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China's Belt and Road Initiative to reshape routes in Thailand and the broader South-east Asian region

ThailandEconomy

Analysis


The Belt and Road Initiative (BRI) promises to radically transform a vast swathe of the world’s trade and transport infrastructure, which will have a marked impact on how Asia does business with the world and vice versa.

Historical Precedent

While it is a relatively new idea, the BRI also harks back to medieval times, when the Silk Road flowed between East and West. The Silk Road was a series of trade routes criss-crossing the Asian landmass. Its more famous travellers included Marco Polo and Ibn Khaldun. During this time this trade flow was responsible for the transfer of goods, services and ideas across the globe. The BRI seeks to update this idea to meet the demands of the 21st century, adding a maritime arm and a host of road and rail links.

Previously referred to as One Belt, One Road, the infrastructure investment needed for the plan is estimated at $5trn by PwC. In May 2017 China pledged an extra $113bn for the BRI, to be disbursed via the state-owned Silk Road Fund, set up in 2015 with $40bn of initial capital from the China Development Bank and the Export Import Bank of China. In addition, the Asian Infrastructure Investment Bank (AIIB), with some $100bn in capital, and the New Development Bank, with $50bn, are financing the project from their respective bases in the cities of Beijing and Shanghai.

This funding is backing up a range of infrastructure projects, with the BRI also making clear provisions for partnerships, particularly with non-Chinese enterprises. The benefits of this are considerable: foreign outfits can engage in major projects that enjoy Chinese government-backed guarantees, while also contributing their expertise and local knowledge to ensure project success, further reducing risk all around. Such partnerships with third-party countries can also help open doors in China itself, by helping to establish good working relationships, which are at the heart of doing business in a market that can be difficult to navigate. For China, the BRI builds on the outward momentum of its foreign policy, which started with the Go Out policy of the late 1990s. The increase in overseas trade and investment is boosting Beijing’s drive to internationalise its currency and find new markets to maintain growth momentum and use up excess capacity at home.

The BRI addresses a major need for improvement in Eurasia’s infrastructure. This is critical if economic growth is to move many of the supercontinent’s countries out of the low- and middle-income traps. In February 2017 the Asia Development Bank estimated that this would need $22.6trn in the lead-up to 2030, which could rise to a possible $26trn if climate change is taken into account. The BRI, and the AIIB in particular, are thus seen by advocates as crucial ways to address this shortfall. Indeed, the AIIB has been cautiously welcomed by a number of regional observers as a more Asia-focused addition to the range of multilateral lenders, such as the IMF, the World Bank and the European Bank for Reconstruction and Development.

The BRI is not without its challenges, however. The initiative is vast, with a geographic scope that can lead to political tensions. Transnational projects by their nature involve a wide variety of stakeholders, with success depending on ability to bring many, often disparate, groups into harmony. For all the difficulties, the rewards are potentially game-changing, as those who witnessed the first train from China roll into London’s Waterloo station in April 2017 would undoubtedly attest.

Routes & Corridors

The BRI identifies three main land routes and two maritime routes for its implementation. On land these stretch from China to Central Asia, then to Russia and finally Europe via the China-Mongolia-Russia Corridor and then the New Eurasian Land Bridge. The two other routes are attached to this: one branches off to South-east and South Asia and includes the China-Pakistan Corridor, and the other branches off to form the China-Central Asia-West Asia Corridor.

The South China Sea becomes the junction for two routes, one leading south and east to the South Pacific, and the other heading west, connecting to the Indian Ocean, the Middle East and Europe. The paths begin with China’s coastal ports, while also connecting the China-Indochina Peninsula Corridor and the Bangladesh-China-India-Myanmar Corridor.

These routes bring together a string of nations. In May 2017 President Xi announced at the first BRI summit that some 68 countries and international organisations signed agreements with Beijing over the initiative. The Chinese leader has stressed that the project is open to all, with the likelihood that at the next summit in 2019 its numbers will have considerably swelled. This may be all the more likely since the US decided to pull out of the Trans-Pacific Partnership, a free trade deal that the previous US administration of President Barack Obama had been pursuing and that was also widely seen as a counterbalance to Chinese influence in Asia.

ASEAN

Many of the BRI’s projects are taking place in ASEAN, with the organisation celebrating its 50th year in 2017. ASEAN has grown over that time from a grouping of countries concerned about the spread of Chinese-backed communism to one of China’s most important economic partners. The value of goods traded between the two bodies grew from $40bn in 2000 to $514.8bn in 2017, and raising this to $1trn by 2020 is a joint target. The BRI will likely be responsible for much of that future expansion. “The BRI is a very good idea,” Emma Sri Martini, president director of Sarana Multi Infrastruktur, Indonesia’s state-owned infrastructure company, told OBG. “It is an integrated concept that will strengthen cooperation with China, which has been very keen on providing funds with low interest rates and other different support mechanisms.”

New Links

One of the countries central to the overall concept of the BRI is Thailand. In September 2017 Prime Minister Prayut Chan-o-cha signed a memorandum of understanding (MoU) with Beijing concerning the BRI, in addition to a BT3.5bn ($101.3m) design and supervision contract for the Bangkok-Nakhon Ratchasima high-speed railway. This project will link Thailand to Laos, strengthening regional transport links. It also forms part of a longer rail link that will eventually connect China to Singapore, with a revitalised connection from Bangkok to Kuala Lumpur, and then to Singapore. Thailand is also looking for BRI investment in its $44bn Eastern Economic Corridor project. The scheme, centred on the three key provinces of Chonburi, Rayong and Chachoengsao, will enhance transport infrastructure on the Gulf of Thailand, while boosting manufacturing.

Another initiative that might have implications for the BRI is the controversial Kra Canal project. This would see a waterway excavated across the narrow 135-km isthmus linking the Gulf of Thailand directly to the Indian Ocean, enabling ships from China and other north Asian countries to save around three days sailing, via Singapore, on journeys westwards. The canal would cost around $28bn to complete, but has long been the subject of political controversy due to the impact it would have on fellow ASEAN members Singapore and Malaysia. The project highlights some of the geopolitical complications the BRI raises, as do plans to make the Mekong River navigable, some of which would involve destroying rapids and deepening channels, with a potentially detrimental impact on the environment and fishing practices along the river.

In neighbouring Myanmar there are also geopolitical challenges, alongside huge opportunities for the BRI to radically improve the domestic infrastructure. China is already the largest foreign investor in the country, with $19bn invested between 1988 and July 2017, while also being its largest trading partner. Thus, in May 2017 Myanmar signed several MoUs with China for cooperation with the BRI. Projects already identified include the $2.7bn Kyaukphyu Special Economic Zone and a $7.3bn deep-sea port in the country’s troubled Rakhine State. By 2025 the development is expected to be Myanmar’s highest-capacity port, abutted by a 1000-ha industrial park, with a consortium of Chinese companies carrying out the construction. While these projects were initiated before the BRI, the new initiative links them to a wider economic strategy. Myanmar lies on the east-west corridor of the China-Singapore rail link, which will connect Kawkareik, in Kayin State, with Hue in Vietnam, and on the southern sub-corridor, which links Dawei in south-eastern Myanmar with Bangkok. Other sub-corridors will link to Yangon and Mandalay.

Maritime Partners

While Indochina will see major land and sea links brought within the BRI orbit, Indonesia and the Philippines are also likely to be beneficiaries. Regarding the former, Thomas Lembong, chairman of the Indonesian Investment Coordinating Board, told OBG, “President Joko Widodo’s administration is very determined to make the most of our participation in this initiative, to help drive investment across the economy.”

Indonesia has taken the view that the BRI projects should be concentrated in certain locales – notably those following old Chinese-Indonesian trade routes, such as Sabang in Aceh, Medan in North Sumatra, Batam and the Riau Islands, between Indonesia and Singapore, and Pontianak in Western Kalimantan. The country needs heavy investment in its maritime facilities in particular, as it attempts to implement its Global Maritime Fulcrum policy to raise its status as a key sea power, connecting the Indian and Pacific oceans. Overall, some $359bn of investment is needed for the mid-term development plan leading up to 2019, with only 63% of this coming from the government. Jakarta is thus keen to expand dramatically upon the $5bn-6bn in infrastructure investment from China that it has received since first committing to the BRI in 2013. To do this, both sides may have to overcome a traditional wariness when it comes to major investments, with Jakarta also stating that projects will continue to be open to bids from other countries and consortia.

“The BRI shows that China is a serious partner with an appetite for investment in infrastructure in Indonesia,” Julian Smith, director of PwC Indonesia, told OBG. “However, as with any other type of project, Indonesia’s partners need to prepare projects properly, be clear about their requirements and negotiate effective deals to secure value for money.” One project that is under way, however, is Indonesia’s first high-speed railway, connecting the cities of Jakarta and Bandung. The railway received a $4.5bn loan from the China Development Bank at the May 2017 BRI summit in Beijing.

Indian Ocean

The island nation of Sri Lanka will be an important node for the strategy, as it is directly on the BRI’s maritime routes. A string of major Chinese-backed infrastructure projects in the country are well under way, with some of them long completed. The Colombo International Container Terminal, Colombo Port City and the redevelopment of Hambantota Port and economic zone have all been placed under the initiative’s rubric. The island’s strategic location with good maritime access to South-east Asia, the rest of South Asia, the Gulf and Africa, makes it key to the BRI’s westwards transport routes, while Sri Lanka’s long-standing good relations with China have also helped keep it in Beijing’s view. “Sri Lanka can link its own development plan to China’s initiative in order to achieve a win-win situation,” Wen Zha, from the Chinese Foreign Affairs University, said at the July 2017 Sri Lanka Economic Summit.

The port of Hambantota may serve as a good case in point. It had been struggling to be competitive in the world of Indian Ocean ports, but in July 2017 China Merchant Ports agreed to pay Sri Lanka Ports Authority $1.1bn for a 70%, 99-year stake in the port. Tying the facility into the major east-west maritime corridor proposed by the BRI may give it a new lease of life.

Hambantota has also been controversial due to concerns it highlights among some Asian and Western nations about the true purpose of the BRI. The port has for some time aroused suspicions that it might have Chinese naval uses, and these suspicions were recognised in the eventual deal that was struck, with Sri Lanka retaining a controlling interest over port security. Not all criticisms of the initiative have focused on security, however, and international organisations such as the EU have raised questions over transparency, protection of technical standards, market norms and economic interaction under the BRI. Other entities have pointed out concerns about the potential future debts that involvement with the strategy might incur.

Costs & Benefits

For many countries in ASEAN, the BRI may bring great benefits, as interconnectivity will receive a major boost. This could allow producers to ship their products more easily around the globe, bringing further investment and prosperity.

At the same time, though, such developments are likely to be carefully scrutinised, as ASEAN governments seek to maximise the value obtained from signing up to the different Chinese-backed schemes. It may not always be the case that what is in the interests of the BRI is equally in the interests of a particular national economy, for example. Such scrutiny may lead to higher standards of quality and transparency being imposed, particularly if a rival initiative is waiting in the wings. The year ahead may therefore see a range of new geopolitical trade deals and infrastructure investments taking place around the ASEAN region, as various players seek to gain a more significant share of future global trade.


https://oxfordbusinessgroup.com/analysis/road-china%E2%80%99s-belt-and-road-initiative-reshaping-south-east-asia-2

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