Weekly News Roundup: Dispatches from the Silk Road Economic Belt

India, Japan seek to counter China with AAGC planI

ndian Prime Minister Narendra Modi made a proposal for the Asia Africa Growth Corridor (AAGC) at the annual meeting of the African Development Bank in May, a proposal that won strong support from Japan. We believe that the two countries are trying to counterbalance the Belt and Road (B&R) initiative with the AAGC plan, which China should take seriously and study carefully. (globaltimes)

Can China-India row be the catalyst for a dispute resolution system among top emerging nations?
Months-long stand-off in Doklam shows BRICS bloc needs to find ways to tackle conflict between members, Chinese government adviser says (Scmp)

Pakistan and China discuss Afghanistan after US official snubbed by Islamabad
Pakistan’s Foreign Secretary met China’s special envoy on Afghan affairs on Monday, a foreign office spokesman said, a day after Islamabad cancelled a scheduled visit by a top US official. (scmp)

Braving security fears, Chinese seek 'Silk Road' riches in Pakistan

While the first phase of the China Pakistan Economic Corridor (CPEC), as the Pakistan leg of this new Silk Road is called, concentrated on infrastructure projects, the second part will focus on setting up special economic zones and integrating Chinese firms into the local economy to help Pakistan develop its industries ranging from mining to agriculture. China has also surged to become by far the biggest source of foreign direct investment (FDI) for Pakistan, topping $1 billion in 2016/17, and is betting on its neighbour at a time when many Western companies are still put off by security concerns and corruption.(reuters)

New Silk Road: Japan To Counteract China In Kazakhstan With New Asia-Europe Rail Deal

Just months after the announcement of a deal that would see China’s COSCO shipping and Lianyungang Port take a 49% cut of Kazakhstan’s epic Khorgos Gateway dry port on the Kazakh/China border, Japan’s Nippon Express logistics firm has signed an MoU with Kazakh Railways (KTZ) to increase the overland flow of container traffic between the Japan / South Korea region and Central Asia, the Caucasus, and Europe. Nippon Express provides the cargo and KTZ handles the transshipment and processing of the containers through Kazakhstan. (Forbes)

Arctic sea route strengthens Sino-Europe trade bonds

Tianjian, a multi-function cargo ship, loaded with over 36,000 tonnes of machinery, set off from east China's Lianyungang on 31 August. Carrying tunneling machines bound for Russia to be used in subway construction work and wind power equipment heading for Denmark, Tianjian is the third of China's planned six cargo ships to ply the northern route to Europe in 2017. (xinhua)

Cargo train services launched between Weihai and Hamburg
Cargo train services have begun between Weihai, a coastal city in east China's Shandong Province, and Hamburg, Germany.A train carrying 34 containers departed from Wendeng Railway Station in Weihai at 10 a.m. Saturday, marking inauguration of the service.The weekly service will pass through Mongolia, Russia, Belarus and Poland, covering 11,000 km to arrive in Hamburg. (Xinhua)

The hunt for Red October: how the Bolshevik Revolution turned into a Chinese tourist trap

The 100th anniversary of the October Revolution has triggered a surge of Chinese ‘red tourists’ to Russia, eager to pay homage at the birthplace of communist revolt (scmp)

Towards new horizons of strategic partnership 

Putin: Ahead of the 9th BRICS Summit to be held in Xiamen, China, on September 4 and 5, Russian President Putin published an article on his views of the prospects of BRICS future cooperation. In his article titledTowards New Horizons of Strategic Partnership, he wrote, "I consider it important in this regard to present Russia's approaches to cooperation within the framework of this large and respected association and to share my views on the future of our further cooperation." "I would like to begin by expressing our appreciation of China's significant contribution as this year's chair of the organisation, which has allowed the BRICS countries as a group to move forward in all the key areas of our partnership, including politics, the economy and culture. Moreover, the group of five has greatly strengthened its global standing." xinhua (in Chinese) xinhua

Trump’s Great Game

Since the US president announced last week a new plan for Afghanistan that involves a greater role for India in the war-torn country and accused Pakistan of providing “terrorist havens,” Islamabad has been struggling to construct an effective strategy in response, FM Shakil writes. While rejecting accusations that it harbors terrorists, Islamabad knows two things: that it cannot fully abandon support for militant groups because they provide a bulwark against India and that its economy still depends significantly on the US. Analysts predict that Washington’s policy of isolating Pakistan could push it closer to Russia, China, Turkey and Iran, dooming to failure US efforts to help the Afghan government bring stability and peace to the region. (Asia Times)

China, Tajikistan agree to forge comprehensive strategic partnership

Chinese President Xi Jinping held talks with President of Tajikistan Emomali Rahmon here on 31 August, agreeing to establish comprehensive strategic partnership between the two countries. Applauding Tajikistan's support for the Belt and Road Initiative, Xi said both sides should synergize the Belt and Road Initiative with Tajikistan's national development strategy for the period up to 2030. The two countries should cooperate more in transportation, energy, ports and network infrastructure development to improve all-round connectivity, Xi said. China and Tajikistan agreed to jointly launch cross-border railway, road and natural gas pipeline projects, and explore cooperation in wind and solar energy, according to the joint statement.(xinhua)

Ghost cities haunt stability dream in China’s far west

Several ambitious projects around Kashgar have stagnated despite government plans to put Xinjiang’s economy on a par with the rest of the nation (scmp)

Nepal and China fast track rail link in aftermath of Sino-Indian border row

China and Nepal agreed on Thursday to ramp up plans for a cross-border railway amid public assurances from China that Beijing would work hard to avoid conflict with New Delhi.Chinese Foreign Minister Wang Yi also said Beijing hoped Nepal could be a bridge between China and India, following a bitter border stand-off between the two Asian heavyweights. (scmp)

China scraps export quotas on REMs: What's going to change?

In late December, the Chinese Ministry of Commerce announced the lifting of the export quotas for rare earths, those seventeen chemical elements in the periodic table widely used in defence and high-tech industry, considered for years the 'trump card' of Beijing. Under the new guidelines, rare earths will require an export licence but the amount that can be sold abroad will no longer be covered by a quota. On teh other hand, the system will be replaced with resource and environmental taxes. Another major change: while before there were 28 rare earth producers working under the export quotas, now -in theory- any company with export contract is elegible to export. By incrising the number of exporting companies, Beijing hopes to boost competition and raise the price of the metals after prices hit rock bottom last year, said Zhanheng Chen, deputy secretary general of the China Rare Earth Industry Association.

The move -widely expected-, is the final match of an international standoff lasted about five years. In 2012, for the first time, the United States, Japan and the European Union  jointly presented a complaint to the WTO (World Trade Organisation) on alleged irregularities in Beijing's export policies. Last March, the WTO has eventually recognized that “China’s export quotas were designed to achieve industrial policy goals" and “do not comply with WTO rules and China's obligations in the WTO ", of which it is a member since 2001. Beijing tried to appeal without success.

In 2009, China had begun to trickle its exports citing the need to conserve a dwindling and limit environmental damage from mining. Rare earths, despite the name, are  relatively plentiful in Earth's crust , but the techniques used to extract and refine them is labor-intensive, environmentally hazardous and increasingly costly. However, Beijing imposed no restrictions on production and use of rare earths by companies within China failing to convince the rest of the world of its good intentions. Chinese officials have expressed hope foreign manufacturers that use rare earths will shift production to China and give technology to local partners. Beijing also tightened control over its rare earths industry by pushing companies to merge into state-owned groups and forcing smaller producers to close.

Over just a quarter-century, the rare earth industry has been completely upset. Around the middle of the twentieth century, India, Brazil and South Africa still represented the main source of rare earths, closely followed by the United States through the 1980s. Until the late 1990s, the United States were able to meet the domestic needs relying on their national resources. The American production was shut down when low-cost minerals from China begun to flood the global market. A mix of government subsidies, large availability of raw materials and aggressive mining technics allowed China to cut costs and charge prices 5% of those offered by other international manufacturers. The grip on the sector has become particularly alarming when, in the aftermath of the 2008 financial crisis, many of the countries that were planning an economic recover thanks to high-tech exports found themselves short of raw materials. Europe, United States and Japan suffered the biggest looses.

Over the years, enjoying a semi-monopoly position, China has not failed to exploit its own resources as a weapon of retaliation. In 2010, rare earths gained greater visibility even among non-experts. An 'accident' occurred off the Senkaku/Diaoyu islands (whose territoriality is historically disputed between Japan and China) between a Chinese fishing boat and a Japanese patrol boat angered Beijing: the Chinese governament cut its supplies to the Japan, at the time the beneficiary of 66% of the Chinese exports. Then , China's exports declined by 70% spiking prices up to 40%, causing alarm among the economies and industries that rely on rare earths metals. It was the beginning of the so-called 'rare earths crisis'

At that time, in the light of the protectionist turn, illegality began to flourish thanks to an agreement between small mining companies and criminal gangs able to dribble regulations. Underground activities, that are estimated to have produced between 20-30mila tons a year, is complicit (along with the global economic slowdown) of the prices' collapse after a fairly stable 2001-2009 period. However, as suggested by Jon Hykawy, a Bay Street veteran and expert on critical materials, illegal mining will no longer be a problem: "Since 2011, export quotas set by China have not been met by official exports. We can argue what impact unlicensed or pirate production might be having, but the fact of the matter is that prices have fallen and quota was available, so one would expect that pirate production cannot be a huge portion of the market. Why would a major purchaser, say a major automotive company, depend on illegally produced and smuggled material when the quota allows for them to legally buy the same material and remove some degree of supply chain risk?”

The fact is that, in the wake of WTO complaint, the restrictions were gradually relaxed. Indeed, Du Shuaibing, analyst at Baichuan Information, refers to the 'China Daily' that the removal of the quota system might have little impact on the market because in recent years the export volume has stood well below the prescribed ceiling. In the first eleven months of 2014, the world's second-largest economy exported 'only' 24,866 metric tons of rare earths, well below its 30,611-tons quota.

"It seems to me that the quotas and other policies that drive a wedge between the domestic price and the international price of rare earths were pretty clearly not consistent with the WTO agreement, so changing the policy is a good step for the rule of law in international trade. But I think it will have limited substantive effect on market competition or who trades with whom" said  Eugene Gholz, Professor at the 'University of Texas at Austin and consultant of the US Department of Defense.

Gholz is the author of a 'revolutionary' study published last October by the Council on Foreign Relations. According to the US Geological Survey, althought US would have no less than 13 million tons of rare earths stocks, the dependence on Chinese supplies in military  industry would still be almost total. Nevertheless, for Gholz, the embargo against Japan and the rigid restrictions imposed by China have had a limited global impact, and not just because of smuggling activities mentioned above. Various subterfuges have opened new ways, from exporting rare earths combined with small amounts of other alloys to a strategy of self-sufficiency based on continuous innovation. Feeling cornered, the high-tech companies have learned to make use of alternative technologies, sometimes less sophisticated, in order to free themselves from the bondage of the precious metals. Since Beijing has slowed its exports, in 2009, the United States, Japan and Australia have started (or restarted) their mining activities in Canada, South Africa and Kazakhstan. For its part, Tokyo has bypassed the obstacole making partnerships with Mongolia and India, the second largest producer in the world.

In this perspective, the functionality of the Chinese reserves in the so-called 'the geopolitical of the rare earths' is greatly reduced. According to Gholz, China would now account for the 70% of global production, down from over 90%. "The quotas have not been formally binding. The combination of demand destruction due to increased efficiency, innovation, and product substitution; expanded availability of rare earth oxides outside of China; and movement of downstream rare earths business (e.g., magnet-making) to China in recent years reduced demand for Chinese exports of rare earth oxides that were covered by the quota”, he said. “Some of the movement of downstream business to China may well have been caused by anticipation that the quota would otherwise be binding in the future; some of the movement of downstream business to China was also likely caused by other policy levers that made the internal Chinese price of rare earth oxides significantly lower than the export price, meaning that magnet-making would be less expensive in Chinese factories than in Japanese factories (or in other foreign locations).“

Downstream production in China may also have had easier access to cheap, illegally mined feedstock, since after all giving illegal material to a domestic producer would not require the trouble of smuggling it across a border; perhaps it would involve less corruption costs, and as a result some downstream Chinese producers may have expanded at the expense of foreign downstream producers, again meaning that China would not need to export as much material covered by the quotas. “In essence, a number of factors have combined to minimize the relevance of the quotas over the last few years,” he said,

Gholz opinion is widely shared among experts. Nayef Al-Rodhan, honorary fellow of 'the Oxford University and Director of the Geopolitics and Global Futures Programme at the Center for Security Policy in Geneva, said that “the revocation of the quota system will not change much since it is followed by a strict export license system and a consolidation of the rare earth metals industry in China, which will be dominated by six big state-owned conglomerates". According to the Wall Street Jorunal, Baotou, China MinmetalsCorp. , Aluminum Corp. of China, Ganzhou Rare Earth Group Co., Guangdong Rising Nonferrous Metal Co. and Xiamen Tungsten Co. account for about 85% of China's rare earths production.

Obviously, in the longer term, demand will only rebuild if buyers feel confident about being able to obtain rare earths in a reliable fashion in the future. But, “China is making the industry more opaque, not less”, said Hykawy, “The export quota is gone, but the production quota remains, so there is still artificially limited Chinese supply. It is also expected that in the short and medium term, China will proceed to compensate for the demise of the quota system by rolling out other, alternative safeguards: it could impose a resource tax on rare earth metals, possibly new export rules, or environmental taxes. Moreover, the end of the quote system will not reflect equally on all rare earths and some will be subject to very strict export licences, thus giving Chinese enterprises great leverage."

The WTO ruling does bring a momentous change in the rare earths export regime from China in the sense of making it more ‘orderly’ but it does not significantly, in the short term at least, alter China’s immense influence on the market, said Al-Rodhan. “Rather, it can be argued this change is more symbolic than of much impact. It will improve the overall management of the rare earths export and reduces frictions with other trading partners without necessarily weakening China or impacting overall prices”