China's Silk Road has Silk Roadblocks

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For a decade or more, it seemed that China could not get enough of every commodity under the sun.  From coal to gold, an aggressively-expanding economy snapped up raw resources in order to fuel more construction, more production, and more manufacturing.  Some agricultural commodities felt the gale-force winds as well, including beef, but many others didn't get as much as a hint of a bump from an economy growing by double-digit percentages at its peak.  As the commodity boom has passed and the Chinese economy has hit the brakes, the newest Five-Year-Plan seeks to create internally rather than consume externally, leading to an agricultural surge where you may not expect it.  Chief among such startups is the Xinjiang province, more famous for deserts than harvests, where the Chinese government wants to create a cotton belt and launch a new Silk Road.  A lot of silken roadblocks, however, lie in their path.

Lucrative Travels

Marco Polo unfairly gets credit as the first European to have crossed central Asia and reached China, a notion that misses the mark by at least one thousand years (the Roman Empire sent emissaries to the Han Empire and vice-versa to conduct trade).  Nevertheless, we can credit Polo with incredible tenacity and bravery, venturing some five thousand miles across an entire continent and back to conduct trade and record his travels for an eager audience.  The Silk Road of antiquity offered direct access to that most valuable fabric, as well as spices, gold, slaves, glass, furs, and ivory, for those brave or foolhardy enough to traverse the equivalent of a quarter of the world's circumference.  As silk production moved increasingly from China to India following British colonization, and as sea trade became easier and more profitable than overland trade, the Silk Road fell into disuse.  Silk itself went into decline as Indian cotton production exploded, led in part by Gandhi's ultra-pacifistic morals that denounced the cultivation of silkworms, who must be boiled alive to harvest their precious cocoons.  Today, China leads the market in silk production by a huge margin, producing 150,000 of the 180,000 tons of global output.  Only recently, they've also edged India as the world's leading producer of cotton with 6.5 million metric tons per year.  The Xinjiang province represents a weapon in the Chinese economic arsenal, but it's not clear whether that weapon will backfire.

Go West, Sailor

The next Chinese Five-Year-Plan features a massive shift westward.  The overwhelming majority of Chinese manufacturing takes place in the eastern seaboard, which makes perfect sense but has resulted in fantastic gridlock, pollution, and corruption.  Newly-minted Chinese president Xi Jinping has made it a personal agenda to tackle each of these issues in turn.  His solution, at the moment, lies in pushing as much of China's problems to the west as he is able to.  The Xinjiang province, a region with lots of deserts and only a few cities, has been identified as a major location to move the massive Chinese textile business, with the Chinese Politburo hoping to create one million new textile jobs in Xinjiang (population of just 20 million) over the next decade.  The initiative, known as "One Belt, One Road" clearly desires a revitalization of the region and a new Silk Road connecting Chinese textiles to Asian and European markets.  At a time when the Trans-Pacific Partnership seeks to undermine Chinese economic authority throughout western Asia, the Chinese aren't taking the news sitting down.  With new industry and one million new jobs, furthermore, Beijing hopes to quell a frequent thorn in their side: separatism.

This Land Isn't Our Land

Most Americans have some familiarity with the Chinese disputes with Taiwan and Tibet, claiming both autonomous regions as Chinese territory despite each region's claim of autonomy.  In the case of Taiwan, the sixty warships of the US 7th Fleet patrolling between South Korea and Malaysia disputes the claim right back.  For Tibet and Xinjiang provinces, no such military muscle exists to help ethic Tibetans and Uyghurs contest the rule of ethnic Chinese from a capital 1000 miles away.  Uyghurs practice Islam, furthermore, meaning that their desires to resist Beijing come financed by Sunni clerics and Saudi Arabian or UAE oil cash.  Human-rights activists claim that the repressive Chinese policies clamped down on the Uyghurs of Xinjiang include excessive taxation, imprisonment, and harsh treatment of Muslims suspected of harboring separatist insurgents.  Beijing officials want a huge population to split from the countryside and move to rapidly-growing cities, giving up nomadic lifestyles to incorporate into the Chinese economy, believing that the promise of employment will ease all societal discontents.  Yet Uyghurs who work in textile factories popping up around the nascent cotton belt and its Silk Road earn only about 3000 yuan (~$500) per month, while those in eastern Chinese factories earn about 4000.  With sixty percent of the Chinese cotton crop already flowing out from Xinjiang, furthermore, it's not clear how much more agriculture the region can sustain with their scant water resources.  The World Resources Institute labels Xinjiang at "high risk" for water stress.  Given the problems of pay, separatists, international competition, and water, we may as well tack on one more: the logistics of moving goods to and from Xinjiang, where freight costs 50% more than shipping from eastern ports.

  • The Takeaway: Chinese cotton needs to expand aggressively if their textile industry can rebound in the wake of a potentially-devastating TPP.  The Politburo's plans to create a new Silk Road running through Xinjiang represents more a flight of fancy than a realistic scenario, however.  Even if the plan unfolds without further ethnic strife, the costs of Chinese cotton are certain to escalate due to geographical and environmental factors.  Cotton is slowly picking up from yearly lows in September due to the international interest in textiles.  Investors should consider cotton a growth mechanism in the long term, buying with an intent to sell no sooner than 12 months out.  Existing pressure on Chinese cotton will amplify, leading to greater shortages as the Xinjiang experiment likely fails to meet demand.

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