Autor: Kamil Zając

China’s Economy is Slowing Down. What Lies Ahead for the New Silk Road?

China’s GDP continues to rise but at a pace that challenges expert projections. In Q1 2023, China’s GDP saw a year-on-year growth of 4.5%, followed by a 6.3% YoY increase in Q2. However, the rising number of Chinese business bankruptcies is becoming a notable concern. Data from the ChineseReport portal indicates that approximately 460,000 Chinese companies shuttered every quarter. Additionally, changes in the transportation structure of the New Silk Road have been observed. While general volume increases are noted, there is a decline in direct shipments to European Union countries. Could this signify the start of a shift in global trade patterns and the end of the “World’s Factory” model? What lies ahead for the New Silk Road? Will it survive?

Małaszewicze ceases to be China's gateway to Europe. What's next for the New Silk Road?

China’s Economic Growth Slowdown

Reports from the Obserwator Logystyczny logistics news portal reveal a concerning trajectory for China’s industrial sector. In Q1 2023, revenues in this sector plunged by as much as 27%, a trend extending across most sectors. The domestic market also saw reduced consumption, leading to bankruptcies in the business sector. The Center for Eastern Studies (OSW) estimated that in 2022, over 200,000 small and medium enterprises in Shanghai alone discontinued their operations. This figure is stark when compared to the pre-pandemic level of 50,000 in 2018. Similarly, the ChińskiRaport portal states that roughly 460,000 businesses close down quarterly nationwide. Large corporations are not immune either; the renowned Chinese real estate behemoth, Evergrande, declared bankruptcy in the United States. Collectively, this data paints a picture of sustained economic deceleration. The days of double-digit GDP growth are now in the past, leading to a shortage of job opportunities, especially for the younger generation. The current youth unemployment rate hovers around 21.3%.

China’s GDP in 2010-2023

Source: Statista

It’s not just China; almost the entire globe is grappling with mounting uncertainties. China, the world’s premier industrial and export economy, is encountering many internal and external challenges. On one side, there’s diminished demand in China’s longstanding export markets. Not only are US and European consumers scaling back their expenses due to increased living costs, but many countries have also exhausted their budgetary assistance programs, often reliant on credit, to uphold consumption and living standards. Concurrently, there are profound shifts driven by escalating global tensions, spiking defense and security costs, repercussions of the conflict in Ukraine, and growing climatic adversities,”

remarks Janusz Piechociński, President of the Poland-Asia Chamber of Commerce and Industry.

Geopolitical Upheaval Reshapes Global Settlements

The prevailing geopolitical situation, marked by conflicts between the West and the East, is undergoing significant shifts, transforming the global trade landscape. China, a key player within the BRICS nations (Brazil, Russia, India, China, and South Africa), has an increased propensity to conduct international transactions in its native currency, the yuan (CNY). China’s economic cooperation with Russia is also strengthening, which is clearly visible in the transport volumes on the New Silk Road. This shift away from the US dollar (USD) in trade not only slashes operational expenses but also bolsters the profit margins of the domestic economy and eliminates the need for dollar purchases. BRICS nations have collectively decided to tighten economic cooperation based on their national currencies. China is also developing its own interbank payment system, CIPS (Cross-Border Interbank Payment System), envisioned as a rival to the Western-centric SWIFT. Interestingly, the BRICS group accounted for a whopping 25.8% of global trade in 2022, surpassing the US as early as 2020.

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G7 vs. BRICS: A Comparison of Potentials

New Silk Road vs. BRICS

Russia Still Backing New Silk Road

Recent data from UTLC ERA underscores a soaring trade partnership between China and Russia. The commencement of the Ukrainian conflict saw a staggering 776% surge in Chinese product imports to Russia, which now stands at 148.5 thousand TEUs. The aforementioned strategic transition from the US dollar in bilateral transactions has undoubtedly catalyzed this trade escalation.

The sweeping sanctions levied by over 60 nations on Russia and its corporations have undeniably stifled its prospects for economic growth. Historically lucrative and proximate export markets, predominantly for energy commodities, have been progressively restricted since 24 February 2022. Against this backdrop, Russian fossil fuels had to seek alternatives, even as export profitability dwindled. This has pivoted Russia towards nations like China, India, South Africa, and other Global South countries. This geopolitical shift has also redrafted transport routes and the logistics partners navigating them. At its peak, an estimated 600 aging ‘dirty tankers’ were repurposed to circumvent Western restrictions for ferrying Russian oil. This monumental redirection of pivotal export goods, such as Russian oil, is exemplified by India, which ramped up its processing of Russian oil by 27-fold. Concurrently, American companies in the UAE and Saudi Arabia have emerged as primary beneficiaries of diesel derived from it,

adds Janusz Piechociński.

Diminishing Rail Transport Between China and the EU in 2022

ERAI reports that rail shipments on the New Silk Road amounted to 681.2 thousand TEUs in 2022, marking a 2% dip from the 692.5 thousand TEUs in the preceding year. Transit consignments similarly plummeted from 627.8 thousand TEUs to 410.6 thousand TEUs. Evaluating these statistics mandates a detailed inspection of routes to and from China, especially focusing on nations like the Netherlands, Germany, and Poland. For instance, in 2022, shipments from China to Poland stood at 178.5 thousand TEUs, representing a 13% contraction. Conversely, the figure was a mere 12.2 thousand TEUs, plummeting by 61%. Germany, which predominantly leans towards exports over imports when trading with China, also experienced downturns. Germany imported 64.4 thousand TEUs via rail, a reduction of 55%, while its exports to China were recorded at 107.3 thousand TEUs, a 22% decline. The Netherlands saw a transport of 7.9 thousand TEUs from China (a 70.88% reduction) and 6.8 thousand TEUs to China (a drop of 41.54%).

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New Silk Road’s Rail Transport in Select Nations [in TEU]

DirectionYear 2022
import
Year 2022
export
Year 2023
import
Year 2023
export
Poland178 52017 21669 7863 372
Germany64 404107 3007 93042 536
Netherands7 8966 7881 1861 602
Source: own study based on Eurasian Rail Alliance Index (ERAI) data

According to data from the Eurasian Rail Alliance Index (ERAI), the transport landscape between Asia, China, and Europe exemplifies the repercussions of slowdowns in several European economies. Furthermore, the successive waves of COVID-19, accompanying transportation constraints, and an abrupt escalation in transport fees have impacted trade. Despite declining transport prices, the quantity of goods transferred, especially through the primary corridors linking Asia, China, and the European Union, has experienced a downturn. The situation at ports pivotal for bilateral trade has changed. Consider the e-commerce-driven surge in air transport or the fluctuating dynamics of major maritime transport operators. China’s adept diplomacy ensures that the Silk Road’s operation remains unaffected despite the ongoing Ukraine war. Nonetheless, the embargoes on Russia’s Baltic ports, the Black Sea blockade, Russian railway line strategies and substantial investments in corridors alternative to the Rail Silk Road have given rise to a completely new landscape and mounting competition in transport services. The influence of Chinese capital in ports like Piraeus, Koper, Trieste, Rotterdam, and Hamburg underscores this shift,

observes Janusz Piechociński.

2023 Projections Remain Tepid

ERAI data up to July 2023 documents the transportation of 69.8 thousand TEUs to Poland, 7.9 thousand TEUs to Germany, and 1.2 thousand TEUs to the Netherlands. Transport from China to Małaszewicze, which previously exhibited consistent growth up to 2021, began to wane in 2022. From 179.4 thousand TEUs in 2021, the volume declined to 165.8 thousand TEUs in 2022. Current data suggest a continued downward trajectory, with 57.2 thousand TEUs in H1 2023, reflecting a 24% reduction compared to H1 2022.

Transport Volume from China to Małaszewicze in 2017-2023

YearVolume [in TEU]Difference y/y
20176 242
201813 059+109,21%
201937 818+189,59%
2020149 176+294,46%
2021179 432+20,28%
2022
(*1 półrocze)
165 772
*75 556
-7,61%
2023
(*1 półrocze)

*57 180
-24,32%
Source: own study based on Eurasian Rail Alliance Index (ERAI) data

The figures are quite clear. We cannot expect a self-resolution. We must actively fight for the revenue and profits of Polish transport companies in the Asia-China-European Union corridor. To retain our status as a central transport hub, we must consistently enhance our capabilities, leveraging the potential of wide-gauge entries to Poland. It is essential to remember that beyond Małaszewicze, there are places like Sokółka, Narewka, and Siemianówka. After the war, the Broad Gauge Metallurgical Railway (LHS) will gain unprecedented prominence. Our ports, vital in the Baltic Sea’s container handling, cannot be overlooked. However, our considerations and interventions should not be limited to Poland’s transport segment. The once robust Polish economy, now teetering on a technical recession, requires new stimuli, including affordable energy access for both industries and households,

concludes Janusz Piechociński.

Transport volume from Małaszewicze to China in 2022-2023

YearVolume [in TEU]Difference y/y
2022
(*1 semester)
10 782
*9 168
2023
(*1 semester)

*824
-91%
Source: own study based on Eurasian Rail Alliance Index (ERAI) data

Intensifying Rivalry on the New Silk Road

Małaszewicze’s significance as the New Silk Road’s gateway is under threat, particularly from the burgeoning role of the port of Koper. In the first half of the current year, Koper documented a rise in transshipped containers, amassing 554,949 TEUs. With over 1 million TEUs transshipped in 2022, the port is steadily consolidating its stature as a container terminal. To maintain Poland’s pivotal position on the New Silk Road, it is imperative to upgrade the Małaszewicze infrastructure continuously. This includes renovating the secondary expanse of the railway bridge spanning the Bug River.