China’s Maritime Silk Road initiative increasingly touches the EU

14 Aug 18

By Gisela Grieger, Members' Research Service, European Parliamentary Research Service

SUMMARY

Five years since China launched its 21st Century Maritime Silk Road initiative, with the aim of improving its maritime links – on its own terms – with south-east and south Asia, east Africa and ultimately Europe, the country has made significant progress in gaining long-term control over strategic overseas ports. Moreover, the state-driven merger of two giant state-owned shipping conglomerates, China Shipping and China Ocean Shipping Company (COSCO) in 2016, and the subsequent debt-financed takeover of rival Orient Overseas, have brought China closer to global leadership in container lines, with it now in third place.

China's massive push for the construction of large-scale, high-risk and debt-financed infrastructure along the Maritime Silk Road has raised concerns about white elephants being built, and host countries becoming overburdened from servicing their debts to China. The large numbers of such projects has seen some host countries forced to repay their loans by handing over the operation of strategic assets to China for decades ahead. Their experience suggests that, while host countries may never see the much touted 'win-win' results of these projects, China may be poised for double wins from them. Among the requirements applicable to securing loans for Chinese-funded projects is that engineering contracts be awarded directly to Chinese firms without public tender. While this requirement practically excludes other countries' contractors from participation, it also challenges China's repeated rhetoric that its initiative is open to third-party participation.

In recent years, China has made major inroads into the EU by acquiring minority or majority stakes in port infrastructure of strategic relevance for China. Hence, China is increasingly able to shape outcomes in its interest from within the EU.

Introduction

China's 21st Century Maritime Silk Road initiative, which aims to boost maritime connectivity between China, south-east and south Asia, east Africa and Europe, as part of the One Belt, One Road (OBOR) umbrella project, has entered its fifth year. While construction of port infrastructure outside the EU is unfolding on a large scale thanks to massive lending from Chinese banks and extensive involvement of Chinese labour and material, China-led port development in EU Member States is still in its infancy. However, China's maritime footprint in the EU has recently grown at an unprecedented pace as a result of its acquisitions of strategic port infrastructure.

Port connectivity under the Maritime Silk Road initiative

China's expanding global footprint in deep-sea ports

For a rising maritime power like China, gaining access to foreign deep-sea ports is not only vital from a mercantilist perspective, but is also a critical geostrategic asset when it comes to projecting the country's development and governance model on a global scale. Ports are thus at the heart of the Maritime Silk Road initiative. The latter enables China to pursue two avenues to access overseas ports for dual (civil and military) use: 1) Chinese-funded port infrastructure development that may lead to the conversion of debt into equity (port of Kyaukpyu, Myanmar), and 2) acquisition or lease of ports (port of Darwin, Australia, for a period of 99 years). Prior to the initiative’s launch in 2013, Chinese state-owned enterprises were already prominently engaged in large-scale loan-financed infrastructure development in deep-sea ports in Sri Lanka and Pakistan, which were subsequently rebranded as OBOR projects. They may serve as lessons for ongoing and planned projects in Asia, Africa and Europe.

Chinese-funded port development without a 'win-win' guarantee?

The Chinese-financed construction of Sri Lanka's Hambantota deep-sea port illustrates some of the possible pitfalls involved in loan-based construction of infrastructure with 'no strings attached'. The lack of transparent competitive awards of contracts or of assessments of the economic viability and the overall social and environmental impact of projects may undermine the prospects for 'win-win' results. This may notably be the case in asymmetric relations, where a small partner may ultimately end up in a debt trap. Sri Lanka's debt load to China was US$1.5 billion when Hambantota port opened in 2010. This added to the debt piled up earlier for other China-funded infrastructure projects, including the controversial Colombo Port City project. For lack of commercial activity, the Hambantota port was incurring losses and Sri Lanka, hard-hit by a faltering growth rate of 3.5 % in 2016, failed to repay its debt to China. Under a plan to convert loans into equity, in 2017 the port was handed over to China on a 99-year lease – after pressure from India for this to be for non-military use only.

To avoid similar constraints, Pakistan withdrew, inter alia, from an ambitious dam project, citing excessively strict financial terms. Pakistan faces a ballooning debt linked to Chinese-funded projects on the China-Pakistan Economic Corridor, including work in the Gwadar port, which China will operate for 40 years under a 'build-operate-transfer agreement'. Myanmar and Nepal cancelled Chinese-financed projects over environmental concerns and financial irregularities. Allegations of corruption against China Harbour Engineering Company, which the World Bank blacklisted until early 2017, have undermined China's 'win-win' rhetoric. Bangladesh even banned the Chinese firm for attempted bribery.

How is the Maritime Silk Road initiative advancing in the EU?

China as an investor in EU ports

Recently, China has accelerated its acquisition of stakes in EU ports whose location is strategic for the Maritime Silk Road initiative. This has spurred competition among EU ports keen on using their geostrategic position to attract Chinese investment and cargo. The main Chinese investor in EU ports is state-owned China Ocean Shipping Company (COSCO), which is on a debtfinanced global expansion with the aim of ending its recurrent losses. COSCO had already seized investment opportunities prior to the 2008 financial crisis, but later acquisitions under the Maritime Silk Road umbrella turned into a more ambitious state-funded shopping spree. Given China's Polar Silk Road plans, Lithuania's Klaipeda port and ports in Norway and Iceland have attracted investment proposals from China Merchants Group.

China as a contractor for EU port development

The arrival of state-owned China Communications Construction Company (CCCC) on the EU market as a port developer is likely to change the nature of competition in the sector. In 2017, CCCC won an ideas competition to develop an area in the port of Hamburg, by suggesting an additional automated container terminal, sparking a storm of opposition from local stakeholders. In 2016, the Venice Port Authority awarded a €4 million contract to a CCCC-led consortium to design an innovative onshore-offshore port system. The new president of the port authority, however, has questioned the project's unrealistic assumptions on the future container throughput in Venice required to guarantee its viability. China meanwhile favours the ports of Genoa and Trieste.

Challenges and opportunities for EU stakeholders

As China pushes for inter-modal connectivity between EU ports and the Eurasian cargo rail network along its Silk Road Economic Belt (SREB), it may re-shape trade patterns and transport routes to its own benefit. For instance, as a result of COSCO's focus on the port of Piraeus as a gateway to central and eastern Europe, so that it now benefits from 'guaranteed' Chinese demand, the port of Naples witnessed COSCO's divestment in 2016 and shrinking container throughput. On the other hand, new inter-modal connections between Italy and Switzerland provided by the new Gotthard rail tunnel may increase the competitive edge of northern Adriatic ports over northern European ports in terms of shorter shipping times to and from China. While the Adriatic ports still face challenges as regards the financing of deep-sea port capacities and hinterland connectivity, in 2017 the port of Trieste signed an agreement on logistics cooperation with the German inland port of Duisburg to respond to such new intermodal opportunities. A recent study estimates that by 2040, EU-Far East maritime freight will be 40 million TEUs (twenty-foot equivalent units), up from 16 million TEUs in 2016. If about 2.5 million TEUs were transferred from maritime transport and 0.5 million from air transport to rail transport, this would create 50 to 60 additional trains per day (two to three trains per hour) in each direction between China and Europe. However, this would not affect the dominant position of maritime trade.

EU policy for infrastructure cooperation with China

The 2016 EU strategy on China and the related Council conclusions define the principles of EU-China relations, including for infrastructure cooperation, which seek to gain synergies between OBOR and the trans-European transport network (TEN-T). These principles include transparency, adherence to international standards and reciprocity, i.e. a level playing field for EU and Chinese firms in the EU and in China. Projects must meet EU internal market rules on public procurement and technical standards, and must also undergo fiscal, environmental and social sustainability assessments. The 2015 EU-China Connectivity Platform promotes cooperation in infrastructure, financing, interoperability, logistics, and maritime and rail links across Eurasia. Lists of proposed projects were published in 2016 and in 2017.

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