Asia Business Channel

Understanding the potential of the China-Mongolia-Russia Economic Corridor

Introduction

In a effort to determine the potential of the China-Mongolia-Russia Economic Corridor, a key component of the Belt and Road Initiative (BRI), the Hong Kong Trade Development Council has conducted extended on-site evaluations of two of Inner Mongolia’s key border ports – Erenhot and Manzhouli and created reports on these subjects. In addition to identifying potential in the local logistics and trade arenas, the HKTDC also determined that substantial opportunities exist for Hong Kong and overseas companies in terms of both export processing and infrastructure construction.

Part I - Belt and Road Inner Mongolia: Strategic Objectives and Key Deliverables

China’s Belt and Road Initiative (BRI) aims to promote economic links between countries along its routes, and integrate regional development strategies. China, Mongolia and Russia are building the China-Mongolia-Russia Economic Corridor in a bid to strengthen existing cross-border trade and investment between the three countries and turn the region into an integral part of the BRI. Inner Mongolia, a border province in northern China, acts as a bridgehead between China and its northern neighbors. It serves as a logistics center and trade hub along the China-Mongolia-Russia Economic Corridor and plays an important role in China’s external-oriented economic development.

China-Mongolia-Russia Trade Hub

The Inner Mongolia Autonomous Region, on China’s northern border, is a major trading partner of neighboring Mongolia and Russia. Trade with the two countries accounts for over 50% of Inner Mongolia’s import-export trade as well as a considerable share of China’s trade with both countries. Two of the region’s border cities, Erenhot and Manzhouli, are China’s largest trade hubs with Mongolia and Russia respectively.

Since Inner Mongolia’s foreign trade is mainly conducted with Mongolia and Russia, its export growth relies heavily on the economic conditions of the two countries. Between 2014 and 2016, falling commodity prices badly affected economic growth in Mongolia and Russia, which naturally led to a lackluster performance by Inner Mongolia’s exports in that period. Inner Mongolia’s exports to Mongolia dropped by more than 40% in US dollar terms in 2016 from the year before, while its overall exports declined by 20% in the same year.

Processing Trade: Great Potential for Growth


Despite being China’s base for trade with Mongolia and Russia, Inner Mongolia’s advantages as a border province have not been fully made use of. Currently its import-export trade is conducted mainly in the form of “general trade” and “small-scale border trade”.

Compared with other border provinces in the south, the share of Inner Mongolia’s total trade accounted for by processing trade using local or imported resources is relatively low. In Guangxi, for example, processing trade accounts for about 20% of its total trade; in Yunnan, the share is about 10%. In Inner Mongolia, processing trade accounts for less than 5% of its total trade. In other words, its trade structure can be improved.

In light of this, Inner Mongolia has been trying to develop its processing trade in recent years. Construction of import-export resources processing parks has begun in Erenhot and Manzhouli. Imported resources (such as wood and animal and agricultural products) are used for processing and the products are either exported to markets in Europe and America or sold domestically to other regions in China. With processing facilities in Inner Mongolia becoming better and more advanced, the potential for developing import-export processing trade in the autonomous region is vast.

Pillar of China-Mongolia-Russia Economic Corridor

China, Mongolia and Russia signed the Plan on Establishing the China-Mongolia-Russia Economic Corridor in 2016, the first multilateral co-operation plan launched under the BRI. It aims to expand tripartite trade, raise product competitiveness, improve cross-border transport, and develop infrastructure facilities. Taking advantage of its role in China-Mongolia-Russia trade, Inner Mongolia serves as a strategic nexus along the China-Mongolia-Russia Economic Corridor.

One of the key objectives in building the China-Mongolia-Russia Economic Corridor is to construct a logistics passageway crossing the three countries, which should promote tripartite trade between them. Of the seven railway routes outlined in the Plan, six will pass through Inner Mongolia. Two of the three China-Europe Railway Express (CR Express) routes connecting China with Europe leave Chinese territory via Inner Mongolia. Currently, about half of the trains running between China and Europe pass through Inner Mongolia.

In line with the objectives of the BRI, China, Mongolia and Russia are devoting resources to the construction of the Ulanqab-Ulaanbaatar-Ulan-Ude logistics channel. Comprehensive logistics parks are being built and business links strengthened to try to improve transport connections along the passageway, as well as linking the cities of Ulanqab and Ulaanbaatar in Inner Mongolia with the city of Ulan-Ude in Russia.

China, Mongolia and Russia have also prioritized working together to raise production capacity and investment, deepen economic and trade co-operation, and accelerate the synergy between China’s BRI, Russia’s Eurasian Economic Union, and Mongolia’s Prairie Road development initiatives.

Industrial Upgrading a Boost to BRI

As well as promoting foreign trade, Inner Mongolia is also actively pursuing the transformation and upgrade of its indigenous industries, which will help boost the BRI. With its rich energy resources, vast land size and abundant and cheap electricity, Inner Mongolia is ideal for the development of modern industries requiring high power consumption, such as cloud computing. Its climate, with its low temperatures, also offers a natural, cool environment for businesses to house their data centers at low cost.

Hohhot Shengle Modern Service Industry District is the largest cloud computing industry base in Inner Mongolia. It has put a lot of work into developing cloud computing data centers and big data projects. China’s top three telecommunications operators, China Telecom, China Mobile and China Unicom, have all established a presence in the park. With its vast grasslands and well-developed animal husbandry industry, Inner Mongolia has also placed great emphasis on the reform, innovation and modernization of animal husbandry. A large number of businesses in the Shengle district are engaged in collecting and analyzing all kinds of data on sectors such as the dairy industry and grassland ecology. Others specialize in the ‘smart’ rearing of dairy cattle, providing services such as breeding and reproductive technologies to improve dairy cattle breeds.

Part II - Belt and Road Inner Mongolia: The Erenhot China-Mongolia Trade Hub

Mongolia lies between China and Russia and shares more than half of its border with China. Economic co-operation between China and Mongolia has played an important role in the construction of the China-Mongolia-Russia Economic Corridor.

The city of Erenhot, in China’s Inner Mongolia Autonomous Region, is just 9km from Zamyn Uud, in Dornogobi province in southeastern Mongolia, where the Mongolian government is building a free trade zone. Erenhot is the largest center of rail and road links between China and Mongolia, and as such is a vital strategic location in cross-border co-operation between the two countries. Erenhot was designated as a key pilot zone for development and opening up in 2014 and has become a crucial part of the China-Mongolia-Russia Economic Corridor.

Collaborative Development of Land Logistics

Erenhot is actively developing its import and export logistics business with Mongolia. The city has eight logistics parks with a total area of over 2.5m sq.m. Among them, the Huitong imports Logistics Park and Huanyu exports Logistics Park are examples of how land logistics for imports and exports have been developed collaboratively. They have improved the efficiency of cargo transit clearance and material flow and are set to boost further Erenhot’s trade.

1. Huitong Imports Logistics Park

The Huitong Imports Logistics Park is divided into four zones – health inspection and quarantine, customs inspection, specialised logistics storage and storage of mineral products, providing storage, logistics, customs clearance, transportation and other services. Goods imported into China over land via Erenhot must go through the Huitong imports logistics park.

Since Erenhot is on the border with Mongolia, the park mainly handles goods imported from Mongolia, which is traditionally a major livestock breeding country. Goods imported via the park are mainly animal husbandry products, including meat products and derivatives such as cashmere, wool and leather. Machinery and other goods also pass through the park.

Expand Business Opportunities by Improving Border Facilities

Mongolia has a thriving animal husbandry industry and produces many different kinds of meat products, including cooked beef and mutton and frozen horsemeat, which are in great demand in China. Erenhot is China’s only designated gateway for the import of horsemeat, and because its border facilities are limited, Mongolian horsemeat can only be imported into China in winter. This means that the quantity imported always falls short of demand.

In order to develop the horsemeat market, Erenhot has made efforts to improve its facilities and provide cold chain storage. In 2016, the Huitong logistics park built integrated cold chain inspection and storage facilities complete with video monitoring and electronic supervision systems in accordance with the requirements of the General Administration of Quality Supervision, Inspection and Quarantine. This has meant that it is now possible to import horsemeat all year round and not just in the winter. Imports of horsemeat from Erenhot increased from 1,000-2,000 tons a year in the past to over 20,000 tons in 2017. In the next stage of its development, the Huitong logistics park will actively invite investment for repackaging and other basic processing procedures.

2. Huanyu Exports Logistics Park

Erenhot’s exports are handled by the Huanyu Exports Logistics Park, which is divided into three zones – a customs supervision area, a centralized area for inspection and quarantine, and an export storage area, providing services such as forwarding, storage, transit, container consolidation and deconsolidation, and sorting.

Given Erenhot’s geographical location, the Huanyu Exports Logistics Park mainly handles logistics business with Mongolia. Goods exported via the park mainly include daily necessities, building materials and other equipment. Exports passing through this park amount to about 5m tons a year.

The siting of the Huanyu Exports Logistics Park next to the Huitong Imports Logistics Park was intended to save transportation time, by allowing trucks carrying import goods from Mongolia to continue on to the Huanyu exports logistics park after offloading and reload with goods bound for Mongolia. Generally speaking, a truck has to wait one day in the logistics park for customs clearance, before proceeding to customs declaration for the import of goods into Mongolia. Containers are mostly used for transportation to facilitate loading and unloading.

The two logistics parks of Huitong and Huanyu are the main drivers of Erenhot’s import and export logistics businesses. The availability of hotels, office buildings and other facilities in the vicinity of these parks greatly increases the competitiveness of the city’s import and export logistics.

Tapping Border Advantages

In order to take full advantage of its border location, Erenhot is looking to boost the supply chain as a whole by developing import-export processing in addition to logistics. The Erenhot Cross-Border Economic Co-operation Zone consists of a dedicated processing zone and an export processing zone where business clusters are being formed for import-export trade, international logistics, timber processing, minerals processing, livestock processing, building materials processing and grain and oil processing. In total, 78 businesses had moved in by July 2018, including 67 processing enterprises and 11 firms in the storage and logistics business.

Far East Timber Trade Park in Erenhot Cross-Border Economic Co-operation Zone.

The Cross-Border Economic Co-operation Zone has parks for different industries. For example, since neighboring Russia is rich in timber resources, Erenhot considers timber processing as a key industry for development and established the Far East Timber Trading Park within the zone in 2017.

Today, 11 timber-processing enterprises are operating in this park, importing timber from Russia via Mongolia for processing in Erenhot’s import processing park. The finished timber products are either exported to western markets or sold to the western region of China.

The Cross-Border Economic Co-operation Zone is making use of Erenhot’s advantageous geographical location to actively develop its processing industry and supporting logistics and storage business. It is aiming at becoming a processing trade base on the border in preparation for the relocation of some industries from other parts of China.

China-Mongolia Cross-Border Zone in the Pipeline

China is Mongolia’s largest trading partner and the two countries are building the Erenhot-Zamyn Uud Cross-Border Economic Co-operation Zone together in an attempt to strengthen their economic ties. The zone has a planned area of 18 sq.km and stretches across the borders of both countries. The model of “one zone straddling two countries, within national borders but outside customs territory with closed operation” will be used in the development of international trade, e-commerce, tourism, entertainment and financial services. Economic co-operation between China and Mongolia is likely to upgrade to a higher level once this cross-border economic co-operation zone is completed.

Part III - Belt and Road Inner Mongolia: Reinventing Manzhouli as a China-Russia Trade Hub

Ties between China and Russia have strengthened to different degrees across a range of sectors including economic and trade, culture and tourism, over the years. The city of Manzhouli in Inner Mongolia, on the region’s border with Russia, is China’s largest land port of entry from Russia. More than 65% of land transport in Sino-Russian trade passes through the city. In order to promote bilateral co-operation between the two countries and encourage economic reform, Manzhouli was made a key pilot zone for development and opening up in 2010. It is now an important platform for co-operation between China and Russia.

China-Russia Border Economic Co-operation

The border economic co-operation zone in Manzhouli was established over 20 years ago to boost links between China and Russia. Two major industries have developed in the zone – the processing of imported resources (mainly timber), and warehousing and logistics largely involving the export of minimally processed vegetables and fruit to Russia.

Today, about 30 warehousing and logistics enterprises operate in the zone, exporting minimally processed vegetables and fruit. They work from more than 600 warehouses with a total storage area of about 300,000 sq m and export close to 400,000 tons of vegetables and fruit to Russia each year.

Import processing in the zone centers on timber. About 80 timber-processing firms operate there, producing timber boards, furniture, wooden doors and windows, and wooden cabins.

Proximity to Imported Resources

The Manzhouli Kairun Woods Co Ltd is one of the imported timber processing enterprises operating in the imported resources processing park. Its main business includes the design, production and installation of wooden cabins and the manufacture of solid wood furniture, flooring and laminated wood products. It primarily serves the domestic market, selling prefabricated wooden cabins to tourist resorts in southern China and other countries such as South Korea and Laos.

Capitalizing on Manzhouli’s proximity to Russia, Kairun uses Russian Scots pine (Pinus sylvestris) imported from the Alpine zone of Siberia. It is a solid wood with great tensile and compressive strength and stability, eminently suitable for making wooden cabins and large wooden structures.

In order to secure its supply of Scots pine, Kairun has extended its supply chain by obtaining timber and lumbering rights in Russia. Logs are cut into boards of different specifications locally before being shipped to China for further processing into floorboards, anti-corrosive wood, laminated wood, planed timber, bed boards and other products.

The advantage to Kairun in having deep processing facilities on the China-Russia border rather than near the market is the savings to be made in transportation costs. Wood products are very heavy, and thus difficult and expensive to transport. The raw materials can be transported by rail from Russia, reaching the timber-processing park in four days. The weight of the finished products after processing is only half that of the raw materials, which makes them much easier and cheaper to transport on their onward journey from Manzhouli to the market.

Synergy between Cross-Border Trade and Logistics

As well as looking to develop its import and export processing, Manzhouli is also focusing on the synergy between cross-border trade and logistics between China and Russia. The China-Russia cross-border trade and logistics complex in Manzhouli covers an area of 500,000 sq m and includes temperature-controlled storage and cold chain storage facilities, a joint customs inspection and quarantine inspection platform, and a parallel import automotive testing workshop. It is a one-stop trade service area offering all kinds of services for import and export trade, transportation, processing, loading and unloading, storage, domestic and overseas logistics, exhibition, trading, supply chain finance, and so on.

Goods being imported through the China-Russia logistics complex are mostly food products, while fruit and vegetables make up the bulk of exports. The complex currently handles over 90% of Manzhouli’s vegetables and fruit exports. The complex is equipped with cold storage where vegetables and fruit can be stored for a few days before being shipped to their destinations.

In order to improve transport efficiency, the China-Russia logistics complex has a special passageway leading to the outbound tourism and freight cargo channel, effectively shifting some of the functions of the highway boundary control point to the complex. The complex has also launched a comprehensive e-commerce service platform (www.51aladdin.com) to connect buyers and sellers online.

Through its efforts to promote the synergetic development of trade and logistics and integrate the online and offline supply chain, the China-Russia logistics complex has successfully attracted some Russian manufacturers to shift their overseas warehouses from the banks of the Suifen River in Heilongjiang to Manzhouli. Similar warehouses in other cities are likely to be moved here in the future. Operations headquarters will be set up in first-tier cities to handle orders and nationwide distribution while Manzhouli plays its role as a distribution center. This should help boost the city’s logistics industry and the fast-growing China-Russia cross-border trade.

New Trends in Cross-Border Barter Trade

Another of Manzhouli’s development priorities is the promotion of barter trade between Chinese and Russian border inhabitants. A duty-free trading zone has been set up in the Manzhouli China-Russia barter trade zone for the sale of food, daily commodities, handicrafts and garments imported from Russia. Being in China’s northern border region, Manzhouli suffers from severe winter weather, so footfall is affected by seasonal changes. Daily footfall can be as high as 2,000 in peak seasons, but the place is much quieter in the winter.

As in China’s other cross-border barter trade zones, residents of Hulunbuir can apply for a border inhabitant card, which offers them a daily duty-free allowance for purchases worth up to RMB8,000. Tourists from outside the city are only eligible for an annual duty-free allowance of RMB8,000. Russian border inhabitants can do business in the duty-free zone by submitting their applications in Manzhouli.

The aim of the duty-free zone is to provide a trusted petty-trade platform for people living on both sides of the border. The goods sold must be authentic and competitively priced. The warehouses inside the duty-free zone are under customs supervision and the types of goods sold are restricted. The quality and price of goods are also subject to customs supervision.

The duty-free zone has taken measures to promote a more balanced development of cross-border barter trade. Russian border inhabitants are allowed to stay in the trading zone for 72 hours and do not have to leave on the same day. There are hotels and other facilities within the zone. There is also an exhibition hall to showcase the Chinese-made small commodities and electrical appliances to Russian tourists.

The China-Russia barter trade zone also takes advantage of the nearby Manzhouli comprehensive bonded zone, which lies “inside the national border but outside the customs territory” to promote “duty-free trading with goods stocked in the bonded zone for pick-up at different pick-up points”. This new trading model, which involves the processing and manufacturing of imported raw materials and the exhibition of finished samples in the comprehensive bonded zone, online ordering of goods and offline delivery, is the latest strategy for the development of cross-border barter trade and the transformation of Manzhouli into the largest distribution center for China’s trade with Russia.


Editors Note:
This is an original report that was produced by the Hong Kong Trade Development Council (HKTDC). All content rights are solely those of the HKTDC and we republish their research here, by kind permission of the HKTDC.
For more information on the activities, events and research of the Hong Kong Trade Development Council, please visit them on the web at: https://hkmb.hktdc.com/en
Read 147