China's One Belt, One Road initiative reshaping South-east Asia

Hailed by Chinese President Xi Jinping as “the project of the century”, the One Belt, One Road (OBOR) initiative promises to radically transform a vast swathe of the world’s trade and transport infrastructure. In doing so, it may also transform the way Asia does business with the world, and the way the world does business with Asia.

HISTORICAL PRECEDENT: While a new idea, OBOR also harkens 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 Kaldun. Back then this trade flow was responsible for the transfer of goods, services and ideas across the globe. OBOR 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.

Also referred to as the Belt and Road initiative, the infrastructure investment needed for the vast plan is estimated at $5trn by PwC. In May 2017 China pledged an extra $113bn for OBOR, 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 also financing the project from their respective bases in Beijing and Shanghai.

This funding is backing up a vast range of infrastructure projects, with OBOR also making clear provision for partnerships, particularly with non-Chinese enterprises. The benefits from this are considerable, too: 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 round. 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 sometimes difficult-to-navigate market. For China, OBOR 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.

For Eurasia’s infrastructure, OBOR addresses a major need for improvement, which is critical if economic growth is to deliver 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 up to 2030, which could rise to a possible $26trn if climate change is also taken into account. OBOR – 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 many regional observers as a more Asia-focused addition to the current range of multilateral lenders, such as the IMF, the World Bank and the European Bank for Reconstruction and Development.

OBOR is not without its challenges, however. The initiative is vast, with a geographic scope that leads to sometimes inevitable political and diplomatic tensions. Transnational projects by their nature include a wide variety of stakeholders, with success depending on an ability to bring many often-disparate groups into harmony. Yet for all the challenges, the rewards seem potentially game-changing – as those who witnessed the first train from China roll into London’s Waterloo station back in April 2017 would undoubtedly attest.

ROUTES & CORRIDORS: OBOR identifies three main land routes and two maritime routes. 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 branching off to South-east and South Asia, and including the China-Pakistan Corridor, and the other branching off to form the China-Central Asia-West Asia Corridor.

At sea, 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 eventually, Europe. These routes 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 whole string of nations, with President Xi announcing at the first OBOR summit in May 2017 that some 68 countries and international organisations had so far signed agreements with Beijing over the initiative. The Chinese leader has also 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 had been pursuing and that was also widely seen as a counterbalance to Chinese influence in Asia.

OBOR & ASEAN: Many of the first initiatives under OBOR have occurred within ASEAN countries, 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 grew from $40bn in 2000 to $480bn in 2014, with some predicting this number could reach $1trn by 2020. OBOR will likely be responsible for much of that future expansion. “OBOR 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 in providing funds with low interest rates and other different support mechanisms.”

NEW LINKS: One of the countries central to the overall concept of OBOR is Thailand. In September 2017, Prayut Chan-o-cha, the prime minister of Thailand, signed a memorandum of understanding (MoU) with Beijing concerning OBOR, in addition to a BT3.5bn ($101.3m) design and supervision contract for the Bangkok-Nakhon Ratchasima high-speed railway (HSR). This project is typical of OBOR, as it will eventually 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 OBOR investment in its $44bn Eastern Economic Corridor project. The scheme, centred on the three key eastern provinces of Chonburi, Rayong and Chachoengsao, will greatly enhance transport infrastructure on the Gulf of Thailand, as well as the development of manufacturing industries.

Another initiative that might have OBOR implications is the controversial Kra Canal project. The project 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, but has long been the subject of political controversy, as it would impact fellow ASEAN members Singapore and Malaysia, while also raising security concerns in Thailand’s restive south.

The project highlights some of the geopolitical complications that OBOR raises, as do plans to make the Mekong River navigable, some of which would involve destroying rapids and deepening channels, with a potentially detrimental environmental impact.

In neighbouring Myanmar there are also geopolitical challenges,alongside huge opportunities for OBOR to radically improve the infrastructure. China is already the largest foreign investor in the country, with some $19bn invested in Myanmar between 1988 and July 2017, while also being the country’s largest trading partner. Thus, in May 2017 Myanmar signed several MoUs with China for cooperation with OBOR.

Projects already identified within the OBOR framework 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 currently carrying out the construction. The site is also to be the loading terminus for oil and gas pipelines heading for China.

Such projects are also typical in that they were initiated before OBOR, yet the new initiative links them to a wider economic strategy. Myanmar also 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 ASEAN: While Indochina will see major land and sea links brought within the OBOR 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 a view that OBOR 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 the country’s status as a key sea power, connecting the Indian and Pacific oceans. Overall, some $359bn of investment is needed for the country’s mid-term development plan up to 2019, with only 63% of this coming from the Indonesian state. Jakarta is thus keen to expand dramatically upon the $5bn-6bn in infrastructure investment from China that it has received since first committing to OBOR at its inception in 2013. To do this, both sides may have to overcome a certain 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.

“One Belt, One Road 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 now under way, however, is Indonesia’s first HSR, between Jakarta and Bandung. The railway received a $4.5bn loan from the China Development Bank at the May OBOR summit in Beijing.

THE PHILIPPINES: ASEAN’s other great archipelagic nation, the Philippines, has also welcomed the OBOR concept, with President Rodrigo Duterte describing it in May 2017 as a “platform for growth in the region” acting in parallel with ASEAN’s own efforts for development.

While the Philippines is not directly on any of the initiative’s routes, it may still benefit if it can dovetail its own plans for infrastructure development – the current programme requires some $167bn in investment over the medium term – with infrastructure development within OBOR. This is particularly true when it comes to ports and airports, as development of these will enable the country to connect more seamlessly with the improved trading network created by OBOR. The initiative will act as a bridge, not only linking the Philippines more closely to China, but also to the rest of Eurasia. A potential benefactor would be an industry such as fresh foods, with local companies able to more easily shift their fruits and vegetables to global markets.

Participation in OBOR also coincides with the Philippines recent shift under President Duterte away from Washington and towards Beijing. This has seen a number of cooperation agreements signed between China and the Philippines – some 13 of these, worth a total $24bn, were inked back in October 2016 – along with the Philippines becoming a full member of the AIIB. Like Jakarta, Manila is also taking a wait-and-see approach with the details of OBOR cooperation. While Chinese investment in infrastructure is welcome, the Philippines needs to ensure that such support benefits its own development plans and its economy, first and foremost.

INDIAN OCEAN: More directly on OBOR’s maritime routes is the island of Sri Lanka. Indeed, a string of major Chinese-backed infrastructure projects in the country is already 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 now been placed under the initiative’s rubric. The island’s strategic location in the Indian Ocean, with good maritime access to South-east Asia, the rest of South Asia, the Gulf and Africa, makes it key to OBOR’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 in Colombo.

The port of Hambantota may serve as a good case in point. It had been struggling to find a place in the competitive world of Indian Ocean ports, with little business flowing through. In July 2017 China Merchant Ports’ agreed to pay Sri Lanka Ports Authority $1.1bn for a 70%, 99-year stake in the port, which may give it a new lease of life, potentially tying into the major east-west maritime corridor proposed by OBOR.

AFRICA-ASIA: Hambantota has also been controversial due to concerns it highlights among some Asian and Western nations about the true purpose of OBOR. The port has long aroused suspicions that it might have Chinese naval uses – suspicions recognised in the eventual deal, with Sri Lanka retaining a controlling interest over port security. Not all criticisms of the initiative have come from a security perspective, however, but also from bodies such as the EU, which has raised questions over transparency, protection of technical standards, market norms and economic interaction under OBOR. Others have raised concerns over the potential future debts that involvement with the initiative might incur.

Meanwhile, rival schemes have also emerged. One of these is the Asia Africa Growth Corridor (AAGC) being promoted by Japan and India. This brings together Indian Prime Minister Narendra Modi’s Act East policy with Japanese Prime Minister Shinzo Abe’s Free and Open Indo-Pacific initiative. India in particular has concerns surrounding how OBOR might further boost Chinese-Pakistani cooperation, with both of these countries traditional rivals to Delhi’s influence.

Japan, which has its own concerns about China, is thus seen in India as a good partner to counter OBOR influence, with a string of infrastructure deals recently agreed between Delhi and Tokyo, including Japanese support for the Ahmedebad-Mumbai bullet train and the Delhi Metro. Japan is also looking at ways to invest in the infrastructure in north-east India, a region also featuring in OBOR transport corridors.

Just after the OBOR summit in May 2017, the AAGC was unveiled at a meeting of the African Development Bank in Gujurat. Based on four pillars, the corridor seeks to boost quality infrastructure and institutional connectivity, enhance capacity and skills, engage in a range of development and cooperation projects, and boost people-to-people partnerships. It will also likely act as an important balance to growing Chinese investment and influence in Africa. India is also pursuing the North-South Transport Corridor, along with Russia and Iran, to build multi-modal transportation links between India’s west coast and cities as far north as St Petersburg. This too cuts somewhat across OBOR’s New Eurasian Corridor. This build up of regional and inter-regional infrastructure development plans demonstrates continuing rivalries between Asia’s great powers, with plenty of geostrategic challenges involved.

However, for many of the countries of the ASEAN region, these rivalries may bring great benefits, as interconnectivity will receive a major boost. If competition remains on the level of business and finance, producers in the Philippines, or Myanmar, could see a near future in which their products can more easily shipped 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 OBOR is in the interests of a particular national economy, for example. Such scrutiny may also 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 take place around the ASEAN region, with the goal of capturing a significant share of future global trade.