13 Oct Belt and Road Initiative in Southeast Asia – A Poisoned Chalice?
by BHARGAV SRIGANESH
Introduction to “Belt and Road Initiative” (BRI)
The “Belt and Road Initiative” (BRI) is one of the key geopolitical developments shaping the world today. The “Road”, counterintuitively, refers to a proposed maritime route connecting China’s south coast to East Africa and the Mediterranean. The “Belt” is a series of land corridors linking China with Europe, via Central Asia and the Middle East. Officially announced by China’s President Xi Jinping in 2013, the Belt and Road Initiative stretches through 65 countries that collectively produce a third of the global GDP. Close to $900 billion has already been set aside by China’s largest state-owned commercial banks to finance 900 projects (Wu and Zhu 2017). Figure 1 illustrates the maritime trade routes, economic corridors, rail networks and gas pipelines that will connect these key markets (The Straits Times 2017)
Figure 1 – “One Belt One Road” Map (Source: Mercator Institute for China Studies)
BRI in Southeast Asia
BRI has come at an opportune time for Southeast Asian countries. Trade is expanding between the Association of Southeast Asian Nations, the regional bloc, and China. Presently, ASEAN is China’s third largest trading partner and could overtake the EU to be the largest trading partner. In addition, Chinese investments funnelled through BRI projects could tackle current infrastructural deficits and enhance regional development in ASEAN. Considering that the Asian Development Bank has estimated that Southeast Asia will need financing close to $3 billion on infrastructure through 2030 to sustain economy growth, China’s BRI initiative is a timely one (Stratfor Worldview 2017). Most importantly, BRI comes at a time when there has been hand-wringing within ASEAN that the American withdrawal from the Trans-Pacific Partnership, Trump’s protectionist stance and uncertainty over European markets after Brexit could stymie export-oriented growth.
In Southeast Asia, the BRI strives to construct highways, railways, sea ports complementing each other and linking the various peninsular and island countries in Southeast Asia. Thus, instead of viewing the ‘Belt’ and ‘Road’ infrastructure development projects separately, it is imperative to see them as syncretic, multimodal transportation facilities. As illustrated in Figure 2, the BRI, if complete, will offer seamless rail transportation from Yunnan Province in China to Singapore, via Laos, Thailand and Malaysia. (Stratfor Worldview 2017). The Singapore-Kunming Rail Network, also referred to as the Pan-Asia Railway Network will link eight countries including China, Myanmar, Vietnam, Laos, Cambodia, Thailand, Malaysia and Singapore.
Figure 2 – Connecting Southeast Asia by Rail (Source: United Nations)
Meanwhile, China is also planning to build a Special Economic Zone (SEZ), deep-sea port and energy pipelines in Kyaupkyu, Myanmar that will offer secure energy access to Yunnan Province. Securing energy access in Myanmar and circumventing the need for oil and gas supplies to pass through the Malacca straits are strategic issues for the Chinese. Up to 80% of China’s energy needs pass through the Straits of Malacca and this over-reliance was characterised as the “Malacca Dilemma” by former President Hu Jintao 15 years ago (Teoh 2016). This over-dependence on the Malacca Straits is a strategic concern especially since the waters are patrolled by the US Navy and was previously used by Americans to send warships to Taiwan when cross-straits tensions escalated in 1996 (Tarrant 2010). Therefore, the US$10 billion project in Malacca will be a key node of the maritime ‘Road’ in Southeast Asia. Ships sailing through the Malacca Straits, will not need to ship their cargo through Singapore and access the South China Sea. Alternatively, as demonstrated in Figure 3 with the development of the East Coast Rail Link (ECRL), transporting cargo across Peninsula Malaysia and upwards into Thailand becomes a proposition, although there are concerns about how commercially viable it is.
Figure 3 – Malaysia’s East Coast Rail Link (Source: Spad.Gov.My, Straits Times Graphics)
Risks to BRI in Southeast Asia
Considering the scale of infrastructure projects undertaken by Chinese firms, much of the analysis about BRI wrongly perceives that investments in Southeast Asia will automatically result in countries like Malaysia, Cambodia, Laos and Myanmar pivoting towards China. This assessment does not account for the domestic factors that dictate how ASEAN countries manage the appended risks when receiving BRI funding.
Peninsular countries (Cambodia, Laos, Myanmar, Vietnam) and Malaysia need to manage three risks that will be discussed in this report. Some Southeast Asian countries fear that Chinese projects, especially ports, could become naval bases that project Chinese geostrategic power in the region. Also, there are concerns that the BRI projects will not be commercially successful, pose a fiscal strain for Southeast Asian countries in the long-run and make them vassal states. Finally, the gains of the BRI investments might not trickle down to uplift the livelihoods of locals.
First, China could use some of the BRI infrastructure projects for military purposes, a move that could potentially undermine the sovereign, national interests of Southeast Asian countries. The Kyaukpyu Special Economic Zone (KSEZ) project in Myanmar is a case in point. KSEZ has three components: deep-sea port, an industrial park and a housing development project. Its construction is being undertaken by the Chinese CITIC-led consortium (a state-owned investment company) at a cost of $10 billion. Nevertheless, if China obtains an 85% stake in the deep-sea port, there are worried murmurs that Kyaukpyu will be turned into a naval base or dual-use facility in the Bay of Bengal. This is a move that could clearly strengthen China’s geostrategic position in the Indian Ocean, India’s strategic “backyard” (Sun 2017). The Burmese military brass strongly opposes this possibility and has cited the 2008 constitution to state that “no foreign troops shall be permitted to be deployed in the territory of the Union” (Ministry of Information 2008).
Admittedly, these anxieties might be misplaced and exaggerated since China’s strategic objective of the deep-sea port in Kyaupku is primarily to link it with the Chinese National Petroleum Corporation refinery at Anning in Yunnan province. However, the experiences of Pakistan and Sri Lanka have rightfully raised question marks over how China could transform a commercial port into a dual-use facility. For instance, there is a growing belief that the Gwadar port in Pakistan, developed as part of the BRI initiative, is already offering military facilities for the People’s Liberation Army (Sun 2017). Meanwhile, it took repeated assurances by the Sri Lankan government to allay concerns amongst Indian policymakers that the Chinese, who own a 70% stake in Hambantota Port, would use the facility as a naval base. Thus, it will take time before peninsular states trust the Chinese and are convinced that BRI projects will not be used by the Chinese to project military power.
Second, there are doubts about whether BRI projects such as the ECRL and Sino-Laos railway can be profitable. For instance, it remains to be seen if shipping cargo to Malacca, unloading it, and then reloading it via the ECRL, unloading it again at Kuantan and reshipping from there will accrue cost savings. Furthermore, the commercial justification for the ECRL is premised on the estimate that it will carry almost 50 million tonnes of freight by 2030. By 2035, it is expected to carry 60 million tonnes. However, this could be a significant overestimation since Keretapi Tanah Melayu (KTM) only carries about 6 million tonnes every year on its nationwide network (Jomo 2017). Additionally, McKinsey and Company has estimated that the costs of mega rail projects are 45% more than the projected amount. Conversely, expected demand is usually overestimated by two times (Garemo, Matzinger and Palter 2015). Therefore, if the high expectations of this project are not fulfilled by tangible commercial gains, the ECRL will incur a significant loss that will have to be borne by Malaysian taxpayers paying back Chinese loans. Other prominent critics include Malaysia’s Prime Minister Mahathir who said, in a wide-ranging interview with the South China Morning Post that the port in Malacca was unnecessary since Malaysia already had adequate maritime facilities (Jaipragas 2017).
There could be an element of truth to this. Westports and MMC, the two port operators in Port Klang have already made expansion plans that would double the port’s capacity in the next three years. In 2015, a World Bank study also highlighted that a new port on Malaysia’s West coast would be superfluous since existing facilities have yet to reach capacity. Therefore, since there is little economic logic to the project, there has been vocal opposition to the project calling it as a deal that has to do more with military rather than the commercial interests of China (Teoh 2016).
The Sino-Laos railways project faces similar issues regarding its commercial viability. The project should be completed by 2021 and its estimated cost is $7 billion, about half of Lao’s GDP in 2016. According to the Nikkei Asian Review, the first phase of construction will require an investment of almost 2.4 billion and the Laotian government will be responsible for paying a share of $715 million. Over a five year period, the Laotian national budget will allocate $250 million towards financing the railways. The remainder of the $715 million will be financed through loans, backed by Laotian natural resources, from the Export-Import Bank of China at a low annual interest rate of 2.3% (Sun 2017). Considering that high-speed rail lines are usually successful only if there is high passenger density and disposable incomes, the prospects of this project becoming commercially successful in Laos are bleak (Knox 2017). These commercial risks have political and geostrategic ramifications as well. If Laos cannot repay its debts, it will have to cede economic and foreign policy autonomy in exchange for Beijing’s clemency. Hence, the examples of the ECRL, Malacca Port and Sino-Laos railways project demonstrate that the grandiose BRI projects might become burdensome debt ridden ‘white elephants’ in the long-run.
Third, BRI investments might be beneficial for Chinese state-owned firms without improving the economic prospects for locals. For example, the paucity of skilled labour in Laos has meant that the country has had to accommodate 11,000 Chinese workers for the construction of the high speed railway. As of August 2017, most of the 5000 workers constructing the Sino-Laos high-speed railway are Vietnamese and Chinese, with a negligible number of Laotians. Only time will tell if the pledges to transfer know-how and provide vocational training to the Laotians will reap long-term benefits for the country. Furthermore, in a predominantly agrarian society like Laos, the capture of land by Chinese companies – often done with little public consultation – for the high-speed railway development has sparked major protests (Sun 2017).
To conclude, this report has highlighted three main risks that Southeast Asian countries face while accepting BRI investments from China. Commercial BRI projects, especially those that build maritime facilities, could be developed for China to exert military power. This could compromise the national interests of recipient countries and complicate their diplomatic relations with neighbours (I.e. Myanmar’s relations with India if the Kyaukpyu deep-sea port becomes a naval base). Second, grandiose projects such as the ECRL and Sino-Laos railways built by Chinese state-owned enterprises might not be commercially successful in the long-run. If they are not, they could morph into long-term, onerous fiscal burdens for Southeast Asian states. Relinquishing economic autonomy to the Chinese will subsequently debilitate the ability of Southeast Asian states to make independent foreign policy choices. Third, there are concerns that Chinese investments, while beneficial to China, will do little to improve the lives of locals.
Bhargav Sriganesh recently completed his Masters in Political Science and Political Economy at the London School of Economics and Political Science