Breaking Energy Staff

As China’s economy grows larger, it is slowing down. But the advancing economy is also creating new opportunities. That reality was on display recently as China announced the opening of a new railroad link between London and China.

The train line will be one of the longest in the world spanning roughly 7.500 miles – nearly a third of the circumference of the Earth and after leaving China the train passes through Kazakhstan, Russia, Belarus, Poland, Germany, Belgium and France before reaching England. The news might seem like merely another PR stunt by China trying to display economic muscle, but it also has some meaningful information for investors in the energy and materials industries.

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London is the 15th European city with a direct train from China all largely built around President Xi Jinping’s Silk Road initiative announced a few years ago. That plan is intended to create greater economic linkages between China and Europe through transportation. China is in the process of investing $40 billion in the effort.

There is reason to question many of China’s investment decisions. It’s unclear if there is enough demand for a train from China to London. While the train can carry about 200 containers, versus 20,000 on a large cargo vessel, the trip takes about half as long as a 30-day sailing between East Asia and northern Europe. Yet at the same time, capacity on rail line is limited and as a result, there is an enormous back-end capital investment that has been made in this rail link.

The train to London is intended initially to carry garments, bags and suitcases, while the train back to China may carry designer British goods. While the train is expected to run once a week, it’s very hard to see how the economics of the service ever make any sense given the capital expenditure upfront. The service is more of a political and PR ploy than anything else.

Yet investors can still make money off China’s efforts to be seen as a first world nation. In particular, it is very unlikely that this will be the last such train announcement by China. The county is set on pouring money into transportation networks in the same way that it poured money into what are today ghost cities.

Even domestically, Chinese infrastructure spending is likely to continue. Railways are one of the top priorities for the Chinese government and Xi. In December, the country announced that it plans to spend 3.5 trillion yuan or roughly $500 billion to expand its national rail system by 2020. The new high speed rail system is intended to be a major commuting option for Chinese in the future with the total network spanning 30,000 kilometer and covering over 80 percent of major cities in China

US investors can capitalize on this by looking for European and Chinese firms that will benefit from the Chinese government’s largesse. In addition, the investment by the Chinese should help to bolster the markets for steel, coal, and to a lesser extent oil. By itself, $40B is not enough to support any of these markets, but in combination with the regular needs of the global economy, the Chinese spending is a helpful boost.