China's Belt and Road Initative reshapes Sri Lanka

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

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 is seeking 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 the One Belt, One Road initiative, the vast plan has been estimated by PwC to require infrastructure investment of approximately $5trn. 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 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 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 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 require $22.6trn in the lead-up to 2030, which could rise to $26trn if climate change is taken into account. The BRI, and the AIIB in particular, are thus seen by advocates as crucial to address this shortfall. Indeed, the AIIB has been cautiously welcomed by many regional observers as a more Asia-focused addition to 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 programme is vast, with a geographic scope that leads to sometimes-inevitable political and diplomatic tensions. Transnational projects by nature include a wide variety of stakeholders, with success largely dependent on the ability to bring many often-disparate groups into harmony. For all the difficulties, the rewards seem 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 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, and connect with 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 strategy. The Chinese leader has stressed that the project is open to all, expressing 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, which was widely seen as a counterbalance to Chinese influence in Asia.

ASEAN

Many of the initiatives under the BRI 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 become one of China’s most important economic partners. The value of goods traded between the two bodies grew from $40bn in 2000 to $480bn in 2014, with some predicting this number could reach $1trn by 2020. 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 Prayut Chan-o-cha, the prime minister of Thailand, 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 is typical of the BRI, as it 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 eastern provinces of Chonburi, Rayong and Chachoengsao, will greatly enhance transport infrastructure in the Gulf of Thailand and will help develop manufacturing industries.

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, but has long been the subject of political controversy, as it would impact fellow the ASEAN member countries Singapore and Malaysia, while also raising security concerns in Thailand’s restive south.

The project highlights some geopolitical complications that 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 environmental impact.

In neighbouring Myanmar there are also geopolitical challenges, alongside substantial opportunities for the BRI to radically improve the domestic infrastructure. China is already the largest foreign investor in the country, with some $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. The site is also anticipated to be the loading terminus for oil and gas pipelines heading for China.

Such projects are also typical in that they were initiated previously, yet the BRI 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 subcorridor, which links Dawei in south-eastern Myanmar with Bangkok. Other subcorridors 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, chairperson 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 adopted the view that 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 Indonesia’s mid-term development plan leading up to 2019, with only 63% of this coming from the Indonesian government. Jakarta is thus keen to expand dramatically upon the $5bn-6bn in infrastructure investment from China, which it has received since first committing to the BRI 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.

“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 such initiative under way 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.

The Philippines

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

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 the BRI. 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 the BRI. The initiative will act as a bridge, linking the Philippines more closely with not only China, but also the rest of Eurasia. Potential benefactors include industries such as fresh foods, with local companies able to more easily shift their fruits and vegetables to global markets.

Participation in the BRI also coincides with the Philippines recent shift under President Duterte away from Washington and towards Beijing. This transition 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.

Similar to Jakarta, Manila is employing a wait-and-see approach regarding the details of BRI cooperation. While Chinese investment in infrastructure is welcome, the Philippines needs to ensure that such support benefits its own development plans and economy first and foremost.

Indian Ocean

More directly on the BRI’s maritime routes is Sri Lanka. Indeed, various major Chinese-backed infrastructure projects in the country are already well under way, with some long since completed. The Colombo International Container Terminal, Port City Colombo, and the redevelopment of Hambantota Port and economic zone have all 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 and 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 in Colombo.

The port of Hambantota may serve as a good case in point: it had been struggling to find a place amid competing Indian Ocean ports, with little business flowing through it. 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 it into the major east-west maritime corridor proposed by the BRI.

Africa-Asia

Hambantota has also been controversial due to concerns 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 – these suspicions were recognised in the eventual deal, with Sri Lanka retaining a controlling interest over port security.

Not all criticisms of the initiative have focused on security, however, and bodies such as the EU have raised questions over transparency, protection of technical standards, market norms and economic interaction under the BRI. Other entities have expressed concerns about the potential future debts incurred from the development strategy.

Meanwhile, rival schemes have emerged. One of these is the Asia Africa Growth Corridor (AAGC), 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 the BRI 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 counterbalance the BRI, with a string of infrastructure deals agreed upon between Delhi and Tokyo, including Japanese support for the Ahmedebad-Mumbai bullet train and the Delhi Metro. Japan is also looking to invest in infrastructure in north-east India, a region featured in BRI transport corridors.

Just after the BRI 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 the quality of infrastructure and institutional connectivity, enhance capacity and skills, engage in 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 transport links between India’s west coast and cities as far north as St Petersburg. This too cuts somewhat across the BRI’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.

Costs & Benefits

For many countries in ASEAN, 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 have their products more easily shipped around the globe, bringing further investment and prosperity.

At the same time, such developments are likely to be carefully scrutinised, as governments in the ASEAN region 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 interest of the BRI is in the interest 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 on the wings.

The year ahead may 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.