Special Report: Can China overcome the Malacca Dilemma through OBOR and CPEC?

Special Report: Can China overcome the Malacca Dilemma through OBOR and CPEC?

‘The Silk Road Economic Belt and the 21st-century Maritime Silk Road’, more commonly referred to as the ‘One Belt, One Road’ or ‘OBOR’, is the brainchild of China’s foremost princeling and paramount leader Xi Jinping, aimed at investing USD $1 trillion across its Western heartlands and the entirety of Eurasia.

Covering nearly 900 projects in over 60 countries, with funding from a plethora of state financial institutions, China has won over the political elites in most countries in the Central Asian neighbourhood including Bangladesh, Sri Lanka, Nepal and even countries in Eastern Europe, with promises of economic gain. Financed by both concessionary loans from major state owned enterprises including China Development Bank and the Industrial and Commercial Bank of China, parallels have been made between the latest initiative of the ruling Communist Party of China (CCP) and that of the Marshall Plan which the US embarked upon in post-war Europe.

The flagship of OBOR is the China-Pakistan Economic Corridor (CPEC), a $54 billion initiative between China and neighbouring Pakistan, in an attempt to rapidly expand and upgrade Pakistan’s infrastructure as well as strengthen economic ties between the two countries. Forming part of Pakistan’s Vision 2025, the scope of CPEC includes building roads and laying railway lines and pipelines to carry oil and gas. Perhaps most notably, it offers Pakistan a patronage alternative to the US, while bringing economic development in desperately poor regions including Pakistan Occupied Kashmir (PoK).

Chinese officials themselves speak of how the CPEC will not be just about trade and transit; it will be about bringing much needed aid and stability to Pakistan and thus acquiescing a rogue nation on China’s border. Between 2015 and 2030, nearly two and a half million jobs are expected to be created and economic growth should be up by nearly 3 percentage points.

If successful, Beijing would certainly be able to argue it triumphed where Washington failed and Xi’s ambitious aims seemingly have the power to shift global power from West to East as China replaces American financing and security across the region. Exploring China’s motivations behind investment, the secondary effects of capital and what the initiative means for the tripartite Sino-India-Pakistan relationship, sheds light on a greater aim of China’s: overcoming the ‘Malacca Dilemma’ and seeking to dominate South Asia’s Indian Ocean trade.

The impetus behind Chinese investment in Eurasia

China’s motivations behind CPEC – and OBOR more generally – are largely four-fold. At home, the Chinese government not only seeks to alleviate domestic overcapacity in a number of hot sectors including coal, steel and solar, but it also hopes to reform its state-owned enterprises. The CCP also believe that improved transport links will promote growth in China’s heavily underdeveloped West, especially in places like Yunnan and Gansu. By financing infrastructure-oriented projects that are predominantly capital-intensive, Beijing hopes to use up the extra stock it holds in key resource sectors, concomitantly hoping to boost overall GDP while reducing regional economic disparity and alleviate social tension – particularly in Uyghur-dominated regions like Xinjiang where there has been a rise in Islamic extremism.

From a foreign policy perspective, the economic foci of these projects is to use China’s enormous foreign reserves – especially in US and euro-denominated government securities – to finance international infrastructure projects, therein easing ties to the US dollar, diversifying foreign-exchange reserves and building the RMB as a global currency. Furthermore, it’s about tapping into roughly 40% of global resources which can be found in Central Asia, as well as concomitantly boosting China’s influence in the region. By increasing ties with countries in Eurasia, at their gain, Xi’s administration is offering these countries an alternative to both the US and Russia while securing future access to commodity resources. Thus, seemingly the most immediate goal of these development initiatives is to boost China’s influence in Central Asia; a resource-rich region that no longer falls into Moscow’s orbit.

As a growing number of countries become dependent on Chinese transport and energy infrastructure, stronger economic ties will make it increasingly costly for Central Asian governments to oppose China. Yet, while China champions “soft borders” and “ancient trade routes”, in trying to achieve a myriad of objectives, the projects will bring with them a host of political, economic and security risks. Navigating China’s relationship with India and Pakistan is one of them.

The budding Sino-Pakistan relationship

The China-Pakistan relationship has been described as being “higher than the mountains, deeper than the oceans, sweeter than honey, and stronger than steel”, and the establishment of this new economic corridor is an attempt to address a number of economic, political and security issues between the two countries.

Politically, the range of projects aim to diversify the Sino-Pakistan relationship, which so far has been predominantly military-to-military. Pakistan’s Prime Minister Nawaz Sharif believes that by opening up to substantial Chinese investment and boosting Pakistan’s status and gross domestic product, he will be able to deliver more benefits to the Pakistani people. This in turn will serve to increase his favorability ratings and that of the ruling Pakistan Muslim League. Furthermore, warming Sino-Pakistan relations will also lessen Pakistani concerns about India, which in turn serves to decrease China’s worries of another hegemonic power in what it considers its sphere of influence.

In an economic capacity, from the point of view of Islamabad, CPEC in particular is about strengthening the Pakistani economy through infrastructure projects, establishing Special Economic Zones (SEZs), improving electricity supply and re-establishing Pakistan’s energy shortages. The construction of the world’s largest solar energy plant in Pakistan is testament to the priority given to Pakistan’s flagging energy sector. Roughly $33bn of the $54bn invested in CPEC has been allocated into energy packages. With this confidence, were all of the planned projects successfully implemented, the value of those projects would surpass all foreign direct investment in Pakistan since 1970, and equal roughly 17% of Pakistan’s 2015 GDP.

Beyond the economic significance of China’s substantial investments, the launching of CPEC will stabilise the security situation in Pakistan. Former Prime Minister Shaukat Aziz stated in May 2016 that the growth from CPEC projects would cool tensions, which themselves have been cited by World Bank as a major deterrent to sustained economic growth in the country. China’s willingness to help Pakistan has been amplified as of late with Beijing offering to help Islamabad increase the range of its nuclear missiles. Global Times – the CCP’s official mouthpiece – ran an editorial in early January 2017, which stated that “if the Western countries accept India as a nuclear country and are indifferent to the nuclear race between India and Pakistan, China will not stand out and stick rigidly to those nuclear rules as necessary. At this time, Pakistan should have those privileges in nuclear development that India has.”

As a result of the symbiotic relationship between China and Pakistan, analysts are worried about whether or not high economic stakes in the project will allow China to remain neutral if the PoK dispute escalates. This, for one, will have enormous implications for Sino-India relations.

The dragon, the elephant, and the bear in the background

Sino-India relations in early 2017 are at a low point as a result of China blocking India’s entry into the Nuclear Suppliers Group (NSG) and vetoing Pakistan-based terrorist Masood Azhar from appearing on the UN list of terror. The announcement and enhancement of CPEC was the icing on the cake and unsurprisingly the government of India does not look favourably upon the proposed projects that will pass through the PoK — territory India claims ownership of.

At the most recent World Economic Forum in Davos, India’s Prime Minister Narendra Modi said both he and President Xi have agreed to “tap” the vast business opportunities between their two countries. Despite this optimism, he also made reference to strategic tensions between China and India, stating that it’s normal for large, neighbouring powers to have differences and suggesting that both countries “need to show sensitivity and respect for each other’s core concerns and interests.” However, Modi also went on to champion the bringing together of countries under international law, running counter to China’s own interpretation of the rules-based system, most notably brought to light in the recent ruling from the International Criminal Court in favour of the Philippines over disputed islands in the South China Sea.

Knowing that China does not adhere to rules when it comes to matters of its core interests, India is worried about one of the specific CPEC agreements that gives China access to Gwadar port – situated on the Arabian Sea at Gwadar in Balochistan – which New Delhi sees as giving Beijing a strategic naval presence to encircle India.   

Despite these concerns, the feeling of many Indians is similar to the thoughts of former Indian ambassador, Phunchok Stobdan, who believes that although China and Pakistan are motivated by the “strategic intent of besieging India”, avoiding OBOR altogether would be at great cost to India.

One player lurking in the background of the Sino-India relationship is Russia. At the end of 2016, Russia announced that it “strongly” supported CPEC and Russia’s ambassador to Pakistan, Alexey Y Dedov, stated that both capitals have held discussions to merge CPEC with the Eurasian Economic Union; an initiative backed by Russia.

However, despite concerns about Russia’s proximity to OBOR and CPEC, if the economic corridor does open up a new trade route, India – with its strategic location – could see very positive overspill from burgeoning trade with West Asia, Africa and beyond. In sync with this weltanschauung is former Indian Ambassador Melkulangara Bhadrakumar, who believes OBOR is in India’s interest vis-à-vis Central Asia. Like his diplomatic colleague, he also signalled that India might “lose heavily” if its opposition leads it to take a more isolationist stance. Sino-India relations are thus walking a tightrope where India’s move will dictate how both countries interact.

No end to neighbouring tensions between India and Pakistan

Beyond China’s engagement with both India and Pakistan, OBOR and CPEC will have an unprecedented impact on relations between the South Asian Brobdingnagians. India has repeatedly reiterated it will not hold talks with Pakistan as long as its neighbour continues to support Terrorism, and Modi has stated point blank that countries in the region that export terrorism stand “isolated and ignored”.

Adding to the deterioration in relations, as a result of increased economic support from China, Pakistan would have little incentive to expand cooperation with India. Furthermore, if CPEC does considerably improve Pakistan’s economic development, this may cause Pakistan to increase military spending, which in turn could potentially fuel the arms race with India. As a result, Pakistan could in theory begin to act more forcefully in its defence of PoK.

Although this is a frightening scenario, it’s not all doom and gloom for relations between both nations. By participating in OBOR and CPEC respectively, India would have more power to, in essence, play the role of a ‘swing factor’. An India buy-in to the Pakistani economy through CPEC should be seen as an opportunity to influence Pakistani politics.

One curve ball in this relationship is the constitutional status of Gilgit-Baltistan, Pakistan’s northernmost region. If Pakistan’s economic development is realised through CPEC, this could incite further discontent in the region as a result of increased regional disparity in the country. This could be a catalyst for granting Gilgit-Baltistan the constitutional status of a province, therein codifying its status quo. This could potentially – indirectly at least – bring the PoK dispute to an end.

Also, Chinese-Pakistani cooperation aimed at eradicating terrorism on the corridor – something China has been quite clear on – could decrease Pakistan’s ‘overt’ support for terrorists in the eyes of India and eventually promote cooperation between the co-rivals.

Will rewards outweigh risks?

The economic, political and security rewards seem attractive to both China and Pakistan, but where things seem to be too good to be true, they probably are. Beyond navigating the implications of the corridor running through PoK, the challenges facing OBOR are neither few in number nor easily resolved in action.

First, in economic terms, there is a view commonly held among policy-makers from New Delhi to Beijing that many CPEC projects are simply not viable enough to sustain the interest of Chinese investors in the long run. In addition to this, numerous countries receiving Chinese financing already bear elevated debt levels and OBOR will weaken their sovereign credit position further, elevating non-payment risks. In the short-term, CPEC may lead to notable benefits like markedly fewer power outages and increased employment in Pakistan, but over the longer-term, issues related to project financing suggest CPEC faces a rockier road to the shared prosperity that is commonly acknowledged.

Second, from a geopolitical security standpoint, the greatest challenge of CPEC will be China’s ability to work holistically abroad. For the projects to be a success, the Chinese will need to work with innumerable stakeholders across Pakistani society; something Beijing isn’t adept at. The Sino-Pakistan alliance is largely a state-to-state relationship managed by specific institutions such as top government officials, diplomats, and senior military personnel. For CPEC to be a triumph, the Chinese need to be dependent on locals and there are long-standing problems around corruption and governance in rural Pakistan, which complicates matters.

Third, the Chinese could face more than just pushback from local areas in Pakistan. A recent report by the Federation of Pakistani Chambers of Commerce complained that the flood of Chinese capital and firms into the country was marginalising local business. One potential consequence of this is that Chinese workers could become increasingly vulnerable to Balochi insurgents and Taliban militants. Across much of Pakistan and Central Asia, Chinese engineers have been captured and killed and the Chinese Embassy in Bishtek, Kyrgyzstan was even targeted with a car bomb last August.  

Finally, China faces difficulties in accepting the Pakistani media’s reaction to how Beijing has handled CPEC thus far. Xi’s administration has employed jarring rhetoric to rebut any criticism of its initiative, even going as far as labelling critics as “enemies of Pakistan” engaged in “disinformation”. Although such confutation may work at home, the Chinese have demonstrated their vulnerabilities to dissenting opinions and will need to employ alternative forms of counter-argument – or indeed appeasement – if they are going to win over the media and increase the likeliness of success.   

Overcoming the Malacca Dilemma

Despite the globalised emphases of China’s alternative economic governance such as the Asia Infrastructure Investment Bank (AIIB) and the Asia Development Bank (ADB), and the initiation of localised development strategies including OBOR, CPEC and Bangladesh-China-India-Myanmar (BCIM) Economic Corridor, Beijing has actually been gearing towards resolving an even greater geostrategic problem for China’s future growth: the ‘Malacca Dilemma’.

The Malacca Dilemma refers to the Straits of Malacca, located between the Malay Peninsula and the Indonesian island of Sumatra, which provide China with its shortest maritime access to Europe, Africa, and the Middle East. The reason why these straits are so important is that roughly 80% of China’s Middle Eastern energy imports also pass through the narrow stretch of water.

By initiating projects like OBOR and CPEC, the hope is that once they are completed, China will be able to pump its oil supplies from the Middle East through pipelines to Xinjiang. Aside from alleviating China’s dependency on an increasingly tense maritime arena, these pipelines are expected to cut short the trade route for China’s oil imports by more than 6,000 miles. This in turn is also projected to open up a brand-new strategic gateway for the middle kingdom to tap into African, West Asian and South Asian trade.

If China is able to realise the aims of CPEC – as a microcosm for the wider hopes of OBOR – it could bring prosperity to Pakistan, stabilise the India-Pakistan relationship, develop its disparate Western regions, and solve a future energy crisis. Contemporaries of George Marshall Jr. will certainly be watching closely.  

About Author

James Tunningley

James Tunningley is a GRI Associate Analyst. He is the Director of the Young China Watchers in London having previously held positions at the Royal United Services Institute for Defence and Security Studies and the China-Britain Business Council. He is on the Young Leaders Program at the Center for Strategic and International Studies Pacific Forum, a Fellow at the Royal Asiatic Society and a Junior Member of the Royal Society for Asian Affairs. He is a graduate of the University of Oxford.