Why China is determined to connect Southeast Asia by rail
Planned 3,000-km rail network raises debt, sovereignty concerns
MITSURU OBE and MARIMI KISHIMOTO, Nikkei staff writers | January 09, 2019 16:20 JST
TOKYO/LUANG PRABANG, Laos — When Japanese trading house Itochu and train maker Hitachi withdrew from a soon-to-be-decided $7 billion tender for a high-speed rail project near Bangkok, it appeared to be another victory for China and its grand plans to connect Southeast Asia with railways.
Thailand has for decades been the centerpiece of Tokyo’s strategy for Southeast Asia, and long-discussed plans to build extensive shinkansen-style rail lines in the country’s east and north were meant to cement the relationship between the two nations.
But while Japan’s ambitions have been stalled by disagreements about financing and other details, Beijing has managed to push ahead with construction of a separate high-speed rail line in northern Thailand. To some, the rail projects are a symbol of China’s growing influence in a country where Japan had spent decades building ties.
China’s high-speed rail ambitions in Southeast Asia don’t end in Bangkok, however. Under its planned 3,000-km pan-Asian railway network, Chinese rail lines will extend even further south, stretching through Malaysia and feeding into Singapore.
Located at the tip of the Malay Peninsula, Singapore is the most developed member of the Association of Southeast Asian Nations. It also has one of the strongest relationships with Washington in the region — giving the project added significance for China.
“If Beijing can court Singapore successfully and brings it into its orbit, that likely means that Singapore may decrease its security relationship with the U.S.” and would give Beijing more space to operate in Southeast Asia, says Stephen Nagy, senior associate professor at International Christian University in Tokyo. It could mean that ASEAN would become more amenable to Chinese demands, such as its push for control over the South China Sea, he added.
Singapore is also the gateway to the Strait of Malacca, the chokepoint for maritime traffic connecting the oil-rich Middle East to energy-hungry East Asia. The U.S. parks vessels in Singapore’s ports and conducts training exercises with its navy.
A dramatic recent shift in Malaysian politics has put China’s plans for Singapore on hold, however. After his election in May, Malaysian Prime Minister Mahathir Mohamad decided to hold up “for now” the $20 billion 688-km east coast rail line connecting southern Thailand to Kuala Lumpur, and postpone for two years a 350-km high-speed rail link between the Malaysian capital and Singapore.
Importantly, the project — estimated to cost between $18 billion and $27 billion — is frozen, not abandoned altogether. Mahathir is 93 and has pledged to clear the way for a successor in a year or two, and the question is whether the next leader will stand as firm on China as he has. Malaysia is already negotiating with China for new terms for the east coast rail link.
Under Mahathir, Malaysia has backed away from the debt-funded infrastructure projects favored by his predecessor, Najib Razak, who faces roughly 40 corruption-related charges in court next month.
China typically provides loans, not grants, for foreign infrastructure projects, and takes possession of the project if the recipient is unable to repay its debt — as happened with a port in Sri Lanka. Such instances have prompted critics in the West to accuse China of practicing “debt diplomacy.”
Despite such criticism, economists say Chinese-backed infrastructure projects will carry on because Asia needs infrastructure investment and covets access to the Chinese market.
“China will continue having significant capacity to finance infrastructure investment abroad for the foreseeable future,” predicts Nicolas Veron, senior fellow at the Peterson Institute for International Economics in Washington. “Even though China faces demographic challenges, like other countries in the region, it is far from having extinguished its growth potential. Its GDP per capita is still low and, based on the experience of other countries in Asia and Europe, has a lot of catch-up potential.”
This has geopolitical as well as economic implications for Southeast Asia. More transportation between nations deepens human and economic contact between them, which “would ultimately begin to link massive China and smaller nations of continental Southeast Asia,” said Kent Calder, professor at Johns Hopkins University School of Advanced International Studies in Washington.
China has been keen to develop its inland and has invested heavily for its westward push toward Central and Southeast Asia. The country’s $1 trillion Belt and Road Initiative is designed to create transport infrastructure for China to import energy and other vital resources from, and export goods to, other parts of the Eurasian continent without relying on its coastal area that is vulnerable to potential Western sanctions or naval blockades, ICU’s Nagy said.
China has only a decade or so of experience operating high-speed rail. But it has already caught up with Japan’s shinkansen — the world’s oldest high-speed rail system — in terms of technology, Japanese officials and experts acknowledge. One measure of its success is its maximum speed: at 350 kilometers per hour, it ranks as the world’s fastest. Japan’s bullet train goes up to just 320 kmh.
The dream of a trans-Asian railway dates back to colonial days when Britain and France tried to develop a rail network connecting their colonies in Indochina. In 1995, ASEAN members embraced a similar idea, reflecting an aspiration to unify all of Southeast Asia under its initiative, said Seiya Sukegawa, a former Japanese trade official and associate professor at Kokushikan University in Tokyo.
Since the 1990s, Japan, in partnership with the Asian Development Bank, helped ASEAN build transportation corridors across the region. Under the Japanese model, Thailand was positioned as a platform for building infrastructure links with other parts of inland Southeast Asia. Rail connections with China were not a priority.
Things changed when China arrived with money, manpower and technology. Its pan-Asian railway network vision has been eagerly embraced by ASEAN countries seeking a piece of China’s gigantic economic pie, even though access to China’s vast market is conditional upon countries toeing Beijing’s line on key policy issues.
Chinese construction contracts in ASEAN totaled at least $19 billion in 2017, more than double five years ago, according to data from the American Enterprise Institute and the Heritage Foundation.
Calder says China’s railway push may not be “terribly efficient” in many cases.
“It may be politically controversial,” he added. “My forecast is, they will build it. It will happen.”
A costly line in Laos
Few have embraced China’s assistance more wholeheartedly than Laos, the tiny landlocked nation nestled between Vietnam, Cambodia and Thailand.
Laos has a population of less than 7 million and is classified as a “least developed country” by the United Nations. But despite concerns about Laos’ ability to pay its part, China has backed a 160 kph high-speed railway project in the country that would form the first leg of China’s pan-Asia railway network. If all goes to plan, the 417 km route will link the Laotian capital of Vientiane to the southern Chinese city of Kunming.
The project was approved by Laos’ rubber-stamp parliament in 2012, only to stall amid worries that it could not cover the total construction cost of about $6 billion. Xi’s Belt and Road Initiative, launched the next year, put the project back on track. With China agreeing to shoulder 70% of the total construction costs, the project broke ground in 2015 and construction began in late 2016. The project was reaffirmed during Xi’s visit to Laos in 2017.
The Laotian government has embraced the project in hopes that improving the country’s railway system will cut transportation costs and jump-start trade.
“We hope that the construction of the railway will encourage and promote investment and cooperation, and bring benefits to the country,” Prime Minister Thongloun Sisoulith said in June 2018.
Laos’ terrain poses its own challenges. The railway line will need 167 bridges and 75 tunnels to cut through the mountainous country.
In the northern Laotian city of Luang Prabang, Chinese workers were toiling in the summer heat on a huge iron bridge over the Mekong River. The construction project had not created as many jobs as locals had hoped for, since China sent its own engineers and workers. But Chinese money still flowed into the local community.
A Laotian ferryman was waiting beside the bridge for Chinese managers, flying the flag of China Railway Group. Taking passengers across the river usually earns him just 5,000 kip ($0.59), per ride, but Chinese managers are willing to charter a boat for $1,500 a month, he said with a smile.
China Railway hired the ferryboats, office space and the services of a local clinic for its construction workers. The company’s orange flags were seen all over the city.
Critics point to Laos’ rising debt risk as evidence that it is in danger of becoming a client state of China. The rail project’s cost is split between China and Laos by 7 to 3, but even this is a lot for Laos to shoulder: The government has had to borrow $480 million from the Export-Import Bank of China at a 2.3% interest rate, according to the government. Local reports say that the loan is collateralized on revenues from bauxite and potassium being mined in Laos, but the Nikkei Asian Review has been unable to verify these reports.
In March, the U.S.-based Center for Global Development warned about the country’s dependence on China. It cited Laos as among the eight countries with the highest debt ratio to China among the 68 countries funded under its Belt and Road Initiative. The think tank noted that the China-Laos railway represents almost half the country’s GDP, with the International Monetary Fund warning that the project “might threaten the country’s ability to service its debts.”
Prime Minister Thongloun remains optimistic. “I am not concerned much about the burden of debt or the construction of the high-speed railway,” he has said. Laos insists that it will repay its debt with profits from the railway, which officials say will start making money in its sixth year of operation.
Just across Laos’ eastern border in Vietnam, the attitude toward the China-funded rail project is different.
“Vietnam did not protest the Laos-China high-speed railway system,” said a former senior Vietnamese government official. “However, besides economic development, it is necessary to think about national sovereignty of ASEAN members, particularly neighboring nations.”
China and Vietnam have a long-standing rivalry. The two countries fought a brief war in 1979, and tensions continue to simmer over sovereignty of the Paracel Islands in the South China Sea. When China erected an oil rig in waters claimed by Vietnam in 2014, anti-China riots erupted across the country, sparking attacks on Chinese industrial parks and factories.
Beijing responded by freezing its financing for power projects in Vietnam. It was just one example of China’s use of punitive economic measures against countries that move out of step with its policy.
“China wanted to have economic influence over every area globally,” the former official said. “The concern is that China promised a ‘win-win’ solution, but the facts did not prove this policy, including with Vietnam.”
The China connection
With the largest ethnic Chinese population in Southeast Asia, totaling some 9 million, Thailand historically has close ties with China. Bangkok is home to one of the world’s largest Chinatowns.
In 2014, China was awarded a contract to build a high-speed railway from Bangkok to Nong Khai, a border town with Laos. Progress has been slow, however. The construction of the first 3.5k m leg that starts from Nakhon Ratchasima, in northeastern Thailand, and runs to Bangkok began only in December 2017.
Japan initially sought the project, but Bangkok leaned toward Beijing, which was more sympathetic to Thailand’s military-led regime that took over in a coup in 2014.
To officials in Tokyo, the growing Bangkok-Beijing ties came as a shock, and drove home the message that the geopolitical landscape is shifting.
In the past 10 years, China replaced Japan as Thailand’s biggest trading partner and emerged as the second-largest foreign direct investor after Japan. More than 10 million visitors from China a year also provide an important source of foreign exchange for a country that has seen only sluggish growth amid continued political turmoil.
But some in Thailand have voiced unease about the country’s growing dependence on China.
“Thailand must have a strategy to create a balance between investments of different countries, not to depend on or be biased toward just a certain country,” Dr. Anusorn Tamjai, a former Bank of Thailand board member, said. “If we lose the ability to maintain the balance, we could be overpowered and influenced by the Chinese capital.”
Dr. Surachart Bamrungsuk, professor of political science at Chulalongkorn University, said the rail links will have a major impact on Thailand’s national security. “Certainly, a high-speed train is a ‘political train’ since it is part of China’s strategic plan to connect Southeast Asia to China,” Surachart said.
After nearly five years of military rule, Prime Minister Prayuth Chan-ocha’s junta is preparing for a return to democracy by holding general elections in February, though they could be postponed, ostensibly to avoid disrupting the coronation of the new king.
“The question is whether the Thai government after the post-coup period will open to other countries to compete with China in terms of investment for the rail system in the country,” Surachart said.
China is also vying for a 220-km high-speed rail link connecting the two international airports serving Bangkok — Suvarnabhumi and Don Mueang — and a third alternate gateway in U-Tapao.
A consortium that includes China Railway Construction is bidding for the $7 billion project, even as Japanese companies, including Hitachi, Itochu and construction company Fujita have decided stay out for now, citing a lack of financial viability.
The Japanese companies were wary of a lack of support from the Thai government, which has asked the bidders to find ways to make ends meet through the railway itself and related real estate development.
“I don’t think the deepening ties created by the railway would create a fundamental transformation,” Johns Hopkins’ Calder said. “What they will do is strengthen what already has been a strong tie for at least 200 years between Thailand and China,” he said. “It might be to the disadvantage of Japan.”
Additional reporting by Nikkei staff writer CK Tan in Kuala Lumpur
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