The Ukraine war has stretched past a month, and its negative impact is spreading to China’s external trade. The China Railway Express (CRE), also known as the China-Europe Railway Express, has recently recorded a sharp drop in rail freight volume passing through Russia and Ukraine.
The inaugural train for the CRE departed from Chongqing on the Chongqing-Xinjiang-Europe Railway in March 2011. Traversing Eurasia, the CRE later became an important part of China’s Belt and Road Initiative (BRI), which was launched in 2013.
The CRE is mainly divided into the northern, central and southern routes, and they depart China from Manzhouli and Erenhot in Inner Mongolia, and Alashankou in Xinjiang respectively, transporting Chinese goods westwards to Europe through Russia, Mongolia and Kazakhstan.
Many European businesses are worried that the cargo will be affected by the fighting en route, and are more conservative in ordering goods from China, with the freight volume moving towards Europe now down by “about 50%” compared with before the war broke out.
At a press conference during China’s Two Sessions in early March, Chinese State Councilor and Foreign Minister Wang Yi stated that in 2021, the CRE reached new records in freight volume and the number of freight services. It ran more than 15,000 cargo trips, up by 29% year-on-year, providing a strong boost to economic recovery for various countries.
However, there are signs that winter is coming for the CRE, bogged down by the war in Ukraine.
Tang Yuan (pseudonym), Chongqing-based logistics operator for the Chongqing-Xinjiang-Europe Railway, told Lianhe Zaobao that the Ukraine war has had a “huge impact” on this stretch of the CRE that supplies goods to the Russian and European markets, because part of the railway passes through high-risk areas such as Russia, Belarus, Ukraine and Poland. Many European businesses are worried that the cargo will be affected by the fighting en route, and are more conservative in ordering goods from China, with the freight volume moving towards Europe now down by “about 50%” compared with before the war broke out.
Another Chongqing-based logistics operator Zheng Chong (pseudonym) noted that logistics giants such as DHL and Kuehne+Nagel have stopped selling CRE services, and market confidence in the route has been affected. He said, “This is because there is a lot of uncertainty. The entire journey takes about 20 days, and who knows what might happen along the way… especially since western Ukraine has also come under some bombardment.”
Zheng pointed out that it is mainly small- and medium-sized enterprises (SMEs) that are still using the CRE as rail freight is cheaper than sea freight and “price-sensitive SMEs are willing to take the risk”.
Tang added that as the market is highly concerned about secondary sanctions, the volume of goods transported to Russia from China via the CRE has plunged by “at least 90%”.
Export volume to Russia on CRE plunged 90%
Tang added that as the market is highly concerned about secondary sanctions, the volume of goods transported to Russia from China via the CRE has plunged by “at least 90%”.
Director of Washington-based think tank Stimson Center's China Program Sun Yun said that after Russia annexed Crimea in 2014, many Chinese banks and traders became more cautious in trading with Russia, due to concerns about Western sanctions.
She added that it would probably be known in the near future whether the US would impose secondary sanctions on China which would impact normal trade between China and Russia. Such a prospect would depend on the policies and attitude of the Chinese authorities. Currently, China remains unwilling to reproach Russia for invading Ukraine, while claiming to maintain normal cooperation with Russia in trade, economy, finance and energy.
Now, with high inflation and rising energy prices, countries are shifting to the consumption of existing inventory, thus reducing imports.
Apart from the war leading to a drop in the volume of goods transported on the CRE, Tang said that many countries are moving towards living with the virus and resuming production, resulting in less demand for Chinese goods and a lower volume of goods transported by rail, sea and air. Also, due to the coronavirus, countries have been stockpiling goods over the past two years, leading to a bottleneck in the supply chain. Now, with high inflation and rising energy prices, countries are shifting to the consumption of existing inventory, thus reducing imports.
Many logistics companies have started cutting down prices in panic, so as to compete for the limited freight orders on the market. Tang said, “The CRE has to keep running, but there are too few goods. Everyone is cutting prices, and drastically at that.” The costs of rail and sea freight have gone down by 30% compared with before the war, and if the conflict does not end soon, prices may drop even further.
Over the past two years of the pandemic, the CRE operators have made a pile, but their glory days may fade in the next couple of years. Tang lamented, “This year will be a struggle. Supply has exceeded demand, and logistics operators will be caught in an involution (内卷).”
Challenges to stay connected
Wang Huoquan, deputy general manager of Yuxinou-Pacific Integrated Logistics Group Multimodal Company Limited (YPL), noted that the CRE is currently facing the “most extraordinary” situation since it started operations.
To handle future uncertainties, besides consolidating its core CRE operations, YPL would also step up its transformation, and expand its other businesses such as digital logistics, so as to better meet the needs of buyers and sellers.
Chen Sizhong, consultant for Sino-Singapore Chongqing Connectivity Solutions Co., said that the lower freight volume on the CRE would actually help to ease the previous congestion on the route due to the global supply chain crisis.
... the CRE has started to work with insurance companies to have containers covered against war, to ease the concerns of sellers and suppliers.
Tang added that the time to transport goods between China and Europe has significantly shortened from 20-30 days previously to about 15-16 days today. To encourage the market to continue using rail transport, the CRE has started to work with insurance companies to have containers covered against war, to ease the concerns of sellers and suppliers.
Wang Huoquan remained confident about the CRE's prospects. YPL has expanded operations to eastern Europe, and has set up a joint venture in Hungary. The company applied for a site in mid-February and plans to invest 450 billion euros (US$500 billion) to build a 20-hectare (about the size of two football fields) multimodal logistics centre that can provide water-rail combined transportation services at the Danube River. The new logistics centre will process cargo on the CRE going towards eastern Europe, and serve inland and rail logistics within Europe.
Chen also thought that some parts of the CRE might increase in strategic importance, and serve to minimise the impact of the pandemic, war and other risks. He said, “China will assess the strategic value and usefulness of these routes… if two of the three routes are affected, then the third will probably become the most stable strategic route.”
Russia-Ukraine war hits Eurasia supply chain
Director of the Institute of International Affairs at the Renmin University of China Wang Yiwei assessed that the Russia-Ukraine conflict has had a profound impact on the global supply chain and connectivity, and has hit food and energy security, which are key focuses of the BRI.
Wang Yiwei pointed out that while Ukraine was originally one of the gateways to Eurasia, it is now an obstacle because of the war. He said, “The biggest impact on the BRI is not just issues involving the supply chain and global connectivity but more so investor confidence and global uncertainty — will the war trigger spillover effects?”
Sun also stressed that the impact of the Ukraine crisis on the BRI in Eurasia includes “all aspects”. Security instability has led European countries to prioritise national security, implying that policies and resources that could have been invested in economic development would be reduced.
She added that because Russia has not won the war, it could adopt desperate and risky measures including escalating the war with the use of tactical nuclear weapons. “This would definitely create great uncertainty for Eurasian countries,” she said.
There are currently no signs that Central and Eastern Europe, West and Central Asia, and other regions are losing momentum in their cooperation with China on the BRI... — Associate Professor Li Mingjiang, S. Rajaratnam School of International Studies, Nanyang Technological University
Associate professor Li Mingjiang of the S. Rajaratnam School of International Studies at Nanyang Technological University told Zaobao that the current impact on the BRI is focused on two aspects: the CRE and its related trade; and BRI projects in Russia and Ukraine. There are currently no signs that Central and Eastern Europe, West and Central Asia, and other regions are losing momentum in their cooperation with China on the BRI, and “other major impacts are not yet obvious either”.
Competition with the US’s Indo-Pacific Economic Framework
The academics Zaobao spoke with also noted that the Russia-Ukraine war would further intensify competition between the BRI and the US’s Indo-Pacific Economic Framework for Prosperity (IPEF) in the future.
Sun felt that China-US relations could further worsen as a result of the Russia-Ukraine war, with the US deepening its rivalry with China. “Competition between the BRI and the IPEF is likely to intensify,” she said.
Wang Yiwei said that the IPEF was the US’s prototype for developing a new globalised economy. “This is not just a competition with the BRI. The plan is to de-sinicise or weaken China’s role, position and interests in the new round of globalisation,” he observed.
Li also remarked, “Competition between the BRI and IPEF is inevitable… To a certain extent, the Ukraine crisis will exacerbate this rivalry.” This is because the West eagerly wants to decouple from the Chinese and Russian economies.
But he expects that the actual effects of such an economic decoupling would be gradual and limited. After all, China holds a massive trade volume and it would be extremely difficult to decouple from it. “In the end, decoupling may not be fully achieved, and China may only be cut off from just a few supply chains,” he said.
Sun also pointed out that competition between the BRI and the IPEF is largely dependent on the outcome of the Russia-Ukraine war as this would affect the US’s future resource allocation to Europe and the Indo-Pacific. She said, “If Russia becomes more aggressive after the end of this war… the US’s security policy focus will lean towards Europe.”
She made the point that the BRI is a means for the Chinese government to mobilise financial resources to create a global market for its excess domestic production capacity. But after seven or eight years since the launch of the BRI, its strength is weakening. In contrast, the IPEF is better placed to shape the economic framework, norms and rules of the international economy. Hence, the BRI must also formulate a framework or model to compete with the IPEF, and it would be interesting to see what the BRI can come up with.
China-Europe relations will be affected
At the press conference during the Two Sessions, Wang Yi stated, “China and Europe are two major forces for world peace, two big markets for common development, and two great civilisations for human progress. The China-Europe relationship is not targeted at any third party, nor is it subjugated to or controlled by any third party.”
He also implied that the US was “unhappy to see the steady growth of China-Europe relations” and thus fabricated the narrative of the "China threat", played up the competition with China, clamoured to see China as a "systemic rival", and even imposed sanctions and provoked confrontations with China. He urged China and Europe to be “on high alert against these developments”.
But Europe overall believes that China has not been neutral enough, despite professing to practise a balanced diplomacy, as it has refused to call Russia’s attack on Ukraine an “invasion”. — Sun Yun, Director of the China Program, Stimson Center
Sun pointed out that the Ukraine crisis would certainly affect China-Europe relations. Europe is split down the middle regarding its views on China's stance. Eastern European countries that suffered under the hands of the former Soviet Union are more critical of China while Northern and Western Europe have a more objective view. But Europe overall believes that China has not been neutral enough, despite professing to practise a balanced diplomacy, as it has refused to call Russia’s attack on Ukraine an “invasion”.
In Li's view, on the other hand, China-Europe relations have yet to significantly slip back. No doubt, some European elites think that China is too partial to or even condones Russia’s behaviour in Ukraine, and this would “to a certain extent, affect the political mutual trust between the European Union, Europe and China, causing both sides to lose trust in each other”. But if China’s balanced diplomacy can be better executed, it may help reduce the impact on China-Europe relations.
Sun added that Europe would watch China’s moves carefully, chiefly in terms of whether China would supply Russia with arms, and whether it would provide economic support to Russia. She said, “If China is able to maintain a relatively rational and neutral attitude towards both of these things, it would have a great impact on Europe’s perception of China.”
... March and April this year would be a major test for foreign trade. But China’s western regions could still make use of the Chengdu-Chongqing economic circle and internal circulation to mitigate the risks... — Yao Shujie, Economics Professor, Chongqing University
Using internal circulation to mitigate risks
Yao Shujie, Chongqing University economics professor and University of Nottingham Ningbo assistant provost, told Zaobao that the Russia-Ukraine war would inevitably affect the BRI not only in terms of railways but also in terms of exacerbating the risks of decoupling among major economies. He predicts that sea freight could also be affected if war continues.
Yao pointed out that Chongqing’s new southbound western land-sea trade corridor is still operating smoothly and steadily at present. Thus, goods originally transported via the CRE would most likely be rerouted to this strategic corridor to mitigate the impact on the CRE. Hence, there might not be a particularly big impact in the end.
Amid the mounting downward pressure on China’s economy, Yao was of the view that March and April this year would be a major test for foreign trade. But China’s western regions could still make use of the Chengdu-Chongqing economic circle and internal circulation to mitigate the risks to the external circulation through infrastructure development, digital transformation, strengthening domestic trade and other measures.
He also assessed that China’s economy still had room to grow this year. Adjustments could be made to the country's industrial structure to drive further upgrades, transforming low-to-mid end production to mid-to-high end, thereby improving product quality and competitiveness. He also thought that China would be able to optimise the spatial distribution of foreign trade and deepen exports to other trading partners such as Africa in order to reduce the impact of the Russia-Ukraine war on foreign trade.
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