China’s ‘Maritime Silk Road’ needs a new approach to successfully realize the objectives of the program outlined by the central government, according to a new study — entitled, “Assets and Albatrosses on the Maritime Silk Road” — from a leading China-focused global research company.
The report by Gavekal Dragonomics on China’s expanding maritime project portfolio across Southeast Asia said there are solid economic and commercial reasons for China to expand its presence in the region and that host nations can benefit from Chinese funding, construction, and expertise.
However, the study issued a stark warning regarding the dangers of poor project planning and weak due diligence, as a result of heavy political pressure on state-controlled companies to invest in Belt and Road countries.
“Once decisions have been made on a government-to-government basis, it is impossible for banks and construction firms to say no. Under the current model, Chinese investors will experience heavy losses when projects go wrong,” the study warned.
Belt and Road — a cornerstone China’s foreign policy
Launched by Chinese President Xi Jinping at the end of 2013, the Belt and Road Initiative is now a major cornerstone of Chinese foreign policy.
The ‘Belt’ is a planned network of overland road and rail routes; oil and natural gas pipelines; and other infrastructure projects running from central China to Europe. The ‘Road’ — or Maritime Silk Road — is a network of port and other coastal infrastructure projects from South and Southeast Asia to East Africa and the northern Mediterranean.
Some projects seem to ignore market realities and are at high risk of failing, which can be financially painful for the Chinese entities involved, study author Lance Noble told JOC.com.
“When Myanmar suspended the $3.6 billion Myitsone Dam in 2011, China Power Investment Corp. lost the $800 million it had already sunk into the [plan].”
The impact of failing projects goes beyond financial losses, with failed projects potentially undercutting the ability of Chinese firms to win projects elsewhere, which means a high political cost, Noble added.
China's goal: win friends across the developing world
“One of the strategic aims of Beijing’s ‘infrastructure diplomacy’ is to win friends across the developing world. This requires gaining a reputation as a reliable partner. If Chinese firms leave a litter of financial albatrosses behind them, the most serious damage will be political,” Noble said.
Southeast Asia is one the main beneficiaries of Belt and Road investments, with a host of new projects launched over the past five years.
Malaysia is home to six Belt and Road projects collectively valued at more than $30 billion. These include the development of three regional ports at Kuantan, Penang, and Kuala Linggi; a large industrial park at Kauntan; and the high profile East Coast Rail Link and Melaka Gateway developments.
Four Chinese-invested port projects are under way in Indonesia, including expansion works at the country’s largest port of Tanjung New Priok by the Ningbo Zhoushan Port Group.
There are two major Belt and Road projects under way in Cambodia and one each in Brunei and Myanmar, where China is partnering with the government to develop a $10 billion deepwater port and industrial zone at Kyaukpyu.
More projects are expected to be launched in the region, bringing benefits such as improved connectivity, regional trade growth, and upgrading of systems and management, the study noted.
Beijing has made an enormous amount of funding available for Belt and Road projects. The main source of funds are the Chinese policy banks, China Development Bank, and the Export-Import Bank of China. Commercial state lenders such as Bank of China have also promised investment of hundreds of billions of dollars in Belt and Road projects.