The New Silk Road

Via The Economist, a report on China’s efforts to develop the impoverished south-west part of it country into an economic hub:

EVERY day hundreds of trucks rumble across the border between China and Laos, carrying wood, textiles and agricultural goods to China, and home appliances, small machinery and building materials back. The Laotian frontier town of Boten is largely empty, apart from a few dusty shops selling snacks or machine parts, a row of rusting cars, vacant buildings and some geese; an advertisement for a Thai ladyboys’ performance hall is a rare sign of passing trade.

Over the Chinese border the roads are smoother: palm trees line the main street of Mohan, which is flanked by logistics firms, translation companies, express-delivery services, mechanics and stores selling Thai bags, cosmetics and coffee; few buildings are more than ten years old (a spiffy-looking customs post, pictured above, is among the newest). Many residents are newcomers, too. Yet the Chinese town is no metropolis. Chickens walk the streets. Firms shut for several hours after lunch. Money-changers sit at the base of a banana tree accosting visitors.

Both frontier towns aspire to something better. A deserted marketing suite just inside Laos features plans for a cross-border golf course. In Mohan work has already started on “Fortune Plaza”, a 22,000-square-metre (237,000-square foot) site with bars, shops, hotels and offices. Regional and national leaders have even grander visions for the south-western province of Yunnan, of which Mohan is part, because it shares 4,000km (2,500 miles) of borders with Laos, Myanmar and Vietnam. They want it to be the hub of an economic take-off in South-East Asia. The challenge is great: an underdeveloped part of China will need to lift some of Asia’s poorest and most unstable countries with it.

Yunnan has a prosperous past. Around 2,000 years ago people in south-west China traded tea and other goods across thousands of miles to Europe. These days the province is something of a backwater, albeit a beautiful one. Only two of China’s 31 provinces have a lower GDP per person. The gap between rural and urban incomes is among the largest in the country. Far from Beijing and the wealthy eastern seaboard, Yunnan is often seen as a dead end. Its dramatic scenery is a huge asset in its drive to boost tourism, but the rugged terrain hampers development. Its other economic pillars—mining and tobacco—are dominated by state-owned companies. Private investment is low.

There is nothing new about plans to rejuvenate Yunnan. As early as 1985 it set up “border-trade zones”. Since the early 1990s the central government in Beijing has been trying to reposition Yunnan, from peripheral province to the centre of various cross-border economic networks. “The first step to going global is to go regional,” says Yang Xianming of Yunnan University. He reckons Yunnan should be the centre of a new Asia; parts of the province are closer to Singapore and Thailand than to China’s eastern seaboard. These countries offer access to strategic shipping routes.

Xi Jinping, China’s president, is leading the new charge. In September 2013 he outlined plans to reinvigorate the ancient Silk Road with a modern network of high-speed rail, motorways, pipelines, ports and fibre-optic cables stretching across the region. The economic highway he envisages follows three routes: one running from central China through Central Asia and the Middle East; a maritime route extending from the southern coast; and a third branching out from Yunnan.

Encouragingly, Mr Xi supports the rosy rhetoric with the prospect of hard cash. This month he promised to create a $40 billion Silk Road fund. He also stumped up $50 billion in October to establish an Asian Infrastructure Investment Bank to lend money to build roads, railways and other transport links in poorer parts of Asia—partly in the hope that many of these will open up markets for China.

Leaders in Beijing see such links, and the trade they generate, as essential to building good relations with neighbouring countries. Links are already being built with gusto in Yunnan. The supports for an expressway to Ruili, on the border with Myanmar, stand proud amid the banana groves and tea bushes, waiting for the road itself. Long tunnels were burrowed through hills to build a road from Kunming, the capital of Yunnan, to the Laotian border, which was completed in 2008. A railway line between Kunming and Hekou, on the border with Vietnam, should be finished next year.

Cross-border connections are improving. Parallel oil and gas pipelines now run between the port of Kyaukphyu in Myanmar and Kunming; this month China Unicom, a state-owned telecoms company, completed an optical cable between Yunnan and Myanmar. China’s imports from and exports to all three neighbours have increased almost every year since the 1990s.

But China’s ability to forge stronger economic ties could be undermined by the instability of its neighbours. In July Thailand approved a $23 billion deal for two high-speed rail links with China, to be built by 2021. But questions remain over the durability of an agreement made with a military junta. Myanmar has opened up politically since Thein Sein became president in 2011. But its relations with China have soured. Mr Thein Sein suspended Chinese construction of a dam, partly to show that he was not in China’s pocket. Plans to build a railway line from Kunming through Myanmar are on hold.

Countries bordering on China are wary of its ambitions. They are concerned partly about China’s economic clout, fretting that it will derive disproportionate benefits from the links. (Many of the goods, such as drugs and guns, which Laos and Myanmar have to trade are illegal.) Chinese goods, they worry, may flood their markets and drown their own nascent industries. China enjoys the electricity generated by dams that raise the risk of flash floods downstream. Neighbours grumble that China’s emphasis is on laying tarmac and iron rather than sharing technical know-how, and that it often uses Chinese workers rather than their own citizens.

A deeper fear is that China has bigger plans than building roads, laying railways and boosting trade. China, neighbouring countries fear, is trying to expand its sphere of influence along with its markets. Its apparently peaceful rise on its land borders contrasts with what they see as threatening behaviour in the South China Sea (sometimes involving the same country, Vietnam). Whether through trade or occasional flexing of military muscle, China’s aim is to boost its regional dominance. If countries’ economies depend on China, it calculates, they are less likely to fight over maritime territory and other contentious things. Some foreign commentators describe Mr Xi’s Silk Road-building as China’s Marshall plan, a reference to America’s post-war policy of using rising economic strength to secure its foreign-policy ambitions.

As well as linking more closely with bordering countries, China has its sights on neighbours farther afield, such as Singapore and Thailand. But smoothing the journey to distant countries will not automatically invigorate markets. Encouraging businesses will require freer flows of labour and fewer customs barriers, as well as better efforts to uphold the rule of law. Firms in Yunnan are keen on talk of a new Silk Road, but they see no profound change in a region that is rightly more renowned for smuggling of contraband.

This entry was posted on Monday, December 1st, 2014 at 3:56 pm and is filed under China.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.