Belt and Road to bring vision to China’s blindspot beyond the Malacca Strait

This article is the second 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 second and focuses on the western part of the maritime route

  • By Elliot Wilson
  • 12 Oct 2017
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The Belt and Road Initiative (BRI), China’s ambitious attempt to redraw the global trade map in its own image, has a blind spot. It isn’t in Southeast Asia, where China is building ports and free trade zones with abandon. Nor is it in the desert states of Central Asia, through which it is building thousands of miles of rail lines, to help its manufacturers ship goods overland to Europe. Both these regions are well known to China, filled as they are with nations either on friendly terms with it — or suspicious of its motives, but keen to remain on good terms with the rising superpower.

No, the view in China’s mirrors starts to blur only when we push west of the trade chokepoint of the Strait of Malacca, and enter the Indian Ocean. This is new territory for China in every way. What its ambitions are in this part of the world is largely a mystery. Perhaps China itself does not yet know. But it is an integral part of the Belt and Road Initiative, so the question is worth exploring.

This part of the maritime road stretches west across the Indian Ocean — which alone covers more than 70 million square kilometres — into the Persian Gulf and the Red Sea, before heading north, through the Suez Canal, to Europe.

For trade-dependent China, these are colossally important routes. More than 80% of its oil imports traverse the Indian Ocean, according to the US Energy Information Administration, heading from Africa and the Middle East, before pushing north to the mainland. Most Chinese-made goods bought by European consumers make the opposite journey, after passing through the Suez Canal.

To many countries, a natural impulse would be to protect these routes using a judicious mix of carrot and stick. European colonists did so in the past, often erring on the wrong side of the equation. But this is the modern world, run according to international laws and norms, and China is still getting to know a vast region filled with cultures it does not yet fully understand, and business practices still alien to its eyes and ears.

Rather than seeking to dominate and bully regional trading partners, China’s highly logical solution has been to pump billions of dollars’ worth of capital into huge local projects, with the aim of building infrastructure that will increase the flow of trade, while being of use to both China and the sovereign in question.

Egypt and Sri Lanka in focus

Take two mega-projects that have, so far, flown under the radar. Many know of China’s investments in Pakistan, most notably in the port city of Gwadar, where it is building a 2,280-acre free trade zone, an industrial port, and a naval facility large enough to dock visiting aircraft carriers.

But fewer know that China, thanks to a $500m investment from Tianjin-based conglomerate Teda, is now the biggest investor in the Suez Canal Area Development Project, launched in 2014 by Egyptian president Abdel Fattah el-Sisi, with the aim of developing three cities, including Ismailia and Port Said, and building a new canal that will run parallel to Suez. In effect, China and Egypt are working to transform a canal that generates $5.2bn in annual revenues, into a $100bn investment hub serving markets in Europe and eastern Africa.

Another mega-project that is likely forever to alter trade routes, in the Indian Ocean but also far beyond, can be found in Hambanota, on the southern shores of Sri Lanka. Not long ago, this was little more than a fishing village. But this month, if all goes to plan, another state-run firm, China Merchants Group, will sign a $1.1bn deal to buy a majority stake in Hambanota’s port.

China, naturally, has been quick to talk up the deal — and the loss-making facility. Its ambassador to Sri Lanka talks of turning the town into South Asia’s answer to Shanghai. Many might scoff at the notion, but Sri Lanka is perfectly positioned on the map to become a major trading power — with Chinese help — over the coming decades.

An 11-square-kilometre special economic zone encircling the deep-water port is being planned by China Merchants, with the aim of sucking in investment from mainland manufacturers, logistics experts, telecoms equipment makers, and IT firms. In time, China hopes to brand Hambanota as the Indian Ocean’s leading trans-shipment hub, capable of providing oil storage, refuelling and maintenance facilities for global shipping firms making the long trek between continents. And why not — it is after all perfectly positioned on the map, close to the Indian mainland, and equidistant between Suez and the Strait of Malacca.

Sri Lanka, which has taken care to ally itself with China while remaining on good terms with its giant neighbour India, as well as the US and Europe, certainly identifies with China’s vision of its future. “For millennia, Sri Lanka was an important trading centre in the middle of the Indian Ocean,” Indrajit Coomaraswamy, governor of the Central Bank of Sir Lanka, tells GlobalMarkets. “We are equidistant between East Asia and Europe, 20 miles from India, and with easy access to the Middle East and Africa. Crucially, Sri Lanka is in the middle of China’s Maritime Silk Road. Priority is being attached to promoting Sri Lanka as a regional and even a global hub.”

And China is setting down roots across the region, building rail lines in Bangladesh and free trade zones in Myanmar. In the Republic of the Maldives, a collection of 1,110 islands scattered across an area of ocean the size of Syria, it has taken out a lease on an atoll within shouting distance of the capital, Malé, and is funding (via its two chief export lenders, China Development Bank and Export-Import Bank of China) the construction of a new airport.

Plans are afoot to build a port-cum-naval facility on Laamu, a Maldivian atoll that lies astride a deep stretch of ocean used by supertankers heading to and from Africa. The atoll is a few hundred miles north of Diego Garcia, a UK-administered island chain that hosts one of only two US naval and military bases in the Asia-Pacific region (the other is on Guam). 

Military might and economic development

This raises one last and highly pertinent question about the country’s goals in the western maritime road. What indeed are China’s ambitions? Some believe it wants to become an Indian Ocean superpower, wedding military might to its economic credentials. Many in this camp subscribe to the “string of pearls” theory, referring to China’s growing network of naval facilities, from Sri Lanka to Pakistan to Africa. In August, China officially opened its first military base in Djibouti, a tiny but strategically relevant state on the Horn of Africa.

Others see in China’s rise a purely commercial imperative. “There is a lot of supposition about the Belt-and-Road Initiative being geostrategic rather than commercial,” says a leading Asia Pacific infrastructure banker. “To my mind, it is 100% commercial.”

The truth — though few in China would be likely to admit it — probably lies somewhere in between. “China,” notes one Asia-based banker interviewed for this story, “is nothing if not a great student of history.” He points first to the fact that 60% of all the world’s oil production passes through the Indian Ocean, and second to the words of Alfred Thayer Mahan, an 18th Century US naval officer and historian, who wrote several classic texts on the history of maritime warfare. Mahan is a quasi-mythical figure in Washington, but also in China, where Party officials study his books, taking to heart his famous mantra: “Whoever attains control of the Indian Ocean will dominate Asia.”

It is nigh on impossible to glimpse into the future, and to evince China’s long-term strategy in this part of the world. Alexious Lee, head of industrial research at Hong Kong-based brokerage CLSA, says he “cannot imagine China becoming an Indian Ocean superpower within the next 10 years”. But he points to the ports, industrial zones and communications networks it is building, which will make it “easier for its naval forces, including aircraft carriers, to park up and refuel almost anywhere. It also ensures that Beijing is able to defend shipping lanes.”

In China’s eyes, all of this extraterritorial activity just makes good commercial sense. It can be folded into the overarching Belt and Road Initiative, after all, creating, as China regularly insists, a “win-win” for everyone.

But to hawks in the likes of India and the US, wary of China’s rise and bristling at the rapidity of its incursion into the region, it might look at an awful lot like a soft takeover by a mighty new power keen to suck an entire ocean into its sprawling new global trade initiative. Which one it is, only time will tell.

Tomorrow: the eastern section of the belt (overland) route

  • By Elliot Wilson
  • 12 Oct 2017

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