China’s Belt & Road Initiative – Blog #5

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(Image credit: srilankabrief.org)

This is the fifth 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 (35 pg, 172 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 #5 – Africa, Australia, South Pacific

Africa

China is Africa’s largest trading partner.  Trade between the African nations and China has historically been exports of rare minerals and other natural resources from Africa in return for imports of manufactured items from China.  The historic trade pattern between African nations and China has caused several problems for the African countries: not only has it depleted the African Continent’s natural resources and failed to generate many new African businesses, it has led to overwhelming debt burdens for several African governments and a problem of empty containers that brought goods from China now clogging ports up and down both coasts.  This last problem has repercussions for all port users.  Supply chain interruptions are practically guaranteed.

A summary of a recent (PricewaterhouseCoopers) PwC study concluded:  “The trade imbalance between imports and exports means that many containers return empty, thereby absorbing valuable port capacity and resulting in higher logistics costs for inbound traffic to offset the cost of an empty return leg. Improving Africa’s trade potential to export manufactured, semi-processed or agricultural goods would significantly improve the imbalance in containerized trade.”[1]

China has long had extensive development projects in Africa, pre-dating the “Belt and Road Initiative.”  These have been mostly in resource extraction and road and rail projects to provide access between mines and ports.  In 2015, China signed an MOU with the African Union declaring China would work with the 54 countries to connect all of the countries through highway, rail and airport infrastructure projects.  Such linkage would be helpful to continental economic development but implementation of actual projects has been slow.

China has engaged in port development projects undertaken under the “Belt and Road” framework, in several countries on the  African Continent, including Bizerte in Tunisia, Dakar in Senegal, Dar es Salaam, Tanzania, Port of Djibouti, Djibouti, Libreville, Gabon, Maputo, Mozambique, Tema, Ghana[2] and Mombasa in Kenya. But comprehensive port development and port connection infrastructure are still deficient, and this is impeding the Continent’s economic development.

China has increased investment in African businesses in recent years, particularly, in manufacturing businesses.  China has financed or is financing over 3,000 projects developed between 2000 and 2014, covered by more than $86 billion in commercial loans to African governments or state-owned entities.

These loans have made China Africa’s largest creditor and that raises the risk of serious financial strains on many African countries that may lack the ability to meet their loan commitments to the Chinese.[3]  Another problem with “these investments in African businesses is that these cases are so sporadic and PR-imbued that they raise more questions about the scope, systematic design, and consistency of China’s plan to transfer its labor-intensive industries to Africa (and hire locally).

Beyond the grand slogans and random cases, China needs to present more systematic, well-coordinated and industry-specific plans to convince Africa and the world that  China is indeed committed to and vested in job creation in Africa.”[4]  Foreign direct investment has its baggage.  As defined in Wikipedia, “a foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.  It is thus distinguished from a foreign portfolio investment by a notion of direct control.”[5]  This would mean that these companies would be Chinese-owned or controlled.

 

Australia

Australia is one of the few countries that has refused the siren call of “Belt and Road” so far, though not for lack of China’s efforts.  Australia has been reluctant to join the “Belt and Road Initiative” officially, “at least in part from reservations against linking, at Beijing’s request, an extensive Northern Australia infrastructure development plan directly with China’s Silk Road.”[6]

Many planned Northern Australia projects have complementarity with “Belt and Road Initiative” objectives but the Australian government is concerned about losing control of its own development plans, given the Chinese track record for taking a dominant role in any joint enterprise.  But, at least some in Australia’s business community are pressing the government to come to agreement with China and join the “Belt and Road Initiative”.  Asialink, an Asia-Australia-promoting ‘think tank’ affiliated with the University of Melbourne, “identifies opportunities in sectors such as: agriculture, financial and legal and planning expertise”[7] that could come in a partnership with China.  Australia is linked unofficially to the “Belt and Road Initiative” through a public-private NGO created in 2016, the Australia-China OBOR Initiative (ACOBORI).[8]

While Australia has resisted Chinese involvement in its development plans for the Northern Territory, China has become a significant investor in several Australian ports:  Darwin—in the northern most part of the Northern Territory, Newcastle—on the northern coast of New South Wales, and Melbourne—at the southern end of New South Wales.[9]  The purchase of the Port of Darwin by Landbridge, a Chinese company founded by billionaire Ye Cheng, has caused concerns in Australia. The port also includes a base used by U.S. Marines, a situation with parallels to the Chinese base and port in Djibouti that is next to a U.S. base.

In addition to national security concerns, there is wariness about Landbridge’s financial strength to carry out the ambitious port area plans as the firm has sought to renegotiate existing loans and get new funding[10] and about what might happen to ownership and control of the facility, bearing in mind Ye Cheng’s use of the Port as security for a $500 billion loan from China’s Export-Import Bank.[11]

The hodge-podge collection of loans, including high-interest short-term ones from China’s shadow banking market underpinning Landbridge’s purchase of the port, left the firm with an unmanageable shortfall between revenues generated and loan repayments required.[12]  Under Landbridge’s lease terms, 20% of the Port must remain in Australian hands, (either the Northern Territories government or an Australian investor),[13] but this leaves operational control of the Port in Chinese hands.

Besides militarily, the Port of Darwin’s location is strategic in other ways:  it is the ‘northern gateway’ for Australasia trade;  it is a “key support hub for the expanding o?shore oil and gas ?elds in the Arafura Sea, Timor Sea and waters off the coast of Western Australia; it is the only port between Townsville and Fremantle with full access to multi-modal transport services;”[14] and its state-of-the art maritime facilities  are capable of handling the largest cargo ships.  The East Arm Wharf in the port handles Panamax vessels.

The purchase of the Port of Darwin appears to be a path to get Chinese interests into the Northern Territory for development purposes, seemingly an end-run around previous Australian policies to keep control of development in the Northern Territory.  Although Landbridge is primarily an energy and infrastructure firm,[15] it has declared ambitious plans to go beyond port development, to build a luxury resort with world-class hotels and luxury residences.  This looks to complement its plans to expand cruise ship facilities[16]and to generate more investment opportunities.

 

South Pacific

China has become very active in the small, scattered island nations in the South Pacific.  The economic value of these tiny countries to China or to the “Belt and Road Initiative” would seem limited, but the strategic value, due to their location is immense and that appears to be the driver behind recent Chinese investments in places like Vanuatu, with a population of 270,400 for the entire island nation’s archipelago.[17]

A large, gleaming new wharf on Santo Island, Vanuatu, is a centerpiece, though it appears to exist more to meet hopeful expectations of marine traffic than current volumes, and the long-term future of all of these islands is threatened by sea level rise.  The wharf was built by a Chinese company and financed by the Chinese government.  Given the experiences of other recipient countries with Chinese infrastructure loans, such as Sri Lanka, some financial experts have expressed concern that Vanuatu will not be meet loan repayment terms and will default on the project, resulting in Chinese acquisition of the facility.[18]

The wharf is just one of many Chinese projects in Vanuatu; others include government buildings,  stadiums, convention centers, roads, and extensions to the airport’s runaway to accommodate larger planes.[19] Perhaps not coincidentally, Vanuatu was the first Pacific nation to support China’s contested claims to islands in the South China Sea.[20]

Guadalcanal, in the Solomon Islands, has been inundated by the steady stream of Chinese immigrants and money into this tiny island.  Chinese immigrants now own dozens of businesses and buildings and a large gold mine, bought in 2014 from an Australian firm.

The United States and Australia have taken note of the growing Chinese presence and are stepping up their development aid.  The fear is “this stretch of jungle–a linchpin of the Australian-American alliance with a long history of naval importance—has become the stage for a new cold war of strategic competition.”[21]

These islands have long sought an undersea telecom cable because satellite-based internet connectivity is hampered by frequent storm clouds that interfere with signals.  Australia has dedicated a large portion of its aid budget to toward installing an undersea cable connecting Guadalcanal (and Papua,  New Guinea) to Australia’s global internet hub,“ a project that Australia promises will be up and running by 2019.[22]

This was Australia’s response to Huawei’s plans to lay a cable to provide the Solomon Islands with a high-speed internet connection reaching to Sydney, Australia.[23]  Australia considers Huawei a cybersecurity threat.  This proposed Chinese project set off alarm bells, especially in light of China’s other telecommunication moves, (discussed in a later section) and belligerence in and around the South China Sea.

 

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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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] The Maritime Executive.  “Africa Needs to Tackle Port Congestion.” 26 April 2018. https://www.maritime-executive.com/article/africa-needs-to-tackle-port-congestion#gs.Sd0n5=w

[2] Bateman, Sam, Rajni Gamage, and Jane Chan, Eds.  “Introduction.”  Footnote, p.9, in ASEAN and the Indian Ocean: The Key Maritime Links. RSIS Monograph No. 33.   July 2017. Bateman, Sam, Rajni Gamage, and Jane Chan.   https://www.rsis.edu.sg/wp-content/uploads/2017/08/Monograph33.pdf

[3]  Schneidman, Witney and Joel Wiegart.  “Competing in Africa: China, the European Union, and the United States.” Brookings.   16 April 2018.  https://www.brookings.edu/blog/africa-in-focus/2018/04/16/competing-in-africa-china-the-european-union-and-the-united-states/

[4] Sun, Yun.  Brookings/Africa in Focus.    “Inserting Africa  in China’s One Belt One Road strategy:  A new opportunity for jobs and infrastructure?” 2 March 2015.. https://www.brookings.edu/blog/africa-in-focus/2015/03/02/inserting-africa-into-chinas-one-belt-one-road-strategy-a-new-opportunity-for-jobs-and-infrastructure/

[5] Wikipedia.  Accessed 29 May 2018.  .https://en.wikipedia.org/wiki/Foreign_direct_investment

[6] The Straits Times (Reuters).  “Australia receptive to China’s One Belt, One Road, but national interest first.”       14 May 2017.  http://www.straitstimes.com/asia/australianz/australia-receptive-to-chinas-one-belt-one-road-but-national-interest-first

[7] Ibid.  http://www.straitstimes.com/asia/australianz/australia-receptive-to-chinas-one-belt-one-road-but-national-interest-first

[8] De Jonge, Alice.  “Australia risks missing out on China’s  One Belt One Road.”  The Conversation. 15 May [viii] 2017. https://theconversation.com/australia-risks-missing-out-on-chinas-one-belt-one-road-77704.

[9] Economist Intelligence Unit.   “China’s expanding investment in global ports.”  11 October 2017.  http://country.eiu.com/article.aspx?articleid=1125980496

[10] Smyth, Jamie.   “Australia port project highlights schism  over Chinese investment.”  Financial Times.   18 July 2017.  https://www.ft.com/content/b4d35440-5a68-11e7-9bc8-8055f264aa8b

[11] Davidson, Helen.  “Refinancing of Port of Darwin raises fresh concerns over Chinese lease.”  The Guardian.  9 June 2017.  https://www.theguardian.com/australia-news/2017/jun/09/refinancing-of-port-of-darwin-raises-fresh-concerns-over-chinese-lease

[12] Grigg, Angus.   “How Landbridge’s purchase of the Darwin Port killed perceived wisdom on China.”  Financial Review.  7 July 2017.    https://www.afr.com/news/world/asia/how-landbridges-purchase-of-the-darwin-port-killed-perceived-wisdom-on-china-20170706-gx66r8

[13] Zhen, Summer.  “Chinese company Landbridge wins 99-year lease on northern Australia’s Darwin port.”  South China Morning Post.  14 October 2015-updated 11 May 2016.  https://www.scmp.com/business/companies/article/1867514/chinese-company-landbridge-wins-99-year-lease-northern-australias

[14] Ports Australia 46th Biennial Conference.  “Australia’s Blue Highway.  Opportunities and Challenges.”  On-line Conference Program.—Social Program.    https://eee.eventsair.com/QuickEventWebsitePortal/ports-australia-46th-biennial-conference-2018/pa2018/ExtraContent/ContentPage?page=2.  Accessed 5 August 2018.

[15]Zhen, Summer.   Op. cit.  https://www.scmp.com/business/companies/article/1867514/chinese-company-landbridge-wins-99-year-lease-northern-australias

[16] Roberts, Greg.  “Chinese group to build luxury Darwin hotel.” The Australian.  11 July 2018 .  https://www.theaustralian.com.au/news/latest-news/chinese-group-to-build-luxury-darwin-hotel/news-story/a07e66a5af11cf38cbe43b65d3a4d6bd

[17]Wikipedia.  Vanuatu. https://en.wikipedia.org/wiki/Vanuatu.  Accessed 28 July 2018.

[18] Bohane, Ben.  “South Pacific Nation Shrugs Off Worries on China’s Influence.”  The New York Times.   13 June 2018.  https://www.nytimes.com/2018/06/13/world/asia/vanuatu-china-wharf.html

[19] Ibid.  https://www.nytimes.com/2018/06/13/world/asia/vanuatu-china-wharf.html

[20] Ibid. https://www.nytimes.com/2018/06/13/world/asia/vanuatu-china-wharf.html

[21] Cave, Damien.  “ A New Battle for Guadalcanal, This Time with China.”  The New York Times.  21 July 2018.  https://www.nytimes.com/2018/07/21/world/asia/china-australia-guadalcanal-solomon-islands.html

[22] Ibid.  https://www.nytimes.com/2018/07/21/world/asia/china-australia-guadalcanal-solomon-islands.html

[23] Ibid.  https://www.nytimes.com/2018/07/21/world/asia/china-australia-guadalcanal-solomon-islands.htm

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BRI Blog next Monday will be:

New Eurasia Land Bridge Economic Corridor

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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.