On OBOR’s commercially suspect projects

Win-win, for China.

Analysts have observed that many projects that China is financing and building under Xi Jinping’s One Belt One Road (OBOR) initiative are commercially dubious. People whose job it is to worry about such things have have surmised that the real motivation might be military-strategic in nature.

There is another — less sinister, but non-mutually-exclusive — explanation. Fitch’s Kalai Pillay says that the real motivation is “exporting China’s excess construction capacity that is accompanied by financing from Chinese state-led enterprises.”

“A lot of the big construction companies in China have bulked themselves up significantly over the last 10 years to carry out the big infrastructure projects in China. As many of these come to the tail end they have this excess capacity, the know-how, the real technical knowledge, a lot of patented technology that can be sold abroad, that needs to be exported abroad,” Pillay says.

He adds that there may be little room for non-Chinese banks and institutions to play a role in financing OBOR infrastructure projects.

“The final leg to this is the capital. There is excess capital which finds itself into all kinds of things, international bond markets, the spread market wherever. But one way to export it also is through financing projects that’s going to take place outside of China. So that’s part of that OBOR strategy,” Pillay says. [The Asset]

In other words, China is providing cheap loans to regional countries to build infrastructure — that might not be commercially viable — using Chinese construction companies. If the projects take off, China benefits. If they don’t, then regional governments will be stuck with debts to the Chinese government.

Not bad. For Beijing, that is.

Chinese inroads

The new silk road is being built faster than the world’s ability to grasp its consequences.

China has worked out a railway route to Afghanistan and, from August this year, begun operating two trains a month from Nantong (China) to Hairatan (Afghanistan) passing through Kazakhstan and Uzbekistan along the way. This remarkable achievement suffers from a temporary hitch — the trains have to go back empty to China because Uzbek authorities are yet to give permission for Afghan goods to transit their territory.

Last week, Chinese trucks drove south-west across the Himalayas, passing through the Karakorum pass into Pakistani territory. They transited through Gilgit-Baltistan and Balochistan before unloading their cargo onto a Chinese ship at the Chinese-built, Chinese-operated Pakistani port of Gwadar. [Gwadar is finally in Chinese hands, after Washington released its pressure on the Pakistani government due to an inability to persist or out of a lack of interest.]

On the eastern side of the Indian Ocean, analysts in Singapore are concerned over what appears to be a commercially dubious proposal to build a new port in the Malaysian town of Melaka (Malacca) that sits at the northern side of the important Straits of Malacca. The Malaysians have pulled out the stops to enable the project to take shape quickly. In typical fashion a little-known local firm is partnering a Chinese company to build the port.

Since there’s enough capacity in existing Malaysian ports, and it is relatively easy to expand them, the Melaka Gateway project is of questionable business value. But a foothold that commands the Straits, the Bay of Bengal and the Indian Ocean makes a lot of geostrategic sense if someone is willing to foot the $10 billion bill. And China is.

It appears that Xi Jinping’s One Belt, One Road (OBOR) is proceeding at a pace faster than the region’s policymakers can handle.

Connectionistan
Building transport connectivity in Central Asia is likely to unleash economic potential in the landlocked region, and depending on where the roads and railways lead, to other regions too. This will come with the usual political economy of Chinese overseas economic expansion: newly enriched local entrepreneurs, strengthened local political strongmen and grumblings due to Chinese labourers imported en mass. This will also be accompanied by fears of a demographic invasion from China into the sparsely populated Central Asian states.

The Chinese railway through the Central Asian states to Afghanistan presents India with a tantalising opportunity, if it were possible for Indian cargo and passengers to use the route. Pakistan would be deeply concerned, of course. Indeed, Pakistani strategists would already be worried that for the first time, China can trade with Afghanistan without having to transit through Pakistan.

New Delhi should explore arrangements with China, Kazakhstan, Uzbekistan and Afghanistan to connect to this railway. At the very least, Beijing’s intentions can be put to test.

Another port in the straits
The Chinese interest in Melaka comes at a time when the United States is likely to rebuff the painfully negotiated Trans-Pacific Partnership. Singapore, among other East Asian states will be unhappy with the turn of events. Another port along Malaysia’s west coast abutting the Malacca straits implies further competition to the island’s own ports. With the projected overcapacity, it gets worse.

While there is little New Delhi can do to ameliorate this, there is an emerging convergence of interests between India and Singapore. So too, we are likely to see, with other East Asian countries as they grapple with the undesirable prospect of having to jump onto the Chinese bandwagon given the increasing unreliability of the United States. This has been true for much of the past decade. Now, however, it has gotten all the more intense. The Modi government is clear that it seeks to engage East Asian states with greater boldness and purpose. Whether this will prove adequate or fast enough remains to be seen.

Manila on the Chinese bandwagon

The Philippines becomes the first Indo-Pacific country to declare itself for Beijing

On the geopolitics of the Indo-Pacific, I have long argued that “the small- and medium-sized countries of the region will prefer a balance where no single power dominates over them. If they do not see this forthcoming, they are likely to join the stronger side.”

Rodrigo Duterte, the president of the Philippines, appears to have decided that that stronger side is China.

“America has lost now. I’ve realigned myself in your ideological flow,” he said at a business forum in Beijing on Thursday. “And maybe I will also go to Russia to talk to Putin and tell him that there are three of us against the world: China, Philippines and Russia. It’s the only way.” [CNN]

There were indications of this for the last few months, but the manner in which he announced a “separation” from the United States, the Philippines’ treaty ally since 1951, could not have been more designed to ingratiate Beijing, his newfound benefactor. Mr Duterte calculates — correctly, in all likelihood — that China will now shower the Philippines with exemplary largesse. It is in Beijing’s interests to demonstrate that those who decide to join the Chinese side will be rewarded, as long as they are willing to ignore some trifling territorial disputes and international arbitration verdicts.

I have also argued that there is a Chinese wedge between ASEAN states that have a dispute with Beijing and those that don’t. That wedge has just gotten deeper and wider. The ASEAN agenda on maritime cooperation is now in question, as Philippines joins other pro-China ASEAN members in being uninterested in confronting China. Vietnam, in particular, will be under a lot more pressure.

The Philippines remains a pro-American country. It is also likely that parts of the country’s security establishment have deep links with the US armed forces. How Mr Duterte’s policy will go down with the people and the security establishment remains to be seen.

The Asian Balance: Temples, rivers and other disputes

The list of regional security issues where ASEAN is falling short is growing

Excerpts from today’s Business Standard column:

Yet, ASEAN, a regional grouping often celebrated for its pragmatism and competence, has been unable to keep two of its members from going to war with each other. It will now try to play peacemaker, but it is unlikely that it can achieve anything beyond temporary damage control. Cambodia has legal title, but Thailand is more powerful. Preah Vihear is intertwined with Thailand’s domestic political turmoil, and because ASEAN cannot interfere in the internal affairs of its members, meaningful mediation will have to wait until the unrest, intrigue and ferment in Bangkok subsides. Even then, there is no guarantee that the Thais will allow their relative power advantage to be neutralised by accepting third-party arbitration.

ASEAN’s failure to prevent the Thai-Cambodian border dispute from escalating into a shooting war calls into question its ability to take on the more challenging project of anchoring East Asia’s security architecture. That’s not all. ASEAN states have been extremely reluctant to maintain solidarity with their counterparts in the latter’s disputes with non-ASEAN states. It is to the US that Vietnam and the Philippines turned last year when China upped the ante over the maritime territorial disputes in the South China Sea.

But Laos, Cambodia, Thailand and Vietnam—lower riparians of the Mekong river—have no one to turn to in the dispute over water sharing with China. [Business Standard]

Related Links: More on the Mekong dams, from this interview with Ame Trandem. I also cite Timo Menniken’s academic paper on lessons from the Mekong on China’s behaviour in international resource politics.

Damming the Mekong

Who can resist China?

While researching for today’s Business Standard column I came across Ame Trandem’s article in Vietnam’s Than Nien newspaper on the controversy relating to the Xayaboury (Xayaburi) dam in Laos. Here’s an excerpt of my subsequent email interview with Ms Trandem:

Nitin Pai: What is China’s position on the downstream dams that Laos is building & Thailand is financing? China is not in the Mekong River Commission (MRC) but are they playing a role in the shadows?

Ame Trandem: While China is not a member of the MRC, it is a dialogue partner. However China’s own upstream dam construction on the Mekong has helped pave the way for the Lower Mekong mainstream dams to re-emerge on the region’s agenda. With four dams built on the mainstream in China, its dams have begun changing the river’s hydrology and sediment flow, which has helped ease past reluctance in mainstream dam building.
Continue reading “Damming the Mekong”

The Asian Balance: On the East Asian dance floor

It’s up to you to find your partner

In my Business Standard column today argue that “the (East Asia Summit) club only provides the dance floor. India will have to court its dancing partners on an individual basis.”

Excerpts:

[Although] the EAS is set to become the pre-eminent regional grouping, bilateral alignments remain in a state of flux.

A divide is emerging between countries that have a dispute with China, and countries that don’t. The former — a list that includes Japan, South Korea, Vietnam, Philippines, Malaysia and Brunei — will seek greater security in the form of alliances with the United States and India.

These countries want a closer tango, not least in the security arena. During Defence Minister A K Antony’s visit, his Vietnamese counterpart General Phung Quang Thanh welcomed Indian Navy ships to make more port calls and offered maintenance facilities at Vietnamese ports. Last month, South Korea signed two defence cooperation agreements with India encompassing a broad range of activities, including exchange of visits, R&D, training and joint exercises. An agreement is still some distance away, but the very fact that India and Japan are currently negotiating a civil nuclear agreement is already a sign of how far Tokyo has travelled.

India will have to go beyond defence and invest in building deep, broad and balanced economic relationships with these countries. As the experience with Russia has taught us, a merely defence-centred bilateral relationship can often be troublesome.

On the other side of the divide, Thailand, Indonesia, Singapore and even Australia — countries which do not have territorial disputes with China — while desiring an outcome where the big powers balance each other out, will be reluctant to do anything that might attract Beijing’s unpleasant attention. Not unlike the Hindu and Buddhist kingdoms of historical South East Asia that preserved their independence by paying nominal tribute to the Chinese Emperor in return for being left alone. [Business Standard]

Pax Indica: East of Singapore

The waters east of Singapore hold the key to the lands west of the Indus

Yesterday’s post was about the developments in East Asia. In today’s Pax Indica column, I argue that India must be part of the security equilibrium in that region. Excerpts:

India’s strategic power projection will not be unwelcome in South East Asia. It will also enable the United States to remain engaged in Afghanistan-Pakistan by freeing up resources that might otherwise be employed in the western Pacific. Also, regardless of what the United States does, an Indian strategic commitment in East Asia will strengthen its overall negotiation position with China.

Whatever might have caused China to bully its neighbours this year, it has opened another window of opportunity for India to engage with the region. Pre-occupied as it is with the game in the north-western part of the subcontinent, it is unclear if New Delhi sufficiently realises that the seas east of Singapore hold the key to the lands west of the Indus.

India must vastly increase its economic, diplomatic and military presence in and beyond South East Asia. [Yahoo! India]

The many myths that Yang shattered

In claiming the South China Sea, China destroys warm fuzzy feelings. Good.

Some, like ‘peaceful rise’ are of China’s own creation. Others like ‘G-2’ are outputs of wishful thinking in the United States. Still others, like ASEAN being a coherent geo-political entity are indulgences of the Southeast Asian elite.

These myths never stood up to scrutiny. But a few days ago they were all shattered by China’s foreign minister. Spectacularly so.

Image: 'BBC'

We are, of course, referring to the dust-up between the United States, Viet Nam and some ASEAN countries in the blue corner, and the China in the red at the ASEAN Regional Forum meeting in Ha Noi. [See John Pomfret’s article in the Washington Post, Minxin Pei in The Diplomat and this editorial in the Global Times for the background]

This year, China moved from drawing maps claiming the South China Sea as its own to announcing that it considers that piece of maritime real-estate as much a core interest as Tibet and Tibet. Since it will unambiguously use force to retain and annex these territories respectively, Beijing has just threatened to use force to settle the maritime boundary dispute. Lest people not take the hint, it has let it be known, through its media mouthpiece, that “China will never waive its right to protect its core interest with military means.” Did we mention that all this is after it pledged to use only peaceful means in an agreement with ASEAN nations in 2002? There goes ‘peaceful rise’.

Now consider the extraordinary statement issued by China’s foreign ministry after the ARF meeting. Consider also, that not only has China protected North Korea after the latter sank a South Korean naval ship, it even deterred the United States from conducting a punitive show of force against Pyongyang. And some people thought the two countries can solve the world’s problems?

Yang Jiechi, China’s foreign minister, explicitly tore ASEAN’s geopolitical pretenses to shreds, by noting that the non-claimants to the South China Sea dispute were on its side. It is for ASEAN now to decide to unite on behalf of some of its members or let China dictate terms to them, individually, through bilateral negotiations. The outcome of the ARF suggests that each ASEAN country is looking out for itself, even after the United States threw its hat in the ring.

The shattering of these myths is a good thing—even if the implications are not. Even so, it is better for the world to engage China in a clear-eyed manner, rather than under some political correct subterfuge. What does this mean for India? Read my Pax Indica column tomorrow.