BRI Countries’ Exports To China Surge As Global Producer Prices Boom
By Bob Savic, Senior Consultant with Dezan Shira & Associates
The blow out in global commodity and intermediate goods prices, since the beginning of 2021, has seen producer price inflation (PPI) approach crisis levels across the world’s economies. In some countries, PPI growth has even matched that of the 1970s’ first oil shock. In response, China’s government has taken prudent measures to dampen excessive commodity price increases, while retaining strong demand for imported raw materials and capital goods in powering the economy forward; an outcome benefiting many countries which have signed up to its Belt and Road Initiative (BRI) in recent years.
China’s robust import expansion in face of mounting price pressures
China’s PPI rose by 9.5% in August 2021 – the highest rate in over 13 years, prompting the authorities to sell oil from their strategic reserves for the first time ever, to reduce economically distortive energy price gains. The spiking rates of wholesale price inflation were essentially attributed to ballooning raw material prices which rose by over 18% on the year.
China’s exposure to steeply rising international energy and mineral prices was further inflated by its switch to imports of natural resources over domestic extraction. This followed in the wake of the government’s directives for domestic producers of coal, steel, and other metals to cut output and thereby slash carbon emissions in line with Beijing’s long term local economy greening plans. Accordingly, overseas purchases of coal and iron ore were especially buoyant, in August, with the former growing by nearly 36% over the course of the preceding year, while overall imports leapt by 33%, the highest on record for any single month.
The boom in imports is also an outcome of the Chinese government’s investment program to reflate the economy on the heels of the steep pandemic-driven drop in output during the first half of 2020. In line with this policy drive, from January to August 2021, capital expenditure grew by 8.9% per annum. This was accounted for by 6.2% growth in public sector investment and an 11.5% rise increase in capex by private companies, albeit at a declining rate of growth from the first seven months of the year when overall investment grew by 10.3%, and an even greater 35% expansion at the beginning of the year.
BRI economies plug into China’s record import demand
Numerous countries which have signed up to the BRI, as producers of energy, minerals and metals have benefited from China’s investment-led demand for natural resources. This is particularly so for Russia’s economy as annual GDP rose by 10.5% in the second quarter of 2021 – the fastest growth rate since 2000 when Vladimir Putin was first elected the country’s President.
As a result, the mining sector has seen double digit gains averaging over 12% during the months of May to July and accounting for over two-thirds of exports to China. Over the first seven months of the year, sales to China of crude oil, natural gas, coal, various fuels, and metals including nickel, steel and aluminum reached around US$41 billion in value, up by a quarter over the same period in 2020. On top of this, the Chinese and Russian authorities are coordinating efforts for overall bilateral trade to hit US$200 billion for the full year with the expectation of a trade surplus in Russia’s favor.
Germany has been the only European country to surpass Russia’s level of exports to China, so far in 2021. Its outbound shipments to China, made up mainly of capital goods and vehicles, grew by almost a third reaching US$70 billion from the beginning of the year to July. Germany’s burgeoning exports to China highlight the ongoing integration of these two economic heavyweights, despite Berlin not officially signing up to China’s BRI.
Indeed, China has become Germany’s single largest growth export market since the 2008 global financial crisis. This trend looks set to persist, even in the face of a recent political falling out between Beijing and Brussels, amid the latter’s indefinite deferral of talks in concluding a China-EU investment agreement.
In testimony, though, to the benefits of embracing the BRI, Italy, as the only major west European state to officially endorse the initiative, saw its exports to China rise by 63% over the first seven months of 2021, to US$18 billion. Notably, Italy’s boost in outbound shipments to China was not only the highest for any G7 member, but for any G20 economy.
Other smaller west European BRI-participating economies, including Malta, Portugal, Greece, and Austria, have seen their 2021 exports to China rise annually by 55%, 54%, 50% and 34% respectively: while concurrently eclipsing rates of export growth by all non-BRI European economies.
Many of the other 140-plus countries which have officially joined the BRI have also experienced major gains in their exports to China in 2021. The ten countries of the Association of Southeast Asian Nations (ASEAN), each of which have signed up to the BRI, have seen their collective exports to China expand by 37% over the first seven months of the year, to a staggering US$216 billion, equivalent to 7% of the regional bloc’s GDP. This contrasts with the EU’s exports of US$181 billion albeit with an economy five times the size of ASEAN’s.
While a significant portion of the region’s exports are made up of mineral fuels, iron, and steel, depending on the country, most ASEAN exports to China are manufactured goods, especially electrical and mechanical machinery, plastics, and vehicles. The region’s expansion and more importantly, diversification of exports to China, is set to be further boosted upon full ratification of the Regional Comprehensive Economic Partnership (RCEP), in 2022. RECP is set to become the world’s largest trade bloc and will include ASEAN, China and four other major Asia-Pacific economies.
The sixteen countries of Central and Eastern Europe, all of which have also officially joined the BRI, have experienced substantial export increases over the first seven months of 2021, having an average growth rate of 69% for all countries combined. Some economies, namely Croatia, North Macedonia, Albania, and Bosnia have seen particularly robust export growth of 247%, 212%, 111% and 104% respectively. More established exporters to China such as Serbia, Romania and Poland have seen their exports rise by 82%, 70% and 40% in each case.
Other regions of the world, where most countries are BRI members, have similarly benefited from strong export growth, including Africa at 46% and Latin America and 35%, although performance per country on each developing continent varies dramatically.
BRI transport corridors pave new routes for trade growth
Container shipping rates for the movement of cargo have escalated to extreme levels alongside producer prices in recent months. For instance, freight rates for cape size vessels, the main carriers of iron ore and coal cargos weighing 150,000 tons, were trading at near record highs in August 2021. As such, cargos from the main commercial ports in Brazil to China’s port of Qingdao, at the end of that month, were assessed at US$36.50 per metric ton (MT), just a sliver off the record high of US$37.50 per MT set in May, this year.
Similarly, panamax vessels, typically used for transporting around 70,000 tons of coal and gains, have reportedly seen some of the highest container rate increases in the history of shipping; doubling in price during the three months to end July, alone. The smaller supramax container vessels also hit peak freight levels in what has been described as a robust market by shipping experts.
This complex and prohibitively costly picture of seaborne freight may in future, if not necessarily at present, be progressively alleviated by China’s new BRI overland transport corridors. In many ways, the crisis in seaborne freight costs serves to prove that Beijing’s multi-trillion-dollar BRI infrastructure program was essentially driven by long term practical economic concerns. This stands in contrast to unfounded accusations by Western governments of Beijing’s ‘debt-trap diplomacy’ to exert malign influence over developing countries. Upcoming articles will explore some of the new BRI infrastructure being built around the Mediterranean including Southern and Eastern Europe, and North Africa. On this occasion, our coverage will briefly touch upon some of the key land transportation links connecting China with Europe and other parts of the Eurasian BRI.
Overall, since 2020, trade in goods between China and Europe has exceeded that between Europe and the United States. An increasing portion of this new two-way trade has been facilitated by substantial Chinese and European intercontinental rail connections. As a result, about 12,500 freight trains travel between these two regions every year, up by 50% over the previous year, with China transporting up to 1.14 million containers to Europe, alone. Land transportation container freight is expected to grow significantly over coming years as China continues to invest heavily in intercontinental railroads, in addition to new airport hubs, roads and ports.
At present, Beijing is investing close to US$15 billion in new intercontinental rail projects connecting China with Europe. These include the Moscow-Kazan railway which will ultimately connect to the city of Yiwu, along China’s eastern seaboard, via Urumqi and Xi’an. The Tehran-Mashad rail development, in Iran, will link up with China’s largest city, Chongqing, while being further extended westwards to the newly constructed Istanbul-Ankara railway. These main BRI freight arteries will then connect through local railways entering various major European cities including St Petersburg, Helsinki, Riga, Warsaw, Berlin, Prague, Hamburg, and London. Within CEE, China’s flagship high speed rail construction will connect Belgrade with Budapest, while Chinese financed highways will link further south with key transit cities of Skopje, in North Macedonia, and the deep-water port of Piraeus, in Southern Greece.
Numerous other major Eurasian rail connections are also being built or planned for. Some of the major projects include southwestern China’s city of Kunming being linked by rail with mainland Southeast Asia, including Malaysia, Laos, and Cambodia, to end up in Singapore, over a multi-stage construction lasting from 2021 to 2030. Other BRI rail projects will connect Kunming with port cities in Myanmar, while several BRI rail projects are being planned in Bangladesh. Lastly, the China Pakistan Economic Corridor US$7 billion rail project, which was given the green light by Islamabad, in 2020, will connect Kashgar, in western China to Pakistan’s Gwadar port on the Indian Ocean.
Clearly, most of these overland projects will take time to bear fruit before a significant amount of freight can be shipped overland as an alternative to the escalating costs of seaborne container shipping. Saying that, though, how many BRI and Eurasian connectivity sceptics, only several years earlier, would have ever envisaged that vast overland rail treks carrying millions of tons of freight would now be made over 12,000 times a year? Times change and trade expectations for the BRI have changed too.
Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at email@example.com or visit www.dezshira.com