China's Belt and Road Initative shapes PNG

The Belt and Road Initiative (BRI) promises to radically transform a vast swathe of trade and transport infrastructure throughout Eurasia and Africa, which will have significant effects 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 – serving as a series of trade routes criss-crossing the Asian landmass – flowed between East and West. Its more famous travellers included Marco Polo and Ibn Khaldun. During the Silk Road’s heyday, this trade flow was responsible for the transfer of goods, services and ideas across the globe. The BRI seeks to update this same concept to meet the demands of the 21st century, adding a maritime arm and a host of road and railway links.

Previously referred to as One Belt, One Road, the initiative is estimated to require infrastructure investment of $5trn, according to 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 is backing a range of infrastructure projects, with the BRI making clear provisions for partnerships, particularly with non-Chinese enterprises. The benefits of this are considerable: foreign outfits can engage in major projects with Chinese government-backed guarantees, while contributing their expertise and local knowledge to ensure projects succeed, further reducing risk for all players involved.

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, as well as 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 Asian Development Bank estimated that this would require $22.6trn of investment in the lead-up to 2030, which could rise to $26trn if the effects of climate change are taken into account. The BRI – and the AIIB in particular – is thus perceived by advocates as providing crucial tools to address this shortfall. Indeed, the AIIB has been cautiously welcomed by 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 programme is vast, with a geographic scope that can lead to notable political tension. Transnational projects by their nature involve a wide variety of stakeholders, with success depending on the 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 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, including the China-Pakistan Corridor, and the other forms the China-Central Asia-West Asia Corridor.

The South China Sea serves as 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 coastal ports in China, connecting the China-Indochina Peninsula Corridor and the Bangladesh-China-India-Myanmar Corridor. These routes bring together a string of widely varying nations. In May 2017 Chinese President Xi Jinping announced at the first BRI summit that some 68 countries and international organisations had signed agreements with Beijing over the initiative – a figure that has since risen to 70. The Chinese leader stressed that the project is open to all, with a relatively high likelihood that at the next summit in 2019 its numbers will have grown further. This may be all the more likely after the US decided to pull out of the Trans-Pacific Partnership, a free trade agreement that the previous US administration of President Barack Obama had been pursuing and was widely seen as a counterbalance to Chinese influence in Asia.

South Pacific

Although China has been actively involved in infrastructure development in the South Pacific for several years by using state-owned contractors to construct projects funded by concessional loans, it has become increasingly intent on linking its infrastructure activities in the region to the BRI. In November 2017 Papua New Guinea and China signed three memoranda of understanding for infrastructure upgrades and the development of an agriculture industrial park, which both parties described as forming part of the transnational BRI.

Ahead of a June 2018 visit to China, PNG Prime Minister Peter O’Neill announced his country would become the second Pacific nation, after Timor Leste, to formally commit to the BRI. During that official visit the two parties also agreed to work towards establishing a bilateral free trade agreement. Recent years have seen further major China-led infrastructure initiatives undertaken in Vanuatu, Tonga and Samoa, but none of these have been formally classified as BRI-related projects. Australia has become increasingly wary of China’s growing influence in the region and the arrival of the BRI on its doorstep. In mid-2018 Julie Bishop, the Australian minister of foreign affairs, publicly expressed concern about the potential for China to burden Pacific nations with unsustainable debt that could threaten their sovereignty. She added that Australia and its partners should provide Pacific states with viable alternatives for infrastructure financing.

ASEAN

Many of the BRI’s projects are taking place in the ASEAN region, 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

Thailand is central to the overall concept of the BRI. In September 2017 Prime Minister Prayut Chan-o-cha signed a memorandum of understanding 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, thus strengthening regional transport links. It also forms part of a longer rail network that will eventually connect China to Singapore, with a revitalised link 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, which would enable 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 effects it would have on fellow ASEAN members Singapore and Malaysia. The project highlights some of the geopolitical complications arising from the BRI, as do plans to make the Mekong River navigable, 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 opportunities for the BRI to radically improve domestic infrastructure. China is already the largest foreign investor in the country, with $19bn in outlays between 1988 and July 2017, while also being its primary trading partner. Further solidifying this, in May 2017 Myanmar signed several memoranda of understanding with China for cooperation with the BRI. Projects already identified include the $2.7bn Kyaukphyu Special Economic Zone and a $7.3bn deepwater 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 agenda 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, 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 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 has substantial need for 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.” However, one project that is currently under way is Indonesia’s first high-speed railway, connecting the cities of Jakarta and Bandung. The railway project 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 the Hambantota Port and economic zone have all been placed under the initiative’s rubric. The island’s strategic location with 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.

Hambantota Port may serve as a good case in point. It had struggled to remain competitive among 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 it. Integrating the facility into the east-west maritime corridor proposed by the BRI may give it a new lease of life.

The area has also been controversial due to concerns among some Asian and Western nations about the true purpose of the BRI. For some time, Hambantota Port has aroused suspicions that it might have Chinese naval uses, and these 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 expressed concerns about the potential future debts that involvement with the strategy might incur.

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 has particular concerns about the BRI’s potential to boost Chinese-Pakistani cooperation, with both of these countries traditional rivals to Delhi. This has caused Indian authorities to view Japan, which has its own concerns about China, as a good partner to counter the BRI, with a string of infrastructure deals agreed 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.

Costs & Benefits

For many developing countries 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 emerging economies 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. Such scrutiny may lead to higher standards of quality and transparency being imposed, particularly if a rival initiative, such as the AAGC, is waiting in the wings. Therefore, the coming years may see a range of new geopolitical trade deals and infrastructure investments taking place throughout Eurasia, as various players seek to gain a more significant share of future global trade.

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Cover of The Report: Papua New Guinea 2018

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