China’s belt and road: from Malaysia to Philippines, Asean projects face roadblocks

Barrels of ink have been spent on hyping up the Belt and Road Initiative, which Beijing launched with great fanfare in 2013. But in the intervening years, the programme has faced a raft of challenges as it sought to move across China’s southern border into Southeast Asia.

The RWR Advisory Group in Washington, which monitors belt-and-road projects around the world, estimates that China has started work on or completed projects totalling US$200 billion in Southeast Asia in the five years beginning in 2013. But that number seems inflated to someone who has visited most of the countries in recent years.

China has faced enormous problems getting projects off the ground in the countries that need the investment most. Negotiating the interest rate a country will pay for a loan from a Chinese bank and/or how large a local government or firm will take on is often the subject of years of negotiations. Forced or poorly compensated relocation of farmers to make way for a project has prompted endless protests and complaints and has driven many into poverty.

The lack of concern by Chinese contractors about environmental damage has resulted in governments abandoning some projects. Land acquisition, particularly in more democratic countries, has prompted some farmers to refuse to move. Corruption and hefty kickbacks have dented Beijing’s image and caused delays.

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The following is a look at the status of belt-and-road projects across Southeast Asia.

Malaysia: corruption nearly derails rail project

After elections toppled Prime Minister Najib Razak in 2018, his successor Mahathir Mohamad suspended work and mounted investigations into several Chinese projects.

The biggest was the almost US$16 billion East Coast Rail Link (ECRL). Mahathir suspected Najib had received inflated loans from a China-owned state bank that were siphoned off to cover the debts of the scandal-plagued state investment fund. Nearly a year later, Mahathir had managed to renegotiate the terms of the ECRL and announced that construction would resume.

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According to Mahathir, the cost had been inflated by some US$5 billion to give the contractor, China Communications Construction Company, and two local firms funds to help Najib pay off some US$11 billion in the debt obligations. Recognising that cancelling the project would inflict considerable reputational damage to China, Beijing agreed to cut about one-third of the original price and shorten the route of the rail.

Mahathir also suspended three Chinese oil and gas pipeline projects costing over US$3 billion and several other projects.

Indonesia: a tough environment for China

In 2015, a Chinese consortium beat out one from Japan for the contract to build a 145km high-speed rail from Jakarta to Bandung. The project was to be completed before President Joko Widodo, known as Jokowi, faced the electorate in 2019. But work on the rail link has been slow.

One of the problems has been the unwillingness of farmers to give up their land along the proposed route. Land speculation along the rail has driven up the cost of the project to US$6.1 billion from an initial US$5.5 billion.

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The Covid-19 pandemic caused work on the project to be halted early this year, prompting officials to say the project would not be completed before 2022.

The sizeable role that China is playing in Indonesia under Jokowi is stimulating a backlash against a “flood” of Chinese workers coming to the country to work on projects. Two years ago, two videos went viral depicting fights between locals and Chinese workers at an industrial estate on the island of Sulawesi.

Muslim workers charged that Chinese nationals blocked them from reciting their Friday prayers. In June and July, Indonesian students in Sulawesi protested against Chinese working in a mine and called on their government to expel them.

Philippines: China pivot gains little infrastructure

A few months after he was elected in 2016, Philippine President Rodrigo Duterte visited China and declared he wanted to mend relations, which had unravelled after his predecessor had brought a case against Beijing in an international arbitral tribunal for its jurisdictional claims and actions in the South China Sea.

Duterte told his hosts that he would “set aside” the tribunal ruling that had decided overwhelmingly in favour of the Philippines.

He returned to Manila with some US$24 billion worth of pledges for infrastructure projects such as rail links, ports and hydropower plants. But in the past four years, Chinese companies have built just two small bridges.

In some cases, Chinese companies withdrew when they got Philippine government guidelines. In others, Philippine officials backed out after reviewing a project’s social and environmental impact. Some Chinese firms had difficulty raising funds for their projects.

Thailand: generals hold China at arm’s length

Soon after the military took over in a coup in 2014, Thai generals agreed to build a 885km high-speed rail within four years from the Lao border to Malaysia along the route from Kunming to Singapore.

Six years later, little has happened. The generals pivoted to China after the United States and Europe condemned the coup and called for a quick return to democracy.

But today, more than two dozen rounds of negotiations later, little work has begun as the two countries haggle over the financial conditions, whose engineers would oversee the project, land use rights and technology, and whether Beijing would be able to bring workers from China to work on the project.

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Beijing was so irritated at the Thai foot-dragging that it refused to invite Thai Prime Minister Prayuth Chan-ocha to the first BRI conference in Beijing in 2017.

Chinese firms have completed some feasibility studies and a 3.5km pilot rail has been built, but Thai transport analysts doubt Thailand will build a high-speed rail from the Lao border to that of Malaysia within the next decade.

Instead, Thailand is focused on building a high-speed rail linking the three international airports near Bangkok and has invited Chinese firms to participate in a project led by a giant Thai conglomerate.

Myanmar: dragging its feet

It might seem surprising that China faces some of its biggest problems in Myanmar, particularly because the country desperately needs infrastructure and Beijing has been one of its only patrons since the regime was accused of driving out some 750,000 Rohingya Muslims in late 2017.

In August 2018, Myanmar and China finally agreed on a scaled down Chinese port project at Kyaukphyu, which would provide Beijing access to the Indian Ocean.

Myanmar, under State Counsellor Aung San Suu Kyi, reduced the cost to US$1.3 billion from the hefty US$7 billion that the previous military government had agreed to in 2015. Myanmar also negotiated to cut its share of the project and that of its companies to 15 per cent each. A Chinese consortium will hold a hefty 70 per cent stake. But so far, almost no work has begun.

A month later, the two sides signed an agreement to establish the 1,700km China-Myanmar Economic Corridor to link Kunming in southern China with Mandalay, Yangon and the Kyaukphyu port. Little work has begun there either, except for a feasibility study to build a US$9 billion railroad from Muse on the Chinese border to the port on the Indian Ocean.

In 2011, the previous military-backed government had cancelled construction of the US$3.6 billion Myitsone dam in northern Myanmar following nationwide rallies.

Protesters were angered by the fact the dam was being built on land held sacred by the Kachin ethnic group and on the Irrawaddy River, considered sacred by people in Myanmar. Many were concerned the dam would displace thousands of villagers, interrupt fish migration and sediment flows, and disrupt the ability of people downstream to make a living.

Nine years later, China has not abandoned the project. The Chinese ambassador still regularly raises the dam in Yangon, presumably to press the government to reconsider its decision.

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To help get some infrastructure projects approved, Aung San Suu Kyi set up a Project Bank, which includes western-educated economists, to evaluate the economic viability of proposed schemes. Some of these experts had been involved after Aung San Suu Kyi took office in 2016 in evaluating China’s earlier projects, a number of which had less than generous terms.

In one project, China had provided fertiliser, seeds and water pumps to the Ministry of Agriculture, evaluated the cost to be worth US$300 million dollars, charged 4.5 per cent and required Myanmar to repay the loan in 10 years in hard currency.

Laos: threat of a ‘debt trap’

Chinese engineers are blasting tunnels through mountains in Laos to bring a high-speed rail across the landlocked country by 2022 at a cost of US$5.9 billion, more than one-third of Laos’ GDP.

A joint venture Chinese-Lao firm got a loan from China’s Export-Import Bank for about US$4.1 billion, or 70 per cent of the rail’s cost. Of the remaining amount, China will provide equity of US$1.3 billion and Laos will foot another US$531 million, of which US$459 million will come from the EXIM Bank with interest of 2.3 per cent to be repaid over 25 years. Much of the amount Laos is providing may go to resettling villagers displaced by the project.

However, the rail loan to Laos is only part of its debt to China. Much more is owed for Chinese loans to build hydropower dams on the Mekong and its tributaries. The International Monetary Fund in 2017 warned that Lao public debt was projected to rise to 66 per cent by 2019, which prompted the fund to raise Laos’ debt distress level from “moderate” to “high”. Over half of this debt is owed to China.

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Economists have raised questions about how Laos would pay for the railroad. A Chinese feasibility study estimated it would lose money for the first 11 years of operation and that estimate assumed that neighbouring Thailand would continue building the railroad south to the Malaysian border.

With Thailand unlikely to build this railroad for at least another decade, Laos will have no connection south, which likely means the project will continue to haemorrhage money for years.

Interestingly, China and far smaller Laos haggled over the terms for five years before beginning construction of the project. They negotiated over the size of Laos’ stake in the rail. Initially, China wanted Laos to take a US$7.2 billion loan, roughly three-quarters of Laos’ GDP at the time, to finance the whole project even though China would have been the biggest beneficiary.

Another issue was the interest rate. China offered 3 per cent, but when Laos noted that Thailand was offered 2 per cent Beijing relented. On Chinese access to land along the railroad, Beijing started asking for 55 yards and finally settled for 16.

Forced relocation and slow compensation of farmers along the railroad has prompted considerable domestic discontent about the project.

A special UN rapporteur who visited Laos in early 2019 sharply criticised the government’s China-led development model: “The government’s single-minded focus on large infrastructure projects (such as dams and railways), land acquisition, resource extraction, and foreign investment has created too few jobs for Lao people, generated very large debt repayment obligations and disproportionately benefited wealthy elites.”

He added: “Those living in poverty, ethnic minorities, and people in rural areas have seen very few benefits of the economic boom.”

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Thousands of Lao minority people have also been dislocated from land around the two special economic zones that Chinese firms have built just across China’s border inside Laos.

At the giant Kings Romans casino in Laos’ Bokeo province, well-off peasants farming and raising animals along the Mekong River were forced to move to make room for the casino, a hotel, a golf course, and a huge agriculture project.

The peasants raised funds to send a delegation to protest to the government in Vientiane, but officials were told it was too late to change course. Those displaced got some compensation, but it amounted to little because they effectively lost their livelihoods and were given unfertile plots of land.

Vietnam: little enthusiasm for BRI

Vietnam, on paper a communist comrade of China, is avoiding much engagement with the belt and road despite the country’s desperate need for infrastructure. Regularly facing Beijing’s assertiveness in the South China Sea, Hanoi wants to avoid giving China too much leverage should a conflict erupt in the future.

Still, in 2011, Vietnam agreed to allow China to construct a 12km elevated sky train through the heart of Hanoi, but the project is running way behind schedule and far over budget. Initially, it was estimated to cost US$552 million for which China provided a US$420 million loan. By 2017, the cost had risen to US$890 million and it still is not fully completed today, with Vietnamese and Chinese contractors quibbling over the project’s safety certification.

The project has experienced several accidents that have not endeared state-owned China Railways Sixth Group to the local population. In 2014, some rolls of steel fell off the overhead construction, killing a motorcycle driver and injuring two passers-by. A month later, a 9-metre section of scaffolding fell onto a taxi, trapping three people inside.

Cambodia: protests in the nation most beholden to China

Some Chinese projects have faced significant domestic opposition. The 51 per cent Chinese-owned consortium building the Lower Sesan 2 Dam, Cambodia’s largest so far and which started operating two years ago, faced protests for several years for alleged forced resettlement of villagers without consultation, illegal logging, practising poor labour practices and causing the deterioration of water quality downstream.

Nearly 80,000 people living above the dam are expected to lose access to migratory fish, a key component of their livelihoods.

Decreased spending

Despite the many challenges China’s projects have faced in Southeast, China has demonstrated considerable flexibility and willingness to compromise at least on rail projects.

With the slowing of the Chinese economy, the Covid-19 pandemic, and mounting tensions with the US, spending on the Belt Road Initiative appears to have begun to drop in recent years.

The value of newly-signed projects was down 20 per cent in the first 11 months of 2018 compared to the same period a year earlier.

China appears to have heard at least some of the criticisms and has begun fine-tuning the initiative. In a speech at a conference in Beijing in 2019, Xi pledged to rein in corruption, boost transparency and avoid heaping large amounts of debt on recipient countries.

Murray Hiebert is the author of a new book, Under Beijing’s Shadow: Southeast Asia’s China Challenge, from which this article is adapted. He is a senior associate of the Southeast Asia Programme at the Centre for Strategic and International Studies in Washington DC. This was first published in ISEAS’ Perspectives Issue: 2020/95, by the ISEAS-Yusof Ishak Institute.