By Clay Chandler
May 6, 2017

Good morning.

Westerners visiting China rarely stop in Yiwu, the sprawling metropolis just south of Jack Ma’s hometown of Hangzhou. That’s a shame. Yiwu can teach you a lot about how Jack’s company, Alibaba, became such powerhouse–and why China’s entry into the world economy was so disruptive. The city is best known as home of the world’s largest “Small Commodities Market,” a vast wholesale bazaar where you can haggle face-to-face with sales reps from the myriad small and medium-sized enterprises Alibaba’s online platform helped connect to foreign buyers. Kitchen knives, golf equipment, lava lamps, garden gnomes, sex toys; you name it, somebody at Yiwu sells it.

Thanks to the commodities market, Yiwu itself is surprisingly cosmopolitan, but not in the way you might expect. The town center teems with traders from the Middle East, Africa and Central Asia. On my first visit in 2007, I marveled at the throng of kebab vendors, women in hajibs, men smoking shisha pipes. There’s even a huge mosque! Over the years, Yiwu has been featured in the Western press as “Sock City,” and “The Town That Makes Christmas.” The city made global headlines again this week for becoming the eastern terminus of Chinese president Xi Jinping’s ambitious “New Silk Road” initiative.

Yiwu earned this new distinction with the arrival, on April 28, of a bright red locomotive pulling “East Wind,” the first train to travel directly from London to China. The train included 33 cars carrying 88 freight containers. The cargo: vitamins, baby formula and Scotch whisky. East Wind departed from Stanford-le-Hope, Essex just outside London, traversed the English Channel by tunnel to France, then wound its way through Belgium, Germany, Poland, Belarus, Russia and Kazakhstan before crossing back into the Middle Kingdom. There were multiple stops to switch locomotives and trucks to accommodate the many different railway gauges and signaling systems. In all, the 7,500-mile journey required 18 days. London is now the fifeteenth European city to establish direct rail links with China. The hope is that the London-Yiwu route will become a regular commercial freight service.

East Wind’s journey is the latest manifestation of Chinese president Xi’s dream of linking China’s economy to those of Asia, the Middle East, Africa and Europe via a grand infrastructure scheme he calls “One Belt, One Road.” The Chinese leader floated his “belt” and “road” proposals in separate speeches in 2013. They’ve since been merged into a single concept, and touted as Xi’s signature foreign policy initiative.

The plan’s terminology is befuddling. The “belt” involves a network of land-based roads, railways and power projects that would link China’s western regions to Central Asia and eventually Europe. The “road” is refers to a maritime route from Southeast and East Asia round Africa and into Europe.

We’ll hear more about “One Belt, One Road” (a.k.a. OBOR) on May 14-15 when leaders from nearly 30 nations gather in Beijing for an elaborate conference to discuss Xi’s vision. Among those scheduled to attend: Russia’s Vladimir Putin, Turkey’s Recap Tayyip Erdogan, and the Philippines’ Rodrigo Duterte. OBOR, like Yiwu, has yet to attract many Westerners. Italy is the only Group of Seven nation sending a head of state to the Beijing confab, although the managing director of the International Monetary Fund, Christine Lagarde, is expected to make an appearance.

For now, there’s no clear blueprint or timetable for OBOR, and little in the way of organizational structure to implement them even if they existed. Foreign minister Wang Yi acknowledged as much in remarks this week. The summit, he promised, will produce a document defining the initiative’s goals and identifying common values.

Blueprint or no, the scale of China’s aspirations boggle the mind. The various projects discussed in connection with the OBOR initiative would involve more than 60 countries and dwarf the Marshall Plan, the U.S.-led effort to reconstruct Europe after World War II. At the World Economic Forum in Davos this January, Xi said more than 40 countries and international organizations have signed cooperation agreements related to the effort, and that Chinese companies have invested more than $50 billion so far in Belt and Road-related projects. Fitch Ratings, in a recent report, estimated more than $900 billion in projects are planned or underway, and projected that OBOR-related loans from Chinese banks could total $1.2 trillion.fitch

Western experts disagree on whether OBOR should be taken seriously. Louis Kuijs, head of Asia economics at Oxford Economics, says the program could have far-reaching strategic and economic consequences. David Shambaugh, a leading U.S. China scholar, worries that China is ramping up support for the New Silk Road as the West seems in retreat. Many analysts note that Xi’s vision of a New Silk Road burnishes his credentials as a champion of free trade and global cooperation, while U.S. President Donald Trump’s decision to kill the Trans Pacific Partnership trade agreement underscores his image as an “America First” nationalist.

And yet there is reason for skepticism about China’s grand designs. It’s far from clear Belt and Road projects make economic sense. A recent Wall Street Journal commentary argued that, as growth of its economy slows, China will tire of squandering money on Silk Road white elephants. Other observers say Chinese planners and builders, accustomed to operating in China’s authoritarian political system, lack the technical and political skills needed to implement disruptive infrastructure projects in more fractious nations. China’s infrastructure investments have provoked local backlash in Sri Lanka, Indonesia, Malaysia and Myanmar. In many emerging countries, government and business leaders fear “One Belt, One Road” will prove a one-way street, with infrastructure projects fashioned to maximize extraction of resources for China and speed delivery of cheap Chinese exports.

As for the East Wind, South China Morning Post contributor Tom Holland argues there isn’t much call for a new rail service between Yiwu and London. The cost of shipping at 40-foot container by rail from Europe to China, he notes, is about $2,500 — at least $1,000 more than the cost of sending it by sea. Rail may be quicker, but Holland can’t think of any goods for which it would be worth paying such a large premium to get deliver in 18 days rather than 35. And where a single large cargo ship can carry 10,000 containers between Europe and China in five weeks, to shift that many boxes by rail would require nearly 300 East Wind trains leaving at intervals of 80 minutes apart for 17 days. Upgrading the railway network to a handle that kind of traffic would cost tens of billions of dollars. For rail cargo, Holland concludes, the idea of a Belt and Road route between Europe and China is “nothing more than a fanciful curiosity.”

Enjoy the weekend!

Clay Chandler


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