BOFIT Viikkokatsaus / BOFIT Weekly 2019/35

Rail connections between China and Europe have been a centrepiece of the Belt & Road Initiative (BRI) launched by China’s leadership in autumn 2013. Because BRI is an important political project for China, authorities have lavishly subsidised shipping of freight containers by rail from China to Europe, which in turn has led to growth in rail freight volumes. The reduction in public support should affect the competitiveness of rail freight relative to shipping by sea or air.

 Chinese media report that the formal cap of public subsidies for rail shipping to Europe peaked at 50 % in 2018. The top level of support will be reduced to 40 % this year, to 30 % next year, and subsidies should be abolished in 2022. Besides the central government, local governments have showered money on rail subsidies in efforts to garner real or imagined political points in BRI projects. Overall, the policies of subsidising rail freight to Europe are quite murky.

It is clear, however, that there are big problems associated with subsidy policies. Subsidies are a huge drag on public finances. Moreover, they have already encouraged fraud such as shipping empty containers just to collect the subsidy. The biggest issue, however, will be what happens to completed logistics investments in Europe and Asia once rail subsidies are phased out. The South China Morning Post reports that two rail connections between the northern China city of Harbin and Moscow and Hamburg did not operate last year due to insufficient public-sector subsidies.

The company China Railways Express (CRE) began shipping goods by rail from China to Europe in 2011. CRE and its partners currently offer shipping from about 60 Chinese cities to 53 European cities in 16 countries. While rail transport is suitable for e.g. cars, electronics, processed foods and clothing, only 3 % of the total value of goods (and only 1 % of the volume) shipped last year between China and Europe were shipped by rail. In comparison, air freight accounted for 27 % by value (2 % by volume) and maritime shipping 60 % (90 %).