Belt and Road to transform Southeast Asia into China’s backyard

This article is the first part in a series of four on China’s Belt and Road Initiative that we are publishing during the 2017 IMF-World Bank annual meetings in Washington DC. We have devoted two articles to the Belt element and two to the Road element, of which this piece is the first and focuses on the Southeast Asian part of the maritime route

  • By Elliot Wilson
  • 11 Oct 2017
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Lianyungang Port in east China now pivotal to the Pacific Ocean road and also, with the new China-Kazakhstan logistics terminal, key to the east to western belt SIPA USA/PA Images; Some rights reserved by Storm Crypt/flickr
In the grand scheme of the Belt and Road Initiative (BRI), China’s ambitious attempt to redraw the global trade map in its favour, the eye is drawn to the ‘belt’ part of the route, which stretches from Beijing to Europe overland through Central Asia, with a branch line terminating at the Indian Ocean.

This is natural — after all, this route encapsulates and replicates the old Silk Road along which salt, spices and silks were traded until the collapse of the Safavid Empire in the 18th Century. And most of the best known knockout schemes of Belt and Road such as hydroelectric dams, power plans and pan-regional rail lines are taking place in the deserts and mountains of Central and South Asia.

“In many belt-and-road countries, investment in infrastructure is the key to expanding economic opportunities in those countries, and so many of the first wave of [BRI] projects have been in roads, rail, ports and so on,” says Gerald Keefe, head of corporate banking, Asia-Pacific at Citi.

But by focusing on the ‘belt’ and on big-ticket infrastructure we become blind to the bigger picture. And this is where the ‘road’ part of the initiative comes in.

The road across water

First, it is useful to identify the basics of the ‘road’: what it was and is, then explore what is to come. Many struggle with the concept of a maritime road as we equate them with paved surfaces — though in ancient times trade routes were often called roads whether they passed through oceans or deserts.

In its heyday, the maritime Silk Road was as, if not more, important than the overland route. From the 3rd Century BC, goods were shipped from eastern China through the South China Sea and into the Indian Ocean, winding up in the bazaars of the Middle East (via the Persian Gulf) or the markets of Europe (via the Red Sea).

It makes sense, for the sake of this story, to split the maritime road in two, creating an eastern and a western road divided by the trade chokepoint of the Malacca Strait. The tale of the western part of the road will follow in tomorrow’s edition (Friday, October 13).

Here we will focus on the eastern route, at the heart of which is Southeast Asia, a region that has recently regained its momentum and its mojo.

China’s interest in Southeast Asia, also known as the Association of Southeast Asian Nations (Asean), is clear: its desire to see its corporates embedded in regional supply chains and its goods sold in local supermarkets utterly logical.

In a way, it is a latecomer here. China’s first step after opening up to the world in the 1980s was to rebuild its ties with the great powers. It then needed African commodities to power its economy and to enmesh itself in the robust supply chains

developed by Japanese and Korean conglomerates. Southeast Asia rather fell by the wayside after the 1997 Asian financial crisis, lacking resources, power, growth, wealth or political cohesion.

That has changed. It’s possible to see a future in which Southeast Asia is not just one of China’s most valuable trading partners but also the most important link in the entire belt-and-road initiative.

Belt and Road future

To understand why, it’s worth looking ahead to what the BRI is likely to become. First, infrastructure. While the great rail links that aim to connect China with Europe are largely cargo-driven operations, most of the big BRI-related transport projects in Southeast Asia involve the construction of high speed commuter rail. China is building a $5.5bn high speed service connecting its southern provinces with Singapore via Thailand and a $13bn double track line running from Malaysia’s east coast to its west.

China is building new ports, airports and power plants in Indonesia and Malaysia. The biggest sovereign beneficiary by far is Singapore: the Lion City accounted for 31.4% of all belt-and-road-related investment in the three years to the end of 2015, according to the World Bank. Indonesia came third, with Cambodia, Vietnam, Malaysia and Thailand also in the top 10.

These projects are of paramount importance to this region of 636 million people. Southeast Asia offers oodles of growth and plenty of thrusting young companies but it lacks the finances to build the infrastructure it desperately needs. The Asian Development Bank reckons the region’s 25 emerging markets, most of them located in Asean, must spend $1.7tr a year between 2016 and 2030 on new roads, telecoms towers and transmission lines just to maintain the current rate of growth. Right now they are spending $881bn a year between them; China’s ample financial reserves can help close that gap.

But China’s aspirations in the region go much further. Better rail links and bigger ports, notes James Cameron, Asia co-head of infrastructure and real estate at HSBC, “will allow firms in China’s hinterland, in landlocked provinces in the south and southwest, to get their goods to market in Southeast Asia far quicker” than is currently the case.

Digital road

Citi’s Keefe sees the maritime ‘road’ becoming, at least in Southeast Asia, a crucial conduit for high end Chinese-made products, from smartphones and televisions to fast-moving consumer goods, to digital goods and services. “China has an emerging set of companies, from telecoms to IT to consumer brands, that will become global champions in their own right and they all want to sell into the Asean market,” Keefe says. “There is an entire digital aspect to the belt-and-road story that has been overlooked but which is vital to what the BRI will become. Countries along the maritime route are potential markets for Chinese tech and consumer goods — the ‘belt’ route is more about natural resources and energy, and the ‘road’ is about everything else.” 

Look closely at the region and you can see this digital road forming before your eyes, with the charge led by private and state run firms. In March, Alibaba unveiled a new

digital free trade zone in Kuala Lumpur, which will be jointly run and owned by the Hangzhou ecommerce giant and the Malaysian government.

With almost breathtaking speed, state run telecoms operators have become big players in the lucrative and systemically important world of submarine cabling. Between 2016 and 2019, Chinese firms are projected to participate in 20% of global submarine projects against 7% over the previous four years, according to a study from the University of Washington.

Around half the projects will involve cable (which offers residential, corporate and governmental users cutting edge bandwidth) being laid in the Asean region. Three state firms — China Unicom, China Telecom and China Mobile — are listed as co-owners of the new SeaMeWe-5 cable linking France with Singapore via the Middle East. Huawei, a Shenzhen-based telecoms equipment maker, is building a submarine cable linking the Solomon Islands with the Australian coast close to Sydney.

There are other reasons for China to focus so heavily on Southeast Asia. It may have come late to the region from a state-to-state perspective. But Chinese merchants have been here for millennia, quietly running banks and shipping firms and owning property in the likes of Singapore, Malaysia and Indonesia.

This makes new Chinese money a good fit. “Southeast Asia is where our Chinese clients generally have the highest degree of comfort,” says Citi’s Keefe. “So while a company may be new to an Asean market, they know in general what to expect and what they are getting into.” China-led corporates are also attracted by the region’s rebound, with the economies of the Philippines and Vietnam set to grow at north of 7% for years to come and with Indonesia not far behind.

China’s backyard

And there is one final motive at work here. China may still be feeling its way in a region where European and North American firms and governments, not to mention the likes of Japan and to a lesser extent Australia, still hold considerable sway. But few experts doubt that China in the long term sees Southeast Asia as part of its backyard, filled with captive customers happy to operate within its sphere of influence.

“China wants the same control role in their hemisphere as the US does in the Americas,” says a prominent Asia-focused economist. “The South China Sea is as much a part of China in the long term as the Gulf of Mexico is part of the US — that is how Beijing sees it. Yes, China is investing billions because it wants to enable the free flow of Chinese goods through Chinese-made ports and rail lines. But this is also very much about them being in control of the region.”

Tomorrow: the western section of the road (maritime) route

  • By Elliot Wilson
  • 11 Oct 2017

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