The city where a trillion-dollar plan to dominate global trade began (News)

At a quarter past midnight in Chongqing’s biggest container terminal, milk powder for infants is the hottest new product to come off a freight train that has just rolled in from Germany.

Now, in the humid night, the train is being reloaded for its journey back to Europe.

The high-value cargo – mobile phones, LCD monitors, mechanical parts and clothing – is packed in insulated containers to protect it from Central Asia’s extreme temperatures, which can plummet to minus 30 degrees along parts of the 10,000-kilometre journey.

This morning, another train departed in the opposite direction, to Vietnam, carrying plastic particles for manufacturing to Hanoi.

In this advanced manufacturing hub in the middle of China, the Belt and Road Initiative is no mere slogan nor grand geopolitical strategy – it is a reality.

This misty, mountainous city of 30 million people appears to be where Chinese President Xi Jinping’s signature foreign policy dream – to invest a trillion dollars in infrastructure along new overland and sea routes and connect more of the developing world through trade – began.

The magnificent Yangtze River, known as the Chang Jiang, or “long river” in Chinese, swirls in a languid yellow flow through the ancient river trading port. There are always fishermen on its banks.

There are sights in Chongqing long since lost in the glossy hubs of Beijing and Shanghai. Older men and women carry their daily loads in woven baskets hanging from either side of a bamboo pole balanced on their shoulders.

Chongqing opened to foreign trade in 1895. The river barges sit low in the water as they ply its silty waters, bringing iron ore and coal to Chongqing’s factories, or steel for car manufacturing from downriver.

But it is the recent arrival of the international trains that has transformed trade here. Trains are faster than boat, river or sea.

On a hill above the busy Chongqing rail logistics centre, where lorries queue to enter and unload, a commemorative map gives the clue that this was the prototype for One Belt One Road, as it is known in China.

The map is as much projection as reality. It envisages freight train lines stretching east to Europe, south to Malaysia and as far as Singapore. Sea routes plough through waters from Malaysia to Africa, and then the short-cut to Europe through the Suez Canal.

But the projects are being built. In 2011, a new train, “Yuxinou” started carrying freight overland from China to Germany, setting out from Chongqing, and travelling via Kazakhstan, Russia, Belarus and Poland.

The trains to Europe are dubbed the Land Silk Road Economic Belt. The sea routes, the 21st Century Maritime Silk Road.

These routes notably avoid the South China Sea, those highly contested waters that are now a potential military flashpoint between the US and China. Washington’s Centre for Strategic and International Studies calculates that 64 per cent of China’s maritime trade, worth $US874 billion ($A1.16 trillion), passes through the South China Sea, making it a critical vulnerability for China.

South-east Asia on board

At Yuxinou’s headquarters, next door to IKEA, a world map dominates the wall and the phones are buzzing. Open-plan meeting rooms are full. Clients are being taken through a PowerPoint presentation of the benefits and speed of rail freight to Vietnam.

The Vietnam route opened two months ago, says Yuxinou’s general manager, Qi Dan.

“It is a very meaningful thing to link the entire Asia-Europe continent and south-east Asia through a 13,000-kilometre route,” he says.

As a developing country, Vietnam has a huge demand for European products. The vision is for Vietnamese fruit and electronics not only to enter China by rail but then to continue on to European markets.

Yuxinou is jointly owned by the Chinese, Kazakh, Russian and German state railways, plus a Chongqing state enterprise. Its business is to smooth the customs processing and paperwork for the freight booked along the China-Europe railway – and now Vietnam – so that a container is never unloaded from the train until it reaches its destination.

Chinese products can reach Europe in 13 days compared to 30 to 40 days by sea.

It takes five days for goods to travel to Vietnam. But Qi says the goal is a rail freight service to Thailand (a Chinese-backed railway is under construction) and, ultimately, all the way to Singapore along Malaysia’s east coast.

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The head of the Singapore Chamber of Commerce’s branch in Chongqing, Amos Goh, explains that Singapore is the largest foreign investor in Chongqing, focused on logistics, aerospace and IT.

And, though the rail line won’t reach Australia, Qi says there are business opportunities for Australia too.

“Central Asian countries may use our railway to reach Singapore, then a fast and direct shipping route to Australia will be cheaper than air transport,” says the freight logistics executive.

Qi also explains the loftier benefits of the rail line in Belt and Road terms: “We want better connections and communication channels, whether it is the economy, trade, culture or even politics. We want China to understand the world in a better way, and let the world understand China.”

He adds: “It is good for globalisation.”

Slogans and aspirations

The “Belt and Road Initiative” is now a far grander vision than the map on the hill in Chongqing. It describes Xi’s strategy for a rising China to engage the world. Its reach stretches far and wide. It is designed to secure supply lines for the energy and food that China’s 1.3 billion people rely on.

And it’s become a political mantra in a Chinese communist system that loves a mantra for the times.

It is formally enshrined in the Chinese constitution. It is so ubiquitous that it’s become a catchcry attached by the marketing savvy and politically astute to any foreign-related investment project or forum, even offshore tourism ventures.

After Xi gave two speeches in Kazakhstan and Indonesia in 2013, calling for the building of the economic belt and the maritime road, overseas Chinese infrastructure projects already underway such the massive China-Pakistan Economic Corridor – a roads and port project – were rebadged as Belt and Road.

By the end of 2017, 38 cities in China had rail freight links to 36 cities in the European Union.

By the time an international Belt and Road Forum was held in Beijing in May 2017, attracting 29 world leaders, about 60 nations had signed memorandums of understanding to join, as well as the United Nations. That number is still growing.

The proposed maritime route now extends through the South China Sea and into the Pacific. There is even talk of it encompassing cruise ship tourism, requiring new, larger ports.

The 2017 forum was designed to give international legitimacy to the grand project, and to invite other countries to participate in setting rules, the Chinese foreign ministry said. Yet key Western countries stayed away, or sent ministers or trade officials, not prime ministers. Australia, declining to formally sign up or link the Chinese-owned Darwin Port to the Belt and Road, sent Trade Minister Steven Ciobo.

Two state banks, the China Development Bank and the Export-Import Bank of China, had by then already loaned $US200 billion to BRI projects. Xi boosted another funding pot, the US$40 billion Silk Road Fund, with an extra 100 billion yuan ($A20.7 billion).

But by now, concerns were being aired in the West about the motives for the big project and the billions in cheap loans on offer. Was it simply a way for China to export its overcapacity of steel and concrete and avoid huge layoffs at state-owned Chinese construction companies by finding new places for them to keep building stuff?

Would Chinese companies be favoured in tenders?

By year’s end, fear of debt trap diplomacy began to grow. Sri Lanka handed a controlling 70 per cent stake in a 99-year lease over its Hambantota port to a Chinese state-owned company after being unable to meet loan repayments. The Chinese-built cargo port ran at a loss.

Pakistan cancelled a dam project on national interest grounds after the Chinese construction partner reportedly requested an equity stake. And by June, Malaysia, Myanmar and Nepal were reportedly reviewing whether to go ahead with high-cost Chinese infrastructure projects.

Will the debt trap bite the lender?

In April, IMF chief Christine Lagarde said although BRI was starting to show progress, it faced two key challenges: the first was “ensuring that Belt and Road only travels where it is needed”. This would prevent failed projects and the misuse of funds.

The second was preventing “a problematic increase in debt” in developing countries receiving BRI loans. She said China’s leadership was aware of the potential risks, and that a new government oversight agency might help.

The International Development Cooperation Agency was established by the government in April to keep an eye on its overseas aid, including BRI. It’s an acknowledgement of concerns within the country that BRI had become too unwieldy.

It also acknowledged the geostrategic nature of BRI. Parliamentary documents say the agency’s purpose is to “give full play to aid as an important measure of major power diplomacy”.

But even as One Belt One Road became a political anthem for an increasingly powerful President Xi, think tanks were expressing concern about the risk of taxpayer money being wasted as developing nations took big loans to build infrastructure with little prospect of paying it back.

Significantly, the former president of the Export-Import Bank of China, Li Ruogu, warned in April that few Belt and Road countries had a good credit rating and “the investment risks are relatively large”.

“Raising enough funds for the development of these countries is arduous,” he said.

Part of the solution, according to central bank governor Yi Gang, is for more international banks and commercial lenders to get involved to help China fill an annual infrastructure funding gap of up to $US600 billion across all Belt and Road countries.

Australian banks are said to be watching BRI with interest, but want to see more “deal flow” before committing.

Chinese cash cows

The law firm Herbert Smith Freehills acts for some of China’s biggest construction and energy companies, which are making overseas investments now badged as BRI.

Asked what has changed, Monica Sun, a partner in the firm’s Beijing office, replies: “Previously, there was criticism in host countries of the motives of outbound investment by Chinese companies. Now China is bringing technology and infrastructure, and power and infrastructure, to help countries.”

BRI helps Chinese companies create “a more positive image for their investment, but it is important for them to make sure the business proposition still has a bankable financial return”.

Michelle Li, who handles contract disputes for Herbert Smith Freehills, suggests Chinese construction companies can be viewed as a money pot by some developing countries, and she has heard of companies being asked to provide up to 30 per cent of financing to get a project off the ground.

“There is a somewhat unfair perception of Chinese construction companies always being able to bring Chinese money with them. More often they are reluctant investors,” she says.

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Chinese contractors on projects that are no longer commercially viable have been asked to turn unpaid fees into equity, she says.

“They have found it is difficult to get much done without taking equity, to avoid accepting delayed payments, which is effectively just a different form of being dragged into investing in the project itself.”

The biggest impediment to developing countries building much-needed infrastructure has been the perception that these projects are too risky for commercial investors. The arrival of the BRI sovereign funds, such as China’s Silk Road Fund, may encourage more commercial banks to become involved in co-funding such projects, which may take the pressure off Chinese companies.

By the end of 2017, the Silk Road Fund had invested $US7 billion in 17 deals, while the Asian Infrastructure Investment Bank had approved 20 projects and invested $US3.7 billion.

What does it mean for Australia?

The big question for Australia, which has benefited from strong Chinese investment over the past decade, is whether it will miss out if Beijing begins increasingly guiding investment towards BRI countries, its new foreign policy priority.

According to China’s Ministry of Commerce, from January to April this year, the import and export value of goods trade between China and BRI countries was $US389.1 billion, up 19.2 per cent compared to last year.

Direct investment increased by 17 per cent and project contracts soared by 28 per cent.

Sun thinks there is little chance Australia will miss out, even if the Turnbull government doesn’t formally sign on to the BRI.

“Practically, Australia is still a top destination for outbound investment,” she says.

“It is a stable country, which is attractive to Chinese investors … In Africa, it is easier [for a major infrastructure project] to get government financing if the country is BRI perhaps, but in Australia, the project may not need government funds because it can more easily access international financing.”

Li agrees: “A country which has a stable government like Australia, which is resource rich, has a reliable legal system and good access to private financing, is therefore more attractive to Chinese companies.”

A great hope

A river barge pulls slowly into Chongqing’s Guoyang Port. It has taken a month to travel from Shanghai.

Modern Chinese companies manufacturing high-end technology products and cars prefer to send goods by train these days, but even so, Chongqing’s old river ports are seeing a revival in their fortunes as Belt and Road snakes out around the globe.

In 2016, Xi visited and described this newly combined river and rail port as Belt and Road’s “great hope”.

“A few years ago this was a field,” says Su He, manager of Guoyang Port’s railway transportation department, gesturing to a busy rail loading yard piled high with containers. Giant orange cranes heave the boxes up, and onto the decks of a train.

In an average day, 200 to 300 train carriages are loaded with containers.

A boatload of clothes from Thailand is unloaded from a river boat and the goods transferred to rail for the journey to Europe. There are 13 rail lines coming into the port, which is a free trade zone.

The boats also unload iron ore from Brazil and South Africa.

As China reshapes the world’s trade routes, this is one risk that Australia should contemplate.

Iron ore shipped from Western Australia at low cost feeds China’s steel mills. The trade has grown, largely because of our proximity. It is our second-largest export earner.

But in the future, will China’s “belt” of road and rail routes, and its maritime “road” deliver key food and energy supplies more cheaply and more quickly from somewhere else?