The New Steel Silk Road

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by Richard (Rick) Mills Market Oracle

     

The Silk Routes, collectively known as the "Silk Road", refer to a 7000 mile network of interlinking trade routes that were used for three millennia. They connected China, India, Tibet, the Persian Empire, the Mediterranean countries and parts of North and East Africa.

The Maritime Silk Road was a network of shipping lines from the Red Sea to East Africa, India, China, and Southeast Asia. The network consisted of ship routes in two general directions: the East China Sea routes and the South China Sea routes.

The East China Sea routes connected the Chinese mainland to the Northeast Asian regions of the Liaodong Peninsula, the Korean Peninsula, and the Japanese Isles. The South China Sea route heads down, then up, through the Malacca Straits into the Bay of Bengal, opening up China to the coasts of the Indian Ocean, the Red Sea, the Persian Gulf and the African continent.

These shipping lanes are still in use.

A Southern Silk Road

Willem Buiter and Ebrahim Rahbari, Citigroup Inc. economists, predict growing trade links between emerging markets will increase worldwide trade in goods and services from $37 trillion in 2010 to $149 trillion in 2030. They also estimate that China will overtake the U.S., within four years, to become the world’s largest trader.

"It is the start of a new cycle. China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system." ~ Ben Simpfendorfer, author The New Silk Road

Today trade is flowing on a "Southern Silk Road" connecting Asia, the Middle East, Africa and Latin America:

  • Trade between China and South Asia is still growing
  • China’s trade with Africa is expected to double by 2015
  • Africa’s top trading partners, in terms of bilateral trade volume, are China and India
  • Over 50 per cent of India’s trade is now with other Asian countries while only 32 per cent is with the United States and Europe
  • China’s trade with Arab countries is growing by 30 percent annually and India’s is expected to grow even quicker
  • China’s trade with Latin America is growing twice as fast as U.S. trade with the region and India’s trade within the region has increased 10 fold in a decade

Trade between developing nations is forecast to be larger than trade among developed nations by 2015 – HSBC is calling for a ten-fold increase in developing nations intra-trade over the next four decades.

"Thick borders discourage capital inflows, keep people trapped in rural poverty and leave economies persistently underperforming. Only if they can connect with each will emerging nations be able to turbo-charge their economic futures." ~ Stephen King, HSBC’s London-based chief economist, author of Losing Control: The Emerging Threats to Western Prosperity

The MSCI Emerging Markets Index has risen 102 percent since January 2009, that’s compared to the 41 percent gain in the MSCI World (MXWO) Index of 24 developed markets.

The New Steel Silk Road

The real point of modernizing railways, and the major reason for China’s global push for High Speed Rail, is the increased movement of cargo – a shift in passenger traffic to the new high speed routes frees up space on the older, now congested legacy lines for increased freight shipping.

Shippers can switch to cheaper rail transport instead of using trucks for long haul of heavy bulky cargos. According to the World Bank, because of this shift and the construction of additional freight lines, the tonnage hauled by China’s rail system increased, in 2010, by an amount equal to the entire freight carried by the combined rail systems of Britain, France, Germany and Poland.

China’s total investment in high speed rail was first reported to be about US$300 billion – the Chinese planned a 12,000km high speed passenger network supplemented by 20,000km of mixed traffic lines capable of 200-250kph.

Recent reports indicate that over US$600 billion will be spent on rail construction during the 2011-2015 Five Year Plan. By 2020 there would be at least 16,000 km of passenger dedicated high speed rail. The total rail network by 2020 would be 120,000 km – 80% of it electrified.

China has plans to construct its high speed rail line through Asia and Eastern Europe in order to connect to the existing infrastructure in the European Union (EU). Additional rail lines are planned into South East Asia as well as Russia – this will likely be the largest infrastructure project in history.

The project will include three major high speed lines:

  • UK/Europe to Beijing (8,100 km) and then extend south to Singapore
  • A second line will connect into Vietnam, Thailand, Burma and Malaysia
  • The third line will connect Germany to Russia, cross Siberia and then back into China

Financing and planning for this monumental project is being provided by China – who is already in negotiations with 17 countries to develop the project. In return the partnering nation will provide natural resources to China.

"We will use government money and bank loans, but the railways may also raise financing from the private sector and also from the host countries. We would actually prefer the other countries to pay in natural resources rather than make their own capital investment." ~ Wang Mengshu, a member of the Chinese Academy of Engineering and a senior consultant on China’s domestic high-speed rail project

The exact route of the three lines has yet to be decided, but construction for the South East Asian line had already begun in the Chinese southern province of Yunnan and Burma is about to begin building its link. China offered to bankroll the Burmese line in exchange for the country’s rich reserves of lithium, a metal widely used in batteries.

Russia

Russian Railways, the state rail monopoly, plans to build a €15bn high speed railway line between Moscow and St Petersburg that will eventually reach at least ten Russian cities in the European part of the country.

China sees Russia as a land bridge to Europe and has urged the country to extend its planned HSR network further east to connect the two countries.

Russia and China have announced plans to build a new trans-Siberian link.

Russia wants to build a $65 billion railway from Siberia to North America. This line would extend the proposed Chinese-Russian rail line across 3/4 of the Northern Hemisphere.

Tibet, Iran, Pakistan and India

China has already built a line linking Tibet to the rest of China – it crosses 550km of continuous permafrost and experiences extreme temperatures swings.

Iran, Pakistan, and India are each negotiating with China to build domestic rail lines that would link into the overall transcontinental system. Iran’s Press TV reported that the two countries had signed a $13bn contract for China Railways to build 5,000km of track in Iran.

Vinay Mittal, the Chairman of the Indian Railway Board, told Indian media that high-speed trains were feasible and necessary for India, especially for freight corridors.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said if India is looking at a GDP growth rate of 5 per cent, the present rail infrastructure is fine, but if it wants to grow by 9 per cent, it needs the high-speed rail networks.

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Richard Mills is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, and Financial Sense.

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