China’s Belt & Road Initiative – Blog #13

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(Image credit: srilankabrief.org)

This is the thirteenth Blog in a series based on The Geopolitical Significance of the Chinese Belt and Road Initiative and What it may Mean for Supply Chain Operations Worldwide, a Whitepaper (51 pg, 258 endnotes) researched and written for RAAD360 LLC (raad360.com). The goal is to alert supply chain managers worldwide to the complex risks inherent in BRI. RAAD360 provides RAAD™, a cloud-based supply chain risk management platform.

Worldwide Supply Chain Risk Series

China’s Belt & Road Initiative

Blog #13 – China-Indochina Peninsula Economic Corridor:  Laos & Malaysia

 

Source: ESCAP (From Presentation by Binyam Reja, Ph.D., The World Bank at the 2018 Annual Meeting of the Transportation Research Board, Washington, D.C.)

Malaysia is having serious second thoughts about its “Belt and Road” involvement.  The newly elected government canceled the high-speed bullet train project between Kuala Lumpur and Singapore in May 2018, because it believes the costs outweigh the benefits to Malaysia.

On July 4, 2018, it was announced that work on the 688 km East Coast Railway Link had been suspended. The project’s costs had soared to nearly 50% more than the original estimate.[1]  The loans for the project are a heavy debt burden for Malaysia.  The planned line, which has strategic significance for China, but less so for Malaysia, would “connect the South China Sea at the Thai border in the east with strategic shipping routes of the Straits of Malacca in the west.”[2]  Malaysia is insisting that the deal be renegotiated before it will allow it to proceed.

Time savings of Thai/Kra Canal compared to alternative routes

Source:https://www.firstpost.com/india/thailands-kra-canal-project-is-chinas-masterplan-to-secure-beijings-interests-assert-influence-in-asean-indian-ocean-region-4420647.html. (Image courtesy: kracanal-maritimesilkroad.com)

Other Chinese infrastructure developments in Malaysia include a port complex in Malacca—the Melaka Gateway port on the Strait’s northern shore and the Kuantan port on the South China Sea.[3]

The Melaka Gateway port project is very important both to China as a means of protecting its interests in the Strait of Malacca and to Malaysia as a potential challenger to Singapore’s commercial and maritime supremacy in the Strait.  The project includes one artificial island and three reclaimed islands.

One island will have a container and bulk terminal, shipbuilding and ship repair facilities, and a ‘maritime industrial park.’[4]  But, with nearby Port Klang planning to double its capacity, the need for another port (Melaka Gateway) is questionable.  Indeed, a World Bank study concluded that “there was no need for a new port on Malaysia’s west coast because existing facilities had not reached capacity.”[5]

The ownership and control of the project have already raised concerns.  It has been reported that “the reclaimed islands would allegedly be given freehold status while the port would allegedly be granted a 99-year concession,” conditions called “rare and generous.”[6]  Recently, Malaysia has indicated that it is reassessing the project before it allows it to proceed.[7]  Having Chinese-owned islands sitting in the middle of a strategic major international maritime passageway poses serious reasons for concern.

China appears to have a liking for artificial islands as development sites.   Private Chinese investment in Malaysia includes a noteworthy magnet for Chinese capital and the creation of overseas residential real estate development.  Located in the middle of the vitally-important Strait of Johore that separates southern Malaysia and Singapore and well within Malaysia’s territorial waters, is the first of four planned artificial islands of the $100 billion Forest City project.

This is to be a high-tech, futuristic, ultra-‘green’ master-planned new city, with a state-of-the art security surveillance system.[8]  It is intended to be a largely autonomous Chinese outpost in a foreign land.  Sales by the Country Garden Pacificview joint venture—between Country Garden, a powerful Chinese real estate developer and a company controlled by Sultan Ibrahim Sultan Iskandar—to Chinese buyers were booming until Beijing became alarmed at the degree of private Chinese capital flight it was experiencing.

Over the last decade, an estimated $3.8 trillion in Chinese wealth flowed out of the country, a substantial portion into offshore real estate.  In 2017, Beijing instituted sharply restrictive capital transfer controls that essentially shut off further purchases by Chinese nationals.[9]  The remaining properties are being marketed to foreigners from other countries, such as Dubai, Thailand and Japan.  Long-term visas and paths to citizenship incentives that had been offered to Chinese buyers have caused a backlash in Malaysia and became a campaign issue in recent elections in which a former prime minister, who opposes such incentives, was elected.

Laos has strategic location for China as a land bridge between China and the mainland Southeast Asian states of Myanmar, Thailand, Cambodia, and Vietnam.  In its “Belt and Road” scheme, China regards Laos as a key transshipment node for commerce and a generator of electric power for the region.  Thus, “Belt and Road” projects in landlocked Laos have been concentrated in energy development (hydroelectric dams) and transportation.  Both the Laotian “Belt and Road” transportation and energy projects build upon projects begun in the 1990s under the Asian Infrastructure Bank (AIB), as opposed to the Chinese-created Asian Infrastructure Investment Bank (AIIB).[10]

Laos is part of a $6 billion (also estimated at $7 billion) rail project to link eight Asian countries.[11]  The Pan Asian Railway will run from Kunming in southern China to Singapore.  From Singapore, plans call for the railway to go north through the Malay Peninsula into Thailand.  When the line reaches Bangkok, it will split into three routes, all going to Kunming, China, one through Myanmar, one through Cambodia and Viet Nam, and the third (Kunming-Vientiane) going through Laos.[12]  The portion passing through Malaysia may be in jeopardy, as the government elected earlier this year has put the brakes on most planned or in-process Chinese projects.  The Kunming-Vientiane link “will be paid for by the Laotian government with concessionary loans from China, with Laos’ mineral wealth as collateral.“[13]  Construction in Laos has been slowed by mountainous terrain necessitating bridges and tunnels for more than 60% of the line and clearing land mines left over from the Vietnam War.

The benefits to Laos are diminished by the fact that the labor force is almost entirely Chinese and much of the construction material is brought in from China or made in on-site Chinese factories, such as the cement required for tunnel construction.[14]  A Chinese feasibility study confirmed that the railway would run at a loss for at least for the first eleven years.  The project costs are running at nearly half of Laos’s GDP and are putting the country at sovereign debt risk.  Government debt, mainly due to Chinese project loans, accounts for about 70% of the country’s output.[15]

Questions –

Where does my supply chain intersect with China’s “Belt and Road” transportation network?

What about my supplier’s supply chain?

Can China’s monopoly power increase transportation times in my supply chain?

Can China’s monopoly power increase transportation costs in my supply chain?

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BRI Blog next Monday will be:

China-Indochina Peninsula Economic Corridor:  Cambodia, VietNam and Indonesia

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There is a wealth of information in the end notes to each Blog article.  Click the URLs to bring the sources onto your computer screen for review.

[1] South China Morning Post.  Diplomacy & DefenceBelt and Road Initiative. “Chinese engineering firm told to suspend US$20 billion East Coast Railway Link in Malaysia.”4 July 2018.  https://www.scmp.com/news/china/diplomacy-defence/article/2153801/chinese-engineering-firm-told-suspend-us20-billion-east

[2] EurasiaReview/Benari News.  “Malaysia Reviews China-Backed Rail Link, Scraps Bullet Train Project.”  30 May 2018. https://www.eurasiareview.com/30052018-malaysia-reviews-china-backed-rail-link-scraps-bullet-train-project/

[3] Eva, Joanna, Qi Lin, James Tunningley.  Op. cit. https://globalriskinsights.com/2018/01/chinas-belt-and-road-initiative-regional-outlooks-for-2018/

[4] Negaraku, Bangkitlah.   “Malaysia and China ink $7.3 bn Melaka Gateway project.”   Najibrazak.com.    3 September 2016.  https://www.najibrazak.com/en/international-news/malaysia-and-china-ink-7-3bn-melaka-gateway-project/

[5] Free Malaysia Today.  “Analyst: Is RM43b Melaka Gateway for China trade or military? “   14 November 2016.    www.freemalaysiatoday.com/category/nation/2016/11/14/analyst-is-rm43b-melaka-gateway-for-china-trade-or-military/

[6] Ibid.   www.freemalaysiatoday.com/category/nation/2016/11/14/analyst-is-rm43b-melaka-gateway-for-china-trade-or-military/

[7] Mahorm, Ardi and Roshidi Abu Samah.  “Melaka Gateway project being reassessed.”  The Star Online.    2 June 2018.  https://www.thestar.com.my/news/nation/2018/06/02/melaka-gateway-project-being-reassessed/

[8] Larmer, Brook.   “A Malaysian Insta-City Becomes a Flash Point for Chinese Colonialism — and Capital Flight.”  The New York Times.  13 March 2018.  https://nyti.ms/2GkOE4p

[9] Ibid.   https://nyti.ms/2GkOE4p

[10] Lim, Alvin Cheng-Hin.  “Laos And The Silk Road Economic Belt – Analysis.”  The Eurasia Review.  30 July 2015.  http://www.eurasiareview.com/30072015-laos-and-the-silk-road-economic-belt-analysis/

[11] Perlez, Jane and Yufan Huang.  Op.cit.  https://www.nytimes.com/2017/05/13/business/china-railway-one-belt-one-road-1-trillion-plan.html

[12]Lim, Alvin Cheng-Hin and Yufan Huang.  Op. cit.  http://www.eurasiareview.com/30072015-laos-and-the-silk-road-economic-belt-analysis/

[13]Lim, Alvin Cheng-Hin and Yufan Huang. Op. cit.  http://www.eurasiareview.com/30072015-laos-and-the-silk-road-economic-belt-analysis/

[14]Perlez, Jane and Yufan Huang. Op. cit.   https://www.nytimes.com/2017/05/13/business/china-railway-one-belt-one-road-1-trillion-plan.html

[15] Emont, Jon and Myo Myo.   “Chinese-Funded Port Gives Myanmar a Sinking Feeling.”   Wall Street Journal.  15 August 2018.    https://www.wsj.com/articles/chinese-funded-port-gives-myanmar-a-sinking-feeling-1534325404?mod=hp_listc_pos1

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© Shirley M. Loveless, Ph.D. 2018

Dr. Loveless is a consultant, author, and educator in transportation systems, supply chain risk analysis, emergency management, and economic development.  She is a Member of the Transportation Research Board of the National Academies of Sciences, Engineering and Medicine, and an appointed member of several TRB Standing Committees.  She works with RAAD360 LLC as a supply chain transportation consultant.