China's bold gambit to cement trade with Europe--along the ancient Silk Road

From his office on a bend of the Rhine River, freight terminal boss Bernd Putens can see — and hear — the early stirrings of what China calls the New Silk Road.

The clang-clang of forklifts echoes through his building as 42 containers of cargo are unloaded at the Duisburg Intermodal Terminal, part of the world's largest inland port.

The containers have just arrived on a train from Changsha, China, filled with electronics and other consumer goods, and will return carrying Land Rovers and other European products.

They represent a bold effort by Chinese leader Xi Jinping to extend his country's economic and political clout.

Until four years ago, there was no regular rail service linking China and Germany, and for good reason.

The tracks existed, but at nearly 7,000 miles, the distance is longer than a round trip between Los Angeles and Boston, and trains must switch gauges — a laborious, time-consuming process — as they pass from China into Kazakhstan, Russia, Belarus and Poland. Trains are twice as fast as sea shipment yet twice as expensive, so rail makes sense only for high-value products or goods with short shelf lives.

But two millenniums after traders began ferrying gems, precious metals, fabrics and spices on arduous overland routes linking the Far East with Africa, the Mediterranean and the Middle East, China believes the time is nigh for a modern Silk Road. Leaders in Beijing envision a 21st century version of the path trod by the likes of Marco Polo, starting with locomotives but quickly expanding to encompass roads, pipelines and other infrastructure.

By physically linking itself more tightly with Europe, the Middle East and Central Asia, China is aiming to create new markets as growth slows at home while deepening Beijing's influence across Asia and as far away as the Middle East and Europe.

The effort is at the center of Xi's signature political and economic policy initiative, called the Silk Road Economic Belt and 21st Century Maritime Silk Road.

For two years, Xi has been talking up the sweeping strategy — known collectively as One Belt, One Road, or OBOR — on his frequent trips abroad, while lining up financing plans at home and enlisting the participation of state-run and private companies.

With its expansive ambition, some observers have compared China's grand new endeavor to America's Marshall Plan to rebuild Europe after World War II, a game-changing effort that revolutionized trade and recast many long-standing relationships.

It is expected to cost even more than the Marshall Plan, for which the United States spent the equivalent of slightly more than $100 billion in today's money.

"With these initiatives, Beijing, and more particularly, the Chinese Communist Party, seeks to reinforce the emerging global narrative that China is moving to the center of global economic activity, strength and influence," Christopher K. Johnson of the Washington-based Center for Strategic and International Studies said in a recent paper analyzing One Belt, One Road.

Markus Taube, a professor of East Asian economic studies at the University of Duisburg-Essen, believes the initiative "will strengthen China's economic and diplomatic leverage in Europe and provide a political and diplomatic counterweight against the U.S."

"The more I think about [the strategy], the more it makes sense," he said.

But others are more skeptical, saying China's lofty language around One Belt, One Road masks myriad questions about how much money will be spent on the project and where, and who will benefit.

"It's generated a lot of buzz, but no one is quite sure what it actually means," said Ian Storey, a senior fellow at the Institute of Southeast Asian Studies in Singapore.

China's government has set up a $40-billion fund to promote private investment in One Belt, One Road initiatives and is encouraging state-run banks to make loans for projects including power plants, ports, pipelines and railways — to be built overseas, in many cases, by Chinese companies. The Bank of China has announced plans to fund $120 billion of those projects from 2015 to 2019.

In January, the China-led Asian Infrastructure Investment Bank officially opened its doors, and the multinational institution is expected to finance tens of billions of dollars' worth of projects that fall under the One Belt, One Road umbrella.

Chinese firms, eager to avail themselves of government financial incentives and align themselves with a key Communist Party priority, are scrambling to get on board and show they're embracing One Belt, One Road.

Although massive ground-up infrastructure projects will take years to come to fruition, the ripple effects of the strategy are already being felt in places like Duisburg.

Xi visited the German city in 2014 to tout the rail project, and since then, interest in China-to-Germany freight has surged. Now Duisburg is receiving one train every day from China, including three to five a week from Chongqing, two a week from Wuhan and one a week from Changsha. There are also weekly trains to Hamburg from Wuhan and Zhengzhou.

"Now it seems every [Chinese] city wants to send its own train," Putens said.

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Germany is not the only country welcoming new rail service from the Middle Kingdom. In February, the first train to connect China with Iran arrived in Tehran after traveling 5,900 miles through Kazakhstan and Turkmenistan. The 39-wagon train carried $600,000 worth of clothing, shoes and bags.

China has also pioneered a 16,000-mile round trip between the cities of Yiwu and Madrid. The 82-car train left China full of Christmas decorations, crafts and trinkets, arriving in Spain just before Christmas 2014. The train returned to Yiwu last year hauling olive oil.

Although the train that arrived in Iran originated from China's eastern province of Zhejiang, Chinese officials believe land-locked western Chinese cities such as Urumqi — which is closer to Iran than to Shanghai — could benefit even more substantially from rail links through Central Asia. In that sense, One Belt, One Road is intended to correct an economic imbalance within China, helping goose the development of the nation's western regions, which lag far behind their coastal cousins.

Although the arrivals of the first locomotives in places like Iran and Spain have been greeted with much fanfare, it's not clear if they can blossom into vibrant transportation links and significantly boost trade.

Homayoun Jahani, an executive of the Iranian transportation company Pers, which was involved in arranging the train, said the 14-day journey to Tehran proved the train was a "reliable vehicle" and said plans were already underway to begin monthly service to the port of Bushehr.

But Masoud Daneshmand of the Iran-UAE Chamber of Commerce, said it was "far from being a viable, hustling and bustling railroad."

In Duisburg, port spokesman Julian Boecker said operations have grown increasingly smooth since the first test train from Chongqing in 2011. One-way travel time, which took 18 days at first, now averages 11 to 13 days. Putens said customs clearance in Duisburg has been shortened from two days to two hours.

"As we gained experience in cooperation, efficiency improved," said Boecker, especially in areas such as gauge changes. (While Europe and China have the same gauge width for their tracks, all former Soviet states have wider gauges, so trains have to be adjusted at those borders.) But with the trains now running at 600 miles per day, "it's reaching the limit."

One problem in Germany is that while there are plenty of Chinese goods coming in, finding enough cargo to ship back out hasn't been easy. Empty containers from China are piling up. Port managers are planning to rent a five-acre plot to hold about 2,000 of the metal boxes while Chinese shipping firms figure out how to handle them.

Some do go back full. In addition to Land Rovers, China-bound containers have been packed with Porsches, Audis, auto parts from Ford and Volkswagen plants, steel coils, specialized machinery and milk powder. (Jaded by food safety scandals, Chinese consumers pay handsomely for imported dairy products.)

Putens said his Chinese counterparts had recently requested refrigerated transportation for European wines.

Despite the growth, China rail freight accounted for less than 1% of all cargo handled at Duisburg last year. That's small, said Boecker, but "it is an important symbolic value."

The challenge now is to find better balance between inbound and outbound cargo, and to see if the line can sustain itself without government aid.

"There's economic interest on all sides to keep this rail route alive," said Boecker.

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Taube, the professor at the University of Duisburg-Essen, said that for China, the initial volume of trade by rail isn't as crucial as the opportunities it opens up for economic development — and greater political clout — along the route.

"The rail links are the skeletons, but the important flesh will be the industrialization zones along the tracks," he said.

The long-term vision, he believes, is for China to bring manufacturing to Kazakhstan, Uzbekistan and other Central Asian countries as labor in China gets more expensive; at the same time, Beijing can build up its economic and diplomatic sphere of influence.

Tom Miller, a China expert with Gavekal Dragonomics, said developing transportation links through Central Asia will give China greater access to natural resources in the region, including oil. Diversifying China's sources of energy and the transportation routes will also make China feel more secure, he said.

Just weeks before the arrival of the train in Tehran, Xi became the first Chinese leader to visit Iran in 14 years, signing treaties on judicial, commercial and civil matters and pledging to boost trade — which stood at $52 billion in 2014 — to $600 billion a year over the next 10 years.

China has announced similar headline-grabbing contract deals in countries including Pakistan and Kazakhstan.

Beyond securing more oil and other resources, Miller said China wants to use One Belt, One Road to boost trade with its western provinces and develop their local economies. And Beijing may be hoping to find new customers for some of its excess steel, cement, heavy equipment and rolling stock, among other things.

China's economy has been slowing, with growth dropping in 2015 to 6.9%, its lowest in several decades.

David Kelly, director of research at the Beijing-based consultancy China Policy, said the envisioned projects of One Belt, One Road are too big and would take too much time to provide any sudden economic benefits for China.

The strategy "is not going to yield strong returns on investment for many years," he said.

Still, unlike many of China's earlier "going out" initiatives that saw Chinese firms encounter friction as they ventured to places such as Africa and South America in search of natural resources, One Belt, One Road is being approached with a greater degree of sophistication and patience, Kelly believes.

"A lot of these ventures will be successful," he predicted. "There's already a smarter feel to a lot of the proposals."

julie.makinen@latimes.com

Times staff writer Makinen reported from Beijing and special correspondent Law from Duisburg. Special correspondent Ramin Mostaghim in Tehran contributed to this report.

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A version of this article appeared in print on May 01, 2016, in the News section of the Los Angeles Times with the headline "China invokes trade history with `New Silk Road' plans - Rail links to Europe and beyond could open new markets and expand influence." — Today's paperToday's paper | Subscribe
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