EU’s Global Gateway Opens A Small Development Door

AS A COUNTER to the Belt and Road Initiative, the EU’s Global Gateway project is at least half a decade late and more than a euro short.

Brussels plans to spend 300 billion euros ($340 billion) over the next six years through loans, guarantees and grants to be invested in strategic industries in Latin America, Africa and Asia. There is no official figure for China’s BRI investment, but the most conservative estimates put it at $500 billion since its launch in 2013. 

Projects with an estimated value of $2.5 trillion have had the label slapped on them, although far from all have been realised. That speaks, however, to the power of the BRI brand.

The EU aims to spread its influence and values through Global Gateway. Thus, the initiative has heavy elements of transparency and sustainability to it. Target industries include technology, energy, transport and health. Tackling climate change and global health security will be priorities.  

Specific projects remain to be identified, and probably hostage to various EU member companies varying relationships with China, which is adept at picking off individual EU members when it feels its interests threatened. The stance of the new German coalition government, which is divided on how tough to be on Beijing, will be critical in this regard.

Efforts to counter the BRI by the EU and others are not new. Most recently, the United States put forward its Build Back Better World (B3W) Partnership. However, its openly anti-China stance and US leadership worried some European leaders sufficiently to ensure G7 support was watered down.

Yet even before B3W, there was the Japan Partnership for Quality Infrastructure (2015), the EU’s Asia-focused Connectivity Strategy and the Australia-Japan-United States Trilateral Infrastructure Partnership (both 2018) and the US Blue Dot Network (2019). 

All lacked coordination, shared ambition and a joint strategy. In short, they lacked a brand, and certainly one as powerful as the BRI. In a nod to that, European Commission President Ursula von der Leyen said Global Gateway should become a trusted brand. Easier said than done.

China is anyway reining in its ‘debt-diplomacy’ as it re-evaluates the risks of making high-interest loans to countries that cannot afford to repay them, such as in Africa, and expands its use of Western financing concepts like public-private partnerships.

Beijing’s strategic aim will be to discourage the EU from joining the United States in a common infrastructure drive against the BRI. Just the announcement of the Global Gateway does that. However, Beijing will also seek to draw specific EU nations into its regional development initiatives where they already have interests: France and Italy in Africa, Spain and Portugal in Latin America and Germany in the Balkans and the Caucasus. 

China-Malaysia Relations Pass Into A Chilly Phase

RELATIONS BETWEEN MALAYSIA and China have a history of blowing hot and cold. Malaysia’s new prime minister, if new is an appropriate adjective for the 93-year old Mahathir Mohamad, has brought a renewed chill, even though he has been a longtime friend of China by dint mainly of his criticisms of the West.

Mahathir has halted several high-profile, big-ticket infrastructure projects involving Chinese firms for review, including:

• the $20 billion East Coast Rail Link under construction by China Communications Construction Co. and mostly financed by Export-Import Bank of China;
• the $10 billion Melaka Gateway project , which involves three artificial islands and a cruise ship terminal, being developed by PowerChina International; and
• the $2.5 billion trans-Sabah natural gas pipeline led by a subsidiary of China National Petroleum Corp.

Restrictions have also been imposed on the sales of units in Forest City, a $100 million real estate development on four artificial islands aimed at buyers from China.

There is also a report that three pipeline projects suspended in July have been cancelled outright, an oil and gas pipeline in peninsula Malaysia and another on Borneo, and a pipeline linking a Petronas refinery and petrochemical plant in Johor to Malacca. They had a combined cost of $2.8 billion.

Mahathir has several reasons for applying the brake.

One is purely financial. The first three are expensive projects that saddle the country with even more debt. Malaysia can just about manage its foreign-currency debt, but only just about. It cannot afford to let its financial position deteriorate, which, if the troubles of Argentina’s peso and Turkey’s lira spillover into other emerging market currencies, it could do quickly. Furthermore, Mahathir had long held that the country’s debt holds back its development. Nor does he want to risk Malaysia going the way of Sri Lanka, which had to yield control of a new port to China to settle debt it could not repay.

A second is political. In the wake of the 1MDB scandal. Mahathir is cracking down on what it believes is a whole raft of corruption-tainted deals struck during the previous administration of Najib Razak. The three deals mentioned above were all made within Najib’s time, and Mahathir has criticised them for being opaque.

A third is geopolitical. Mahathir is concerned about China’s increasing activity in the disputed waters of the South China Sea, where Malaysia has claims of its own over a dozen Spratly islands and a large acreage of oil and gas. Being in hock to China, which is also Malaysia’s largest trading partner, weakens Kuala Lumpur’s hand in pushing back against Beijing’s maritime assertiveness. Mahathir is strengthening relations with Japan and Australia to counterbalance China’s influence.

A fourth reason Malaysia’s relationship with its city-state neighbour, Singapore. The two nation’s relations with China tend to be the inverse of each other. Singapore’s relations with China are currently on the up.

Mahathir has said he will hand over the presidency to his deputy Anwar Ibrahim at some point, but may choose to make that point further into the future than he initially indicated (within two years). Anwar, though he has backed the review of the Chinese investments, would likely be more favourably disposed towards China. The further out the hand-over, the longer Malaysia-China relations will remain chilly.

Update: The Financial Times is reporting that Pakistan is initiating a similar review of the China-Pakistan Economic Corridor. That would have greater weight for Beijing than Malaysia’s review because of the corridor’s strategic importance, including its access to Gwadar, the port on Pakistan’s south coast on the Arabian Sea.

Road To Ruin

China may be looking at spending 600 billion yuan on extending its already over-indebted toll road network. This is another sign, to this Bystander’s eye, that an economic stimulus package in the form of transport infrastructure spending is in the making, but it also raises a red flag about tackling slowing growth this way.

Caixin quotes transport ministry spokesman He Jianzhong saying that the country’s toll roads’ aggregate debt, at 2.32 trillion yuan in 2011, was equivalent to 64% of its accumulated investment of 3.65 trillion yuan, still well short of the 80% he said banks use as a red line when determining whether to grant loans. He says that means toll-road building “still merits bank lending” — 600 billion yuan-worth by our back-of-the-envelope calculation.

Setting aside the thought that there is more sophistication to Chinese banks’ credit risk analysis than that calculation (not something we do with full confidence, it is true), we are surprised that toll roads, some of which are not even earning enough from tolls to cover their existing debt service, would be the recipient of such new investment. The whole system is troubled. Recent political pressure has been to cut the cost of tolls, which are expensive and unpopular with drivers, and to crackdown on illegal toll taking. All this puts further financial pressure on toll-road builders and operators.

Some new toll-road lending has already gone to refinance old loans incurred in the three-year road building frenzy that followed China’s post-2008 global crisis stimulus spending. It is a microcosmic warning of the long-term dangers of relying on fixed-asset investment to generate growth, as China has done. In the end the debt becomes unsustainable.

Work Starts On New Chengdu-Lanzhou Railway

Work has started on a new high-speed rail line between Chengdu and Lanzhou. When completed in 2014/2015 it will cut travel time between the Sichuan and Gansu provincial capitals from 20 hours to four.

As well as being a shovel-ready infrastructure project to set free stimulus yuan–the line will cost 62 billion yuan ($9 billion), state media reports– the line is part of a grand plan to open up transport links to western China (and beyond), shipping Xinjiang’s oil, coal and cotton east and tourists in the opposite direction; the route will pass through the Minshan Mountains, home to giant pandas, and Jiuzhaigou and Gannan, both popular destinations.

China's Rail Network

Work is expected to start later this year on other new rail lines connecting to the Chengdu-Lanzhou railway, including Lanzhou-Chongqing, Baoji-Chengdu, Sichuan-Qinghai and Sichuan-Tibet. These complement the high-speed inter-city lines being built in the east.

Overall, China has earmarked 2 trillion yuan ($300 billion) of spending up to 2020 to improve its rail system, particularly for freight, expanding the network from 78,000 kms of track to 120,000 kms.