Nicholas Farrelly: Southeast Asia’s infrastructure dreams spark negotiating frenzy

Nicholas Farrelly: Southeast Asia's infrastructure dreams spark negotiating frenzy

China’s “One Belt, One Road” initiative sounds great, in theory, to its Southeast Asian neighbors: billions of dollars for infrastructure projects and a mechanism for coordinating Chinese investment at a time when regional economic integration is deepening.

     The challenge is to maximize investment opportunities without sacrificing too much long-term political and economic flexibility.

     After all, these are complicated times for mainland Southeast Asia, with Thailand once again ruled by a military dictatorship, Vietnam seeking to carve out strategic rights in the South China Sea and Myanmar preparing for general elections in November.

     Chinese President Xi Jinping’s ambitious initiative envisions a massive, well-connected economic zone spanning Asia and the Middle East.

     For Chinese deal-makers looking for projects under the scheme, Southeast Asia is an obvious starting point.

     Begin with Myanmar. In 2014, the country’s bilateral trade with China hit a record $24.9 billion, according to estimates by trade economists. The Myanmar government says that approximately 80% of its foreign trade is with its northern neighbor. The value of this trade is thought to have increased twentyfold in the past decade.

     The oil and gas pipelines that run from Rakhine State in western Myanmar to the Chinese border at Ruili in Yunnan Province explains part of the recent increase. The gas pipeline was turned on in 2013, with the crucial oil link pumping from earlier this year. This energy now flows over the mountains of Myanmar’s Shan State to Chinese towns and cities.

   Yet other trade between the two countries has dropped off markedly this year, after a fresh outbreak of violence along the border put the brakes on cross-border business. This violence is a reminder that Myanmar’s border areas often remain outside the central government’s control. This adds to the uncertainty for investors, who cannot be sure what Myanmar’s political future will bring.

Big plans

Nonetheless, development blueprints for Myanmar are crisscrossed by audacious schemes for dozens of new rail and road links. Some are designed to tie China into Southeast Asia, but they will also help with connections to India, Bangladesh and beyond.

     The worry is that it only takes a few political or economic hiccups on the Myanmar side of the border before these grand plans are greatly delayed, or put on hold, as the Chinese backers of the suspended $3.6 billion Myitsone dam project discovered. Myanmar’s President Thein Sein suspended the project after widespread domestic and international protests highlighted serious environmental concerns about the dam.

     Thailand is another country due to play a major role in the One Belt, One Road initiative. This month will see construction start on a $10.6 billion fast-rail link from Yunnan in China, through Laos, across Thailand and on to the capital, Bangkok.

     China hopes this 867-kilometer railway will be operational by 2018, carrying passengers at a zippy 180kph. It helps that Thailand received almost 5 million Chinese visitors in 2014. The idea is that an extra 2 million Chinese will use the railway to visit Thailand each year.

     Such is the Buddhist kingdom’s allure for the Chinese that they are quickly becoming the dominant group of foreign visitors, their numbers dwarfing those from any other country. China’s increasingly mobile middle class likes what it finds in terms of food, entertainment, shopping, scenery and fun.

     These visitors are part of a long, unbroken chain of Chinese adventurers, opportunists and migrants who have contributed to Thailand’s economic success. It is no surprise that other ambitious Sino-Thai projects are also on the drawing board.

     Earlier this year there was a surge of exuberance about reviving plans to cut a canal through the Isthmus of Kra in southern Thailand. This grand scheme comes with a daunting price tag: It would cost $28 billion and probably take more than 10 years to build. If achieved, the link would shave time and distance off the route from East Asia to the Indian Ocean, and relieve congestion in the narrow Strait of Malacca, long considered a point of vulnerability for global shipping.

     Perhaps China and Thailand will eventually find a way to deliver on such an extravagant plan, but the proposed link would require a huge commitment of resources from both countries for very uncertain returns.

Balancing act

That uncertainty also figures in the equation for Vietnam, given its difficult historical relations with China. Chinese figures suggest a new record for bilateral trade with Vietnam in 2014, perhaps as high as $83.6 billion. Despite the warm economic ties, the diplomatic relationship is far from easy.

     The memory of a brief border war in 1979 is mostly buried, however competing claims in the South China Sea are out in the open. As China asserts its claims to a vast maritime domain, Vietnam has looked for support from allies and neighbors who also feel threatened by China’s geopolitical ambitions.

     Indeed, Vietnam has sought substantial Japanese support for airport, road and port facilities, opting to avoid putting responsibility for major transport infrastructure in Chinese hands. Grumbles about labor practices at Chinese-built power plants have also dampened Vietnamese enthusiasm for One Belt, One Road projects.

     Like others in the region, what the Vietnamese have found is that balancing immediate economic interests with long-term geopolitical concerns is never easy.

     These are today’s multifaceted dilemmas for countries that stand to benefit from Chinese investment, but are wary of giving up hard-won sovereignty in the process.

     From this perspective, allowing the Chinese to build local links in a global chain of facilities and resources only makes sense if the local upside is significant. From Hanoi to Bangkok and Naypyitaw, everyone is looking to maximize their payoff from China’s regional ambitions, while ensuring their long-term security and economic interests are protected.

     It helps that Japan is also prepared to commit to major infrastructure investments of its own. With the long track record of Japanese conglomerates in the region, the arbitrage possibilities are endless.

     It is those Japanese plans that will remain the key competition for China’s One Belt, One Road push. This means that before we see shovels in the ground, the negotiation and renegotiation of Southeast Asian benefits will continue at a frenzied pace.

Nicholas Farrelly is a fellow in the Bell School of Asia-Pacific Affairs at the Australian National University and a partner at Glenloch Advisory, a political and economic consultancy focused on Asian markets.

Nicholas Farrelly: Southeast Asia's infrastructure dreams spark negotiating frenzy