[Analytics] Can Belt and Road reverse sagging fortunes of China’s trade war-hit northeastern ports?

The rust belt region is focused on drawing more firms from Japan and South Korea to use the subsidised sea-to-rail service, a signature of the Belt and Road Initiative. Liaoning, which counts the United States as its fourth largest export market, is seeking to use Dalian port to connect with Russia, Eastern Europe and Central Asia. Amanda Lee specially for the South China Morning Post.

For a while, the ports in the northeastern Chinese province of Liaoning have been pinning their future on the success of Beijing’s Belt and Road Initiative, a global trading strategy to link China with rising consumer classes in Asia, the Middle East and Europe.

But so far the plan has not turned out to be the game changer they had hoped for, due to fierce competition between China’s many large ports for pieces of the sea-to-rail traffic that the trading initiative has created, as well as subsidies the government is offering to support it. In addition, slower growth in global trade due to the trade war with the United States, overcapacity in port facilities, and a decline in foreign investment, have put downward pressure on their operations.

For Dalian port, through which most of Liaoning’s foreign trade flows, the the belt and road strategy highlights how state planning has played a key role – for better and worse – in driving new markets and business in the depressed rust belt region. It is this predominance of the government’s presence in industries and companies that has become one of the most contentious issues in the trade negotiations between China and the US.

The ongoing trade war, with no sign of a near-term resolution, will continue to dampen overall container traffic growth in China, which has the world’s busiest container shipping ports. The growth rate is likely to fall to zero or a low single-digit percentage figure in the next 12-18 months, according to report published in May by US rating agency Moody’s.

The government has been pushing for further consolidation of Liaoning ports to boost their performance, but also to strengthen the state’s control in the sector. In June, state-owned China Merchants Port Holdings raised its stake in Liaoning Port Group – which controls three northeastern ports including Dalian – to 51 per cent, giving it majority control.

Liaoning counts the US as its fourth largest export market. A range of US imports flows through Dalian, the province’s largest port, including agricultural products, car and car parts, and technology products such as LED screens and integrated circuits, some of which are subject to trade tariffs.

To improve its business fortunes, Dalian is focused on capitalising on its position as one of the major Chinese ports closest to Japan and South Korea, to connect their shipments with Russia, Eastern Europe and Central Asia through its sea-to-rail freight services.

A typical route starts from Japan or South Korea, with the ships stopping over in Dalian where the goods are offloaded and transferred onto the wagons of the China-European trains bound for markets in Manzhouli, Irkutsk, New Siberia or Moscow.

The sea-to-rail service could reduce delivery time from Dalian port to Moscow to just 12 days, a quarter of the 50 days needed for goods to be shipped by sea to northern European ports, according to Xia Ting, a manager with Liaoning Port Dalian Container Development.

On paper, this makes the belt and road proposal seem like a winner for Liaoning’s ports to expand their business and reduce reliance on US trade, but it has not worked out that way so far. Japanese and South Korean companies, the major suppliers of electronic goods, equipment, cars and car parts to Europe and China, have been lukewarm about using the sea-to-rail freight service.

What is more, the service has required heavy subsidies from local governments in the region, many of which are already burdened by falling revenues and high debt.

Almost all of the services to Europe were subsidised by local government coffers, according to a December research report by the Institute of Geographical Sciences and Natural Resources, a unit of Beijing sponsored think tank Chinese Academy of Social Sciences.

It said the subsidies varied from US$2,000 to US$3,000 for every two 20ft equivalent unit (TEU) containers, with some going to as high as US$7,500 if the goods were locally made.

“As of now … promoting the development of China-European trains through subsidies at the initial stage as a policy guide or to cultivate a market is permissible. However, it is ultimately unsustainable,” the report said.

The difficulty in sustaining these operations is already showing in Dalian. Without a consistent supply of goods moving through the port on the sea-to-rail freight system, traffic had slowed substantially from the estimated 35,000 TEU of goods shipped at its peak in 2016 and 2017, Xia said, without giving comparative numbers.

According to the Ministry of Commerce, there were a total of 6,300 freight trains going between China’s ports and Europe in 2018, estimated to equate to around 600,000 TEU of goods shipped. But these figures paled in comparison to the total 42 million TEU of goods that came through China’s biggest port in Shanghai last year.

Since 2018, the mature coastal ports of Shanghai and Xiamen and inland heavyweights like Chongqing in the southwest and Xian in the west are also fighting for pieces of the same pie.
“The overall volume has gone up, but everyone is in on it,” said Xia.

The belt and road strategy, the cornerstone of President Xi Jinping’s foreign policy, seeks to build infrastructure projects to connect Asia with Africa and Europe, and in doing so boost trade.

However, the strategy has attracted a barrage of criticisms from China’s biggest trading partners, complaining that the country’s state firms have an unfair advantage over foreign players.

China’s state-dominated port and shipping sectors have been integral to the Belt and Road Initiative, and would benefit most from increased global trade. But that has not been the case for the northeastern rust belt – Liaoning, Jilin and Heilongjiang provinces – which has seen profits decline in its traditional heavy industries like ship building, steel making and coal mining over the years.

And Liaoning, the region’s biggest economy, has yet to see a strong resurgence of investment from Japan and South Korea, which has gradually declined since 2014.

According to government statistics, foreign direct investment into Liaoning plunged more than 80 per cent from US$27.42 billion in 2014 to US$4.9 billion in 2018, due in large part to cuts from Japanese and South Korean firms. There are signs that foreign investment is stabilising at a low level, while the provincial government has stepped up its efforts to improve relations with Japan and South Korea to promote the belt and road plan.

“It’s not yet reached the point [where Japanese and South Korea firms are thinking that] the routes are efficient and the prices are reasonable when it comes to foreign companies investing and building facilities here,” said Yuan Zhenhe, deputy general manager of Liaoning Shenha Hongyun Logistics Company, the sea-rail business platform for Yingkou Port, the second port controlled by Liaoning Port Group.

“Right now the competition is fierce and, as far as I understand it, there are 29 cities all over China [offering sea to freight services]. So foreign companies will carefully consider local policies and costs to start with [before deciding where to invest their money].”

Exports of Dalian’s car and car-related manufacturing industries, which produce local branded Cherry cars and Nissans through the a joint venture with Dongfeng Motor, have slumped due to political uncertainties in the emerging markets they are shipped to.

He said the car terminal handled more than 2,000 used cars in 2006 using the sea-to-rail services from Japan and South Korea to Kazakhstan. However, this business has not been consistent due to a lack of goods to trade.

“Back in 2006 [without the belt and road concept] … It was purely based on market [needs],” Ding said.
“Now we are seeing companies starting to look into it. We are preparing for [the business to develop]. We are engaging with Japanese and Korean companies.”