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.

The big deal in Tokyo

After concluding the nuclear deal with Japan, the Modi government must review India’s atrocious nuclear liability regime.

It is a big deal. Owing to the controversy over the replacement of currency notes, though, it has almost slipped popular attention. India and Japan have concluded an agreement that allows Japanese vendors to compete in the India’s nuclear power market.

The deal holds potential for greater competition in the Indian market for nuclear reactors and technology. It also is a shot in the arm for Japan’s beleaguered nuclear power sector, and can help in attempts to rejuvenate the Japanese economy. That’s the economics of it.

Greater significance lies in what persuaded Japan to set aside its decades-old anti-nuclear, ‘anti-proliferation’ stance and conclude a deal with a non-signatory of the nuclear non-proliferation treaty (NPT). Shinzo Abe is finding greater political traction in making big changes to Japan’s traditional foreign policy in the light of an assertive China that is fast expanding its geopolitical footprint. Prime Minister Abe’s policies are by no means fully accepted in the Japanese polity, but he is likely to have his way. With Donald Trump having created unprecedented doubts as to the United States’ commitment to its treaty allies, realists in Tokyo are even more likely to desire closer relationships with potential non-treaty allies (better known as ‘strategic partners’). 

To help get the deal through the Japanese Diet, Prime Minister Abe needs to reassure sceptics that Tokyo retains its anti-nuclear weapons positions. Hence, a note to the effect that Japan reserves the right to give a year’s notice and suspend nuclear commerce with India in the event of New Delhi conducting another nuclear test, was signed and exchanged following the formal nuclear agreement. The concession makes it easier to conclude the deal.

It is not unusual for Indian critics to complain that New Delhi conceded too much, based on a legalistic parsing of an international agreement and its associated notes. Such criticism is overstated. An agreement between two sovereign states depends to a overwhelming extent on the will of the parties to comply. If Japan seeks to renege, it can do so, no matter what is written and signed on paper. So legalities matter only to an extent. No sleep needs to be lost over the matter.

What policymakers and analysts in India should worry about is whether the atrocious law on nuclear liability is consistent with India’s energy, environmental and safety needs. At the moment it seems to restrict competition by keeping vendors from rule-of-law conscious countries out of the Indian market. Not only is the Indian power sector deprived of the possibility of newer and safer technologies, New Delhi (and its strategic partners) are unable to fully harvest the geopolitical rewards of nuclear deals. It makes little sense to sign nuclear deals with dozens of countries only to find that the liability clause is a show stopper.

All parties, including the BJP were complicit in enacting an unworkable nuclear liability law during the UPA government’s term. Now, the Modi government must undo the damage, confront the anti-nuclear lobbies and put in place a sensible nuclear liability regime.

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.

Mirpur se Birmingham tak

A thrilling ride across continents

This is the unedited draft of today’s op-ed in the Indian Express.

For a mere $200 you get a 12-day, 6400 km “thrilling ride” across the English channel through France, Belgium, Germany, Austria, Slovenia, Croatia, Serbia and Bulgaria, Turkey, Iran before the journey–and perhaps your enthusiasm–ends at Mirpur, in Pakistani-administered Kashmir.

If the ‘Azad’ Jammu & Kashmir transport minister’s plans come to fruition, Birmingham and Mirpur, two parts of the same city separated by distance but joined together by immigration, shall be connected by the world’s longest local bus route. Families will reunite more frequently. Nephews will find jobs more easily. Tourists who have plenty of accumulated annual leave will be able to spend $525 more on supporting the local economies instead of on air tickets.

It’s hard for many of us to get our minds around the idea of a bus that crosses a dozen national borders today. Yet, just over three decades ago, there were many intrepid travellers who could make the journey.

Between 1968 to 1976, Albert Tours operated a Sydney-Calcutta-London route, doing 15 overland trips in those years. I found an old brochure advertising departure from London’s Victoria terminus on July 25th 1972 and arrival at Calcutta’s Fairlawn Hotel on September 11th. You could experience “Banaras on the Ganges, The Taj Mahal, Afghan Tribesmen, The Khyber Pass, The Peacock Throne, Communist Bulgaria, The Blue Danube and the Golden Horn”, while enjoying shopping days in New Delhi, Tehran, Salzburg, Kabul, Istanbul and Vienna. Unscheduled adventures included having to “dig out a dry riverbed plus a piece of the mountain.” The fare for the journey of around seven weeks, including food and sundries was £145, which in those days was a lot of money.

Geopolitics put an end to those adventures. By the late-1970s, the Ayatollah Khomeini’s revolution in Iran, General Zia-ul-Haq’s coup in Pakistan and the Soviet invasion of Afghanistan made it all but impossible for an ordinary passenger to innocently sit in a bus and get off at the next continent.

Violence, sanctions, travel restrictions and international suspicions cut off the Indian subcontinent from Europe since then. Hiram Warren Johnson, the US Republican politician who declared that truth is the first casualty of war was obviously wrong. It’s the bus route that suffers first. (Our own Atal Bihari Vajpayee thought starting a bus would end the war, with rather mixed results).

Is a trans-continental bus service from Birmingham to Mirpur feasible today? Three decades ago, the European leg had to traverse two geopolitical blocs. Today the entire stretch from the United Kingdom to the border with Turkey is within the European Union. It’s the journey from Turkey to Pakistan that is, to put it mildly, rocky. Turkey to Iran across restive Kurdish areas, Iran to Pakistan through a Balochistan under an insurgency and military occupation. Then through a Pakistan undergoing a political transformation under the shadow of severe violence.

While it may well be possible to squeeze past these conflicts, it is unclear if people will want to take the risk to save a few hundred dollars. Or, whether it will be possible to price the ticket at $200 after factoring in security risks. In any case, twelve days’s food, accommodation, transit fees and other administrative costs might already bring the fare close to that of a cheap air ticket. It is quite likely that the Pakistani politician allowed his excitement to get ahead of the business case.

Given the differences in purchasing power in Birmingham and Mirpur, the bus is likely to appeal more to those making the journey into the EU. Immigration authorities in the UK and elsewhere in the EU are likely to scrutinise visa applications a little more than they usually do. The security dimension adds to the economic one. Birmingham’s MP, a British politician of Pakistani origin, was putting it mildly when he suggested that “there could be a guarantee from the Pakistani government that there would be rigorous security checks.” A Pakistani government guarantee? On rigorous security checks? Seriously, now.

The idea of seamless overland connectivity across countries and continents is a good one. It is possible, for instance, to drive from northern Thailand, across Malaysia into Singapore. Even if few people actually drive down this route, international road connectivity has contributed to the economic development of South East Asia. China is plugging into South East Asian road networks by building good connections. India is late in the game and trying to build its own road links to the region. The ASEAN-India car rally, covering 7448 km from India to Indonesia is a showpiece of this effort (and has been scaled down due to budget cuts at the Ministry of External Affairs). There is sound economic, strategic and common sense in building good road connections.

It does not follow, though, that good overland connectivity must have an end-to-end bus route. The economics of bus routes might not hold up favourably compared to air, rail and sea transport for distances that span several thousand kilometres. Like the old Albert Tours, the journey will certainly appeal to those with the time, taste and money for adventure. It is unlikely to result in bringing Birmingham and Mirpur any closer together.

Copyright © 2012. The Indian Express. All rights reserved.

The price of minding Mr Hu’s delicate sensibilities

It is not in New Delhi’s interests to be seen as a craven appeaser of China

There are a number of reasons why states come together and form international groupings. These include common interests, common causes, common weaknesses, common fears, gawking, lurking and sabotaging. One of the more inexplicable reasons they form groupings is because some research at some investment bank wrote a report lumping them together based on their growth rates and sizes of their economy. That’s why when outrage suppresses yawn when BRICS summits are held.

If the Indian foreign service is understaffed and overstretched, it also is guilty of enthusiastically expending resources in one too many pointless clubs, from the Commonwealth to the Non-aligned Movement and now to BRICS. The opportunity cost of getting wrapped up in pointless pageantry is lower attention to more important forums like the G-20 and the East Asia Summit. Like in many other areas, the UPA government’s sense of priorities is highly questionable.

Worse, because China’s highly Tibet-sensitive president was to attend the summit, the Indian government found it necessary to round up not only Tibetan protestors, but anyone else who faintly resembled them. Calling it our shameful kow-tow, Mihir Sharma writes of “Tibetans being rounded up, made to squat in the sun; the ever-sensitive Delhi Police indulging in the worst sort of racial profiling, demanding that people who look even vaguely Tibetan prove their credentials or be locked up.”

Having met some of the top Indian officials dealing with China policy, I can say with some confidence that they are not the appeasing sort. So why did Delhi Police (which takes orders from the Union home ministry) behave in such a demeaning manner?

One explanation that you might hear is that since New Delhi is playing hardball where its core interests are concerned there is no point in gratuitously embarrassing China’s leader in the eyes of his peers. This being a crucial year for the Chinese leadership—where power is supposed to change hands at the Party Congress amid factional strife, economic uncertainties and internal instability—why make President Hu Jintao lose face? There’s some merit in this argument. You don’t need to make a public show of your intentions. Making your guest comfortable is as good a principle in diplomacy as in daily life (although some Leftists didn’t believe this ought to extend to a US president).

Nor does preventing pro-Tibet protests prejudice India’s current or future negotiating position on the Tibetan issue. After all, “Free Tibet” protests can take place elsewhere in the country and on any other day of the calendar.

It’s not uplifting, it’s not fragrant, but there is merit in this logic. However, it still misses a larger point. The world—and especially the countries of East Asia—are watching. What they saw is a potential counter to Chinese hegemony bend over backwards (a reverse kow-tow?) to please China’s leader. Although they have seen some measures by New Delhi that persuades them of India’s intentions to contribute to the Asian balance of power, such signals risk confusing them. Small and medium-powers in India’s extended eastern neighbourhood will begin to have doubts about New Delhi’s ability to stand up to Chinese assertiveness. This will make it much more difficult for India to pursue its own interests in East Asia.

Finally, the perception that New Delhi ‘appeased’ Beijing yet again will exacerbate the hysteria in the media and public discourse on matters concerning China. Ironically, the UPA government has ended up embarrassing itself in front of its people in order to avoid embarrassing Mr Hu in front of his. Senior Indian officials have complained that the way the Indian media report issues pertaining to India-China relations complicates matters. The way the Indian established handled Mr Hu’s visit doesn’t help matters either. Feeding a narrative of a weak India unable to show spine to China on core democratic values is unlikely to help New Delhi make tough decisions of give-and-take if the opportunity presents itself. After all, we are all just prisoners here, of our own narratives.

The Asian Balance: Dealing with a vulnerable China

China’s external, economic and ethnic vulnerabilities are worsening

Here’s today’s Asian Balance column in Business Standard.

This may come as a surprise to many, but China today is at its most vulnerable since the Tiananmen Square protests of 1989. That’s not all; it is unlikely that the country will shake off its vulnerabilities – geopolitical, economic and internal security – over the next three to five years.

The developments in East Asia in the past few weeks, focused around the East Asia Summit at Bali, have put China on the defensive. Not only is the United States reinvesting its military assets into the Indo-Pacific region, but almost all of China’s neighbours have moved to construct bulwarks against China. Even Myanmar is showing signs of wanting out of China’s orbit, and is opening up to India, the United States and Vietnam. If countries of the region are ganging up against China, it is largely Beijing’s fault. Picking a fight with each one of your neighbours at the same time is not the smartest of moves. Yet, that’s what China has done over the past couple of years.

What happened in Beijing’s foreign policy kitchen is anyone’s guess but China no longer enjoys a favourable external environment that it used to for the last two decades.

Let’s come to economics. Not only does China hold more than a trillion dollars of US debt, it is likely to have to increase its dollar holdings given the sovereign debt crises in the euro zone. So a lot of China’s money is, and will be for some time, at the mercy of its biggest strategic rival. Continue reading “The Asian Balance: Dealing with a vulnerable China”

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]

The Indira Doctrine is dead

Make way for the Global Raja-Mandala Doctrine

Led by the redoubtable Aziz Haniffa some observers are getting more than a little flustered at a senior US official’s remarks about the United States letting China play a bigger role in and around the Indian subcontinent. Speaking at a seminar at the Woodrow Wilson Center for Scholars, James Steinberg, deputy secretary of state in the Obama administration said “”China has an important role. It’s a neighbor of South Asia. And it’s unimaginable that China would not be involved.”

Well, he’s right. He appears to refer to Afghanistan and Pakistan, but even if he were to mean the subcontinent and its neighbourhood, he would not be wrong. Whether you like it or not, China is and will, in the coming years, become a even more influential player in India’s immediate neighbourhood. This will undoubtedly mean that India’s neighbours will attempts to play one against the other, and because India is the status quo power, this will work to India’s relative disadvantage vis-a-vis China.

The Indira Doctrine—which saw the subcontinent as India’s exclusive sphere of influence—died somewhere over the last twenty years. Whatever might be the reasons for its lapse, the objective reality today is that India is a pre-eminent power, but not the sole hegemon, in its immediate neighbourhood. Getting excited over Mr Steinberg’s realist appreciation of the situation is therefore unwarranted.

Should Indian foreign policy attempt to resuscitate the Indira Doctrine? Doing so would be limiting the vision to India’s capabilities and interests to what obtained during Indira Gandhi’s days, would be very challenging, of dubious strategic wisdom and perhaps even unnecessary. Why? Because India is playing in a much bigger playground today. New Delhi needs a Global Raja-Mandala Doctrine. If China seeks to gain influence in India’s neighbourhood, India should do the same in China’s neighbourhood and elsewhere. [See East of Singapore and The Asian Balance]

What is interesting about Mr Steinberg’s remarks is that the United States is prepared to engage India on this. “Just as we talk about South Asia with China,” he said, “we talk about East Asia with India…” In fact what is even more interesting is this “We see India as (an) East Asian country. We engage with them on issues like North Korea and the like because we think of the importance that India plays.” This is almost exactly The Acorn’s argument.

Because of geography if not anything else, India’s influence in its immediate neighbourhood will grow in parallel with its own development. It is important, however, to understand the opportunities in the geopolitical environment that allow India to implement the Global Raja-Mandala Doctrine. At this moment, it is in the United States’ interest to support India in the East Asian balance of power. New Delhi must swing towards this opportunity.

The Asian Balance: Recognising good neighbours

My new monthly column in Business Standard is called The Asian Balance. It “will devote itself to chronicling and interpreting the unfolding geopolitics of East Asia. It will be a unabashed advocate of Looking East far beyond the Straits of Malacca. Rebuilding the economic, cultural and political relationships that India historically shared with the countries and the peoples to its East has never been more important to our future than it is today.”

The first piece is up. Here’s an excerpt:

Three factors will shape the Asian balance: first, nuclear weapons—what I call the New Himalayas—will shift the India-China contest away from a direct military conflict along the land border. It will take place, among others, in and around the Indian Ocean. It will play out in the form of increased Chinese presence in the waters off India’s coast and renewed US engagement of Asean countries. The big question is to what extent will India be a player in areas that China considers its backyard.

Second, 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. What this implies is that the importance they give to their relationship with India will depend on their assessment of whether New Delhi has the capability, and the will, to contribute to the balance.

Third, unless there is an addition to the number of nuclear powers in East Asia, there will be a preference to create and work through regional multilateral institutions like the Asean Regional Forum (ARF) and the East Asia Summit (EAS). The absence of direct nuclear deterrence in the Western Pacific has emboldened China to claim almost the entire South China Sea as its own. All the activity in East Asia trying to form one big workable grouping is premised on the unfounded hope that a powerful China will play by the rules it promises to. [Business Standard]