Why Is China Developing Xinjiang As A Manufacturing Base?

Market Intelligence

Why Is China Developing Xinjiang As A Manufacturing Base?

One Belt One Road Initiative

Xinjiang is strategically placed. It is close to the cotton and textile producing countries. It is the region from where the Silk Road crosses borders, and moves on to Europe.

The 13th Five-Year Plan outlines China's ambition to make Xinjiang an important gateway to the West, Tibet to South Asia, Yunnan Province to Southeast Asia, and Guangxi Zhuang Autonomous Region as an international passage to the ASEAN -- which include Indonesia, Malaysia, Singapore, the Philippines and Thailand.

While Xinjiang is expected to become the hub for both the US$ 46 billion China-Pakistan Economic Corridor (CPEC) through the PoK and the Silk Road projects to connect with Europe, Tibet is likely to play a major role in connecting China to South Asia, including India via Nepal.

China aims to pour US$ 1 trillion into the ambitious project to remake the world. Its goal is a revolution in trade, the likes of which the world has seldom seen.

The project aims to redirect the country's domestic overcapacity and capital for regional infrastructure development to improve trade and relations with Asean, Central Asian and European countries. The Asia Development Bank estimates that Asia needs US$ 8 trillion to fund infrastructure construction for the 10 years to 2020. China well knows its development is linked to Asia and beyond and, in part, is banking its future on responding to its neighbours' huge infrastructure needs via One Belt, One Road.

The Silk Road Route

The land-based "New Silk Road" will begin in Xi'an in central China before stretching west through Lanzhou (Gansu province), Urumqi (Xinjiang), and Khorgas (Xinjiang), which is near the border with Kazakhstan. The Silk Road then runs southwest from Central Asia to northern Iran before swinging west through Iraq, Syria, and Turkey. From Istanbul, the Silk Road crosses the Bosporus Strait and heads northwest through Europe, including Bulgaria, Romania, the Czech Republic, and Germany. Reaching Duisburg in Germany, it swings north to Rotterdam in the Netherlands. From Rotterdam, the path runs south to Venice, Italy - where it meets up with the equally ambitious Maritime Silk Road.

The Maritime Silk Road will begin in Quanzhou in Fujian province, and also hit Guangzhou (Guangdong pronvince), Beihai (Guangxi), and Haikou (Hainan) before heading south to the Malacca Strait. From Kuala Lumpur, the Maritime Silk Road heads to Kolkata, India then crosses the rest of the Indian Ocean to Nairobi, Kenya. From Nairobi, the Maritime Silk Road goes north around the Horn of Africa and moves through the Red Sea into the Mediterranean, with a stop in Athens before meeting the land-based Silk Road in Venice.

The maps of the two Silk Roads drive home the enormous scale of the project: the Silk Road and Maritime Silk Road combined will create a massive loop linking three continents. China's economic vision is no less expansive than the geographic vision. According to a Xinhua article, the Silk Road will bring "new opportunities and a new future to China and every country along the road that is seeking to develop." The article envisions an "economic cooperation area" that stretches from the Western Pacific to the Baltic Sea.

A win-win for all countries

China's "One Belt, One Road" project aims to make central Asia more connected to the world, and has begun redrawing the energy map of the region. It had built an oil pipeline from Kazakhstan, a gas pipeline that allowed Turkmenistan to break its dependence on dealings with Russia and another pipeline that has increased the flow of Russian oil to China.

Meanwhile, China's growing domestic market means the chance for the region and the world to capitalise by providing goods & services. The initiative is not without its challenges; cooperation and coordination with partner countries over the long term are paramount for it to be a lasting legacy.

Key to One Belt, One Road's success is the development of an unblocked road and rail network between China and Europe. The plan involves more than 60 countries, representing a third of the world's total economy and more than half the global population. China's ultimate goal is to extend the initiative to Africa and Latin America.

Infrastructure development along the Silk and Maritime routes

The 13th Plan states that China will continue to promote Belt and Road Initiative by building the China-Mongolia- Russia, China-Central Asia-West Asia, China-Indochina Peninsula, China-Pakistan and Bangladesh-China-India-Myanmar economic corridors, as well as the new Eurasian Land Bridge.

Chinese companies have funded and built roads, bridges and tunnels across the region. A ribbon of fresh projects, such as the Khorgos "dry port" on the Kazakh-Chinese border and a railway link connecting Kazakhstan with Iran, is helping increase trade across central Asia.

Moscow-Kazan high-speed railway

A China-led consortium last year won a US$ 375 million contract to build a 770 km high-speed railway line between Moscow and Kazan. Total investment in the project - set to cut journey time between the cities from 12 hours to 3.5 hours - is some US$ 16.7 billion.

Khorgos-Aktau railway

In May last year, Kazakhstan's President Nursultan Nazarbayev announced a plan to build - with China - a railway from Khorgos on the Chinese border to the Caspian Sea port of Aktau. The scheme dovetails with a US$ 2.7 billion Kazakh project to modernise its locomotives and freight and passenger cars and repair 450 miles of rail.

Central Asia-China gas pipeline

The 3,666 km Central Asia-China gas pipeline predated the new Silk Road but forms the backbone of infrastructure connections between Turkmenistan and China. Chinese-built, it runs from the Turkmenistan/Uzbekistan border to Jingbian in China and cost US$ 7.3 billion.

Central Asia-China gas pipeline, line D

China signed agreements with Uzbekistan, Tajikistan and Kyrgyzstan to build a fourth line of the central Asia-China gas pipeline in September 2013. Line D is expected to raise Turkmenistan's gas export capacity to China from 55 billion cu. m per year to 85 billion cu. m.

China - Kyrgyzstan-Uzbekistan railway

Kyrgyzstan's prime minister Temir Sariev has said that the construction of the delayed Kyrgyz leg of the China-Kyrgyzstan-Uzbekistan railway would start in 2016. In September 2015, Uzbekistan said it had finished 104 km of the 129 km Uzbek stretch of the railway.

Khorgos Gateway

Khorgos Gateway, a dry port on the China-Kazakh border that is seen as a key cargo hub on the new Silk Road, began operations in August 2015. China's Jiangsu province has agreed to invest more than US$ 600 million over five years to build logistics and industrial zones around Khorgos.

Trans-Asian railways

Subsidies from China are making new overland train routes across central Asia an increasingly attractive proposition for logistics businesses. Cheaper than by air, and faster than by sea, increased overland rail networks could help the region capture valuable business and capitalise on increased trade from China to Europe through overland routes across Belarus, Russia and Kazakhstan.

Rail connection to Tehran

The first freight train from China arrived in Tehran in February 2016 in the wake of China's One Belt One Road project which has seen ongoing investment in overland rail across central Asia. This, plus Iran's landmark nuclear agreement with the west in 2015, has paved the way for deals with France and Germany for a much-needed modernisation of the country's railway network and provided a boost to Chinese-Iranian trade.

China-Pakistan highway

Concerns over what China's new Silk Road project will mean for India are concentrated around Chinese plans to invest US$ 46 billion in a new "economic corridor" between China and Pakistan. The initiative will pass through the disputed region of Kashmir and Indian policy analysts remain divided on whether the project is a strategic threat or an economic opportunity for their country.

Economic gains

Despite this expansive goal, it's not quite clear yet exactly what will tie together the disparate countries along the New Silk Road (both on land and at sea). China has discussed building up infrastructure (especially railways and ports) along the route, yet the vision includes more than simply speedy transportation. China envisions a trade network where "goods are more abundant and trade is more high-end." Beijing expects the economic contact along the Silk Roads to boost productivity in each country. As part of this vision, China has repeatedly stressed its economic compatibility with many of the countries along the planned route, and offered technological assistance to countries in key industries.

China also envisions the Silk Road as a region of "more capital convergence and currency integration" - in other words, a region where currency exchanges are fluid and easy. China's currency, the renminbi, is becoming more widely used in Mongolia, Kazakhstan, Uzbekistan, Vietnam, and Thailand. Yet the project does not call for the renminbi to become the Silk Road's primary currency, but rather hopes that local currencies will be the dominant means of economic deals.

Strategic agreements

There are compelling geopolitical reasons, such as energy security, for China to push forward with its One Belt, One Road plans at a time when its trading partners are potentially excluding it from strategic agreements. Trans-Pacific Partnership countries, the Transatlantic Trade and Investment Partnership and the EU-Japan agreement show comprehensive liberalisation agendas, but do not include China and have the potential to increase trading costs.

In response, China plans to negotiate free-trade agreements with 65 countries along the OBOR. Until now China has signed 12 free-trade agreements including Singapore, Pakistan, Chile, Peru, Costa Rica, Iceland, Switzerland, Hong Kong and Taiwan and a further eight are under negotiation with Japan, Korea, Australia, Sri Lanka, Norway, the Regional Comprehensive Economic Partnership, Asean and the Gulf Cooperation Council.

Domestic Silk Road Plan

One Belt, One Road could have as much impact on China's internal economy as it will have internationally. China's top priority is to stimulate the domestic economy via exports from industries with major overcapacity such as steel, cement and aluminium.

Many will be build - transfer - operate schemes in which large SOEs will lead the way, but smaller companies will follow. The domestic plan divides China into five regions with infrastructure plans to connect with neighbouring countries and increase connectivity.

Each zone will be led by a core province: Xinjiang in the Northwest, Inner Mongolia in the Northeast, Guangxi in the Southwest and Fujian on the coast.

Funding

One Belt, One Road's vast scale has elevated it to high-profile status given China's financial resources. But even China's deep pockets have limits, with the country's total debt to GDP at 250%. Three financial institutions have been set up to support its development, which have met some resistance in the West given they provide alternatives to the World Bank, IMF and ADB.