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June 11 2018

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June 11 2018 | The Journal of Commerce 29 www.joc.com Government THE SCALE OF government support that makes services on the China- Europe rail network viable is begin- ning to emerge, with Chinese state, provincial, or municipal officials believed to be providing average sub- sidies as high as 60 percent per TEU. Although there are no official fig- ures on the subsidies, forwarders offering services on the route esti- mate that the real cost of transporting a TEU by rail from China to Europe, terminal to terminal, is about 8,000 euros ($9,400), with average subsi- dies per container of 5,000 euros. Rates on China-Europe rail being offered by the forwarding market were built around the remaining 3,000 euros per TEU, according to Ivo Aris, vice president of global forward- ing for C.H. Robinson Europe. "As a user, we see the 3,000 [euros], but the real cost is closer to 8,000," he said. "The question is how long these subsidies will last. How long will China invest that kind of money?" It's a legitimate question with no real answer. The Chinese government last year indicated it planned to draw down the rail subsidies with a view to having the China Railway Express, as the vast network is being called, operate on a purely commercial basis. But another question without an answer is whether an end to sub- sidies would push up freight rates. With 60 percent of the transporta- tion cost per container covered by subsidies, an end to the government support would surely prove disas- trous to rail as a shipper option. However, Andre Wheeler, director of Wheeler Management Consulting in Perth, Australia, said there was unlikely to be a sudden withdrawal of subsidies. As shippers and forwarders increase their use of the rail option, he said, it might even become financially sustainable, although he added that China would only stop supporting the network when its leaders were 100 percent sure it would stand up commercially. "At present, the westbound trains are pretty full and forwarders are already complaining about securing slots, eastbound trains are getting busier, and it is claimed that the current network could actually now function without subsidies," he said. "It is argued that this would only be sustainable when 10,000 trains a year [are] achieved, and currently there are approximately 7,000 in operation." Wheeler has been conducting research on Beijing's Belt and Road Initiative, a trade strategy that appears to encompass the rail link as well as every other global trade route China is involved in on land, sea, or in the air. What he found was a complex web of rail subsidies in three layers: those provided by the central government, the regional government, and the city of origin or destination of a train. "Those subsidies vary from point to point," Wheeler said. "They are different for each operator, and they are also different depending on each region and each city. Some provide subsidies by train, while others by container. It's reasonable to consider that on average every container gets subsidies of more than $4,000 per TEU on the European Union-China route, and $1,500 for China to Russia and eastern Europe." This isn't public information, he noted, and some commodities receive no subsidies, so the onus is on the train operator to get the optimal mix of shipments to make the entire freight train profitable. "But when Beijing removes the subsidies, there is the question of whether the regions and the cities might still give subsidies in order to be more competitive than neigh- boring cities," Wheeler said. "Who knows? It is not written yet." Most global forwarders are now active on the land route, with new services being announced almost weekly. C.H. Robinson in May launched a trans-Eurasian rail freight service between China and Europe that connects nine origin terminals in China with eight desti- nation cities in Europe. JD.com, China's largest retailer, in May also added a block train to its Europe-China rail options, book- ing the entire train from Hamburg 10,000 kilometers (6,213 miles) to Xi'an, the capital of central China's Shaanxi province, where JD.com operates its main distribution hub for cross-border imports. JOC email: greg.knowler@ihsmarkit.com twitter: @greg_knowler Beijing's helping hand Chinese government subsidies keep China-Europe rail network on track By Greg Knowler Most global forwarders are active on the China-Europe rail route. Shutterstock.com International | Washington | Customs | Security | Regulation

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