China’s Belt & Road Initiative – Blog #8

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(Image credit: srilankabrief.org)

This is the eighth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (47 pg, 241 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #8 – China-Central Asia-West Asia Economic Corridor

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

A key project in this corridor is the Khorgos Gateway, which connects China by rail, to a ‘dry’ port (not on any body of water) in Kazakhstan.  Kazakhstan, in turn, is a major link to Europe and Khorgos is critically important to the rail network between China and Europe.  This facility is where the rail system deals with rail gauge differences.  Using large cranes, the containers are lifted from one train on one track gauge to another train on a different rail gauge.  (As a former Soviet republic, Kazakhstan has a wider gauge track than Chinese rail and Western rail.[1]  When trains reach the Belarus-Poland border, the procedure has to be repeated in reverse).[2]  Supply chains using rail systems going between China and former Soviet countries or between Western countries and former Soviet states must be aware of possible delays that can occur if rail traffic is heavy and beyond the facility’s capacity to move train cargoes quickly.  The huge facility also includes factories and warehouses and lots of land for expansion to accommodate expected economic development and rail traffic.[3]

Khorgos also has a vital position in other important rail networks. From Khorgos to Almaty in Kazakhstan, the rail line goes to Tode Bi, where one line goes north to Western Europe (London is the endpoint) and one line goes west and then south and west again to Iran.[4]  These both build upon legacy railways dating from when Kazakhstan and the other countries along the path that were part of the Soviet Union.  These long-distance rail lines are discussed below.

Again, as has happened in other countries with major “Belt and Road” projects, Kazakhstan has ended up selling a significant share of the Khorgos Port to China, in this case, to COSCO Shipping Corporation and Jiangsu Lianyungang Port Co, each of which each now owns 24.5%.[5]

China is Kazakhstan’s major trading partner in an exchange pattern that follows most of China’s trade with less-developed countries.  Most of Kazakhstan’s exports to China are oil and minerals.[6]  China expects this corridor to be a major route not only for its exports to Kazakhstan but also for goods bound for Europe.  China has also become a major direct investor in Kazakhstan with its 2005 purchase of PetroKazakhstan, which controls the second-largest proven oil reserves in the country.[7]

Becoming part of the “Belt and Road Initiative” has brought a flood of loans, grants, investments, and technical assistance to Kazakhstan, not just from China directly, but also from sources such as the World Bank, the European Bank for Reconstruction and Development, and the Asian Development Bank.[8]  These funds will greatly help Kazakhstan continue toward its goal of becoming a major regional player.  Kazakhstan has signed an agreement with the OECD that it will foster government transparency and improvement of the investment climate for foreigners.  Kazakhstan hopes association with the OECD will assist it in achieving its development goals.[9]

Another major infrastructure project in this Corridor—or rather several projects, including ones going back to when Kazakhstan was part of the Soviet Union—is the Central Asian Gas Pipeline.  The original pipelines connected Russia via Uzbekistan and Kazakhstan to Turkmenistan’s Dzharkak field in the Amu Darya Basin.  Before the “Belt and Road Initiative” (in 2006), China contracted with Turkmenistan for a long-term supply of natural gas.  It expects to import 65 million cubic meters per year.  Four pipelines are now operational.  China is seeking reliable natural gas supplies to enable it to meet more of its energy needs with cleaner natural gas instead of petroleum.[10]

The train lines referenced above are major parts in the “belts” of the overall “Belt and Road” strategy.  The train line from China to Iran continues from Tode Bi in Kazakhstan to Arys and then south to Tashkent in Uzbekistan and west to Samarkand and Bukhara.  From here, it crosses into Turkmenistan, continuing to Bayramaly and then to Mashhad in Iran.  The endpoint of the 10,400km journey from China is Tehran.  The journey takes 14 days,[11] at least twenty days shorter than a sea-land journey between the two countries.[12]

The China to London route is the other major transnational railway that runs through Khorgos.  This 12,000 km. line runs from Yiwu in the far East of China through Central Asia and Eastern Europe and the Eurotunnel into London, England.  The journey takes 18 days and passes through some of the most challenging terrain on earth, including the Gobi Desert and the Qilian Mountains.[13]

Both of these rail lines represent breakthrough connections between China and Iran and China and Europe and greatly reduce transit times, compared to any other land or sea alternatives.  However, the areas through which the lines pass and in some places the lines themselves, are not without significant risks to supply chains, in the form of political unrest, local corruption, various types of infrastructure risks—including substandard roads and communications, legal and regulatory risks, and foreign trade and payment risks.[14] [15]

As one observer has noted, “For China’s global ambitions, ‘Iran is at the center of everything.’”[16]  Iran has been a trading hub in East-West trade for centuries going back to the original Silk Road.  China’s involvement with Iran has changed over time, in response to economic considerations as well as geo-political ones, but China has been a relatively reliable trade and development partner with Iran throughout all of the political upheavals of the last half century.  With the departure of the U.S. from the Iran nuclear agreement and the re-imposition of sanctions, Iran will increasingly turn to China.  China is the largest importer of Iranian petroleum already and Beijing has indicated that it might not yield to the threat of U.S. sanctions and will continue its imports from Iran.  In addition, many expect that as Western companies yield to the sanctions and shut down their Iran operations, the Chinese will step in and take them over.[17]

Beyond trade, China has been very important to Iran’s economic development, especially during periods when Iran has been treated as an international pariah and has lacked both capital and technical assistance from other countries.  Iran’s road and rail networks are sparse and still antiquated overall, but China has had a major role in providing what is there.  Also, over the years, Chinese engineers have built bridges, roads, dams, tunnels throughout Iran and the metro (subway system) in Tehran.[18]

China has invested in rail infrastructure leading to Iran, as noted above.   The Mashhad-Tehran line, part of the “Belt and Road” railroad line running from Khorgos through Almaty in Kazakhstan and then west and south, has been operational for freight for a couple of years now. (See below).

Attention now is on developing an electrified line between Mashhad and Tehran and links from Tehran to Turkey, connecting to Europe in the future and enabling faster transit times.[19]  The contract for this work is with China National Machinery Import and Export Corporation (CMC), with two-thirds of the cost underwritten by the Chinese government and the balance by Chinese insurer China Export and Credit Insurance.[20]

Until recently, China has focused its port development in the Persian Gulf/Gulf of Oman/Arabian Sea region in Gwadar, Pakistan, even though another port on the Gulf of Oman across the border in Iran may be in a better geographic location to serve China’s “Belt and Road” needs, with potentially shorter distances to  various parts of “belt and Road” network.[21]  China has avoided this port—Chabahar—because it is a project sponsored by China’s Asian arch-rival, India.  That may be about to change.  Iran has sought faster progress on the port projects and, earlier this year, invited both China and Pakistan to participate in the port development, much to India’s consternation.  What India’s response might be if China steps in is unclear.  “Indian officials have repeatedly said the port is crucial for India as it will allow India to bypass Pakistan in accessing Afghanistan and central Asia.”[22]  More than that, Chabahar is a vital factor in India’s maritime strength and a counter to China’s growing dominance of all of the oceans and seas from the Pacific Ocean through the Indian Ocean to the Red Sea.

Chabahar has problems other than the China-India rivalry—Saudi opposition to development of the port and its surrounding area (apparently because of potential competition to Saudi oil, among other reasons)[23] and aggressive U.S. efforts to isolate Iran again, following the withdrawal of the U.S. from the Joint Comprehensive Plan of Action (JCPOA—Iran nuclear agreement).   What happens next for Chabahar in this highly-charged political atmosphere is anybody’s guess.

RAIL ROUTE FROM XINJIANG PROVINCE, CHINA TO TEHRAN

Source: Financial Tribune, “Iran, China Team Up on New Silk Road Project”, https://financialtribune.com/articles/domestic-economy/66450/iran-china-team-up-on-new-silk-road-project

 

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

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BRI Blog next Monday will be:

Central and Southeast Asia Connection with New Eurasia

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There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] South China Morning Post.  Chapter 5—Belt and Road Initiative.  “Khorgos:  the biggest dry-port in the world.” http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/khorgos.html.   Accessed 17 July 2018.

[2]Ibid.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/khorgos.html

[3]Rapoza, Kenneth.  “Kazakhstan Bets Big on China’s Silk Road.”  Forbes.   18 July 2017.  https://www.forbes.com/sites/kenrapoza/2017/07/18/kazakhstan-bets-big-on-chinas-silk-road/#25827a685805.  .

[4] South China Morning Post.  Chapter 3:  Belt and Road Initiative.  “Iran is a key access point to the Middle East.”  Accessed July 17, 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/iran.html.

[5] Rapoza, Kenneth. Op.cit.   https://www.forbes.com/sites/kenrapoza/2017/07/18/kazakhstan-bets-big-on-chinas-silk-road/#25827a685805

[6] Runde, Daniel.  “Kazakhstan:  the Buckle in One Belt One Road.” Forbes.  29 June 2015.  https://www.forbes.com/sites/danielrunde/2015/06/29/kazakhstan-buckle-one-belt-one-road/#205394ee6b5b.

[7] Ibid.   https://www.forbes.com/sites/danielrunde/2015/06/29/kazakhstan-buckle-one-belt-one-road/#205394ee6b5b

[8] Ibid.  https://www.forbes.com/sites/danielrunde/2015/06/29/kazakhstan-buckle-one-belt-one-road/#205394ee6b5b.

[9] Rapoza, Ken.  Op.cit.  https://www.forbes.com/sites/kenrapoza/2017/07/18/kazakhstan-bets-big-on-chinas-silk-road/#2cc1c0658053.

[10] South China Morning Post.  Chapter 4.  Belt and Road Initiative. “The Central Asian gas pipeline”.   Accessed 17 July 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/gasPipeline.html

[11] South China Morning Post.   Chapter  3.   Belt and Road Initiative.  “The railway to Iran.”  Accessed 17 July 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/iran.html

[12] Noack, Rick.  “China’s new train line to Iran sends a message to Trump:  We’ll keep trading anyway.”  The Washington Post.  11 May 2018.  https://www.washingtonpost.com/news/world/wp/2018/05/11/chinas-new-train-line-to-iran-sends-message-to-trump-well-keep-trading-anyway/?utm_term=.9e88fecc4506

[13] South China Morning Post.  Chapter 1.  Belt and Road Initiative.  “Plugging China into Europe.”   Accessed 17 July 2018.  http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/europe.html

[14] South China Morning Post.  Belt and Road Initiative.  “The Railway to Iran.” Op.cit    http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/iran.html

[15] South China Morning Post.  “Plugging China into Europe.”  Op.cit. http://multimedia.scmp.com/news/china/article/One-Belt-One-Road/europe.html

[16] Erdbrink, Thomas.  “For China’s Global Ambitions, ‘China Is at the Center of Everything’” The New York Times.  25 July 2018.  https://www.nytimes.com/2017/07/25/world/middleeast/iran-china-business-ties.html

[17] Taylor, Guy and Dan Boylan.  “China moves to cash in after Trump exits Iran nuclear deal.”  The Washington Times.   7 June 2018.  https://www.washingtontimes.com/news/2018/jun/7/china-steps-business-iran-after-trump-exits-nuclea/

[18] Harold, Scott and Alireza Nader.   “Occasional Paper.  China and Iran.  Economic, Political and Military Relations.”  RAND Corporation, Center for Middle East Public Policy.  2012.  Pp. 11-12.  https://www.rand.org/pubs/occasional_papers/OP351.html

[19]Erdbrink.  Op. cit. https://www.nytimes.com/2017/07/25/world/middleeast/iran-china-business-ties.html

[20] Jalili, Saeed.   “Iran, China Team Up on New Silk Road Project.”  Financial Tribune.   14 June 2018.  https://financialtribune.com/articles/domestic-economy/66450/iran-china-team-up-on-new-silk-road-project

[21]Erdbrink. Op. cit.  https://www.nytimes.com/2017/07/25/world/middleeast/iran-china-business-ties.html

[22] The Times of India.  “Iran says it has offered Pak, China participation in Chabahar’s port project.”  14 March 2018.  https://timesofindia.indiatimes.com/india/iran-says-it-has-offered-pak-china-participation-in-indias-chabahar-port-project/articleshow/63292150.cms

[23] Financial Tribune.  “Rivalry at Iran’s Chabahar Port”.  2 July 2018.  https://financialtribune.com/articles/economy-domestic-economy/89034/rivalry-at-iran-s-chabahar-port

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© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.