contracts for Chinese construction companies overseas.’

Beyond that, the project has become a way to advance China’s place in the world and its relations – sometimes tense – with its neighbours. The recent ruling by the UN Convention on the Law of the Sea that China’s claims to the South China Sea have no historical validity and that, consequently, it has breached the sovereign rights of the Philippines with its actions there, has infuriated the Chinese Government. That ruling could impact its hopes for the MSR but, conversely, the possibilities offered by the introduction of the MSR could smooth over the diplomatic issues with the Philippines and other countries in the South China Sea. ‘It’s not an economic project, it is a geopolitical project – and it’s very strategic’, said Nadège Rolland, analyst at the National Bureau for Asian Research. 

Teething problems

Despite all the money and rhetoric, there are plenty of reasons to doubt the success of this project going forward. It is clear that some neighbouring countries welcome opportunities provided by the proclaimed investments, but the concerns of European countries about China ‘dumping’ its overcapacity in the European market will not have one unnoticed. Public protests in both Kazakhstan and Kyrgyzstan have already put pressure on the respective Governments to reconsider accepting Chinese advances in certain areas and, in April, the Kyrgyz Prime Minister resigned over a scandal involving the allocation of a road-building contract to a Chinese company. 

Part of Chinese hopes for the project was that it would regenerate the western regions of the country, which have long been poorer than the eastern regions. Lanzhou New Area, in the north west of China, is a new city launched in 2012 that was intended to become an industrial and logistics hub, and home to 500,000 by 2020. Around US$10 billion was invested to clear the area for the city, build infrastructure and divert water from a branch of the Yellow River. A free trade zone was established to ensure it benefited from its position on the new Silk Road. 

For all the investment and political support the city remains underpopulated and Xu Dawu, deputy Communist Party secretary for the area, has already publicly conceded the problems that will likely imperil its future. ‘Lanzhou is a very important town on the Silk Road, but it is sandwiched between two mountains with a river running through it’, he said. ‘To draw more industries from the south we need to jump out of Lanzhou and seek a larger space’.

The combination of mixed feelings abroad and the failure of flagship projects at home could slow or even stop the regeneration of history’s most famous trade route. However, it would be unwise to underestimate the capacity of the Chinese Government to deliver such a project. Around 20 cities are built in China each year. Urban population has risen from 170 million in 1978 to around 690 million in 2011. 600 million people have been lifted from poverty in the past 30 years. China’s push towards urbanisation has been unprecedentedly successful and the Government seems to have made OBOR a priority. The establishment of such a trade network in Asia would likely provide a significant boost to mining companies.

Sizeable investment

The new Silk Road could become the largest programme of economic diplomacy since the US-led Marshall Plan for post-war reconstruction in Europe, covering dozens of countries with a total population of more than 3bln people.