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A high-speed train runs through an arched noise barrier in Jiangmen, China. Bullet trains have been operating in
China for only a decade or so. © Getty Images

COVER STORY

Planned 3,000-km rail network raises debt, sovereignty concerns

MITSURU OBE and MARIMI KISHIMOTO, Nikkei staff writers


JANUARY 09, 2019 16:20 JST

TOKYO/LUANG PRABANG, Laos -- When Japanese trading house Itochu


and train maker Hitachi withdrew from a soon-to-be-decided $7 billion
tender for a high-speed rail project near Bangkok, it appeared to be another
victory for China and its grand plans to connect Southeast Asia with
railways.

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Thailand has for decades been the centerpiece of Tokyo's strategy for
Southeast Asia, and long-discussed plans to build extensive shinkansen-
style rail lines in the country's east and north were meant to cement the
relationship between the two nations.

But while Japan's ambitions have been stalled by disagreements about


financing and other details, Beijing has managed to push ahead with
construction of a separate high-speed rail line in northern Thailand. To
some, the rail projects are a symbol of China's growing influence in a
country where Japan had spent decades building ties.

China's high-speed rail ambitions in Southeast Asia don't end in Bangkok,


however. Under its planned 3,000-km pan-Asian railway network, Chinese
rail lines will extend even further south, stretching through Malaysia and
feeding into Singapore.

Located at the tip of the Malay Peninsula, Singapore is the most developed
member of the Association of Southeast Asian Nations. It also has one of
the strongest relationships with Washington in the region -- giving the
project added significance for China.

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Bang Sue Central Station under construction in Bangkok is slated to begin operation in January 2021. (Photo by
Akira Kodaka)

"If Beijing can court Singapore successfully and brings it into its orbit, that
likely means that Singapore may decrease its security relationship with the
U.S." and would give Beijing more space to operate in Southeast Asia, says
Stephen Nagy, senior associate professor at International Christian
University in Tokyo. It could mean that ASEAN would become more
amenable to Chinese demands, such as its push for control over the South
China Sea, he added.

Singapore is also the gateway to the Strait of Malacca, the chokepoint for
maritime traffic connecting the oil-rich Middle East to energy-hungry East
Asia. The U.S. parks vessels in Singapore's ports and conducts training
exercises with its navy.

A dramatic recent shift in Malaysian politics has put China's plans for
Singapore on hold, however. After his election in May, Malaysian Prime
Minister Mahathir Mohamad decided to hold up "for now" the $20 billion
688-km east coast rail line connecting southern Thailand to Kuala Lumpur,
and postpone for two years a 350-km high-speed rail link between the
Malaysian capital and Singapore.

Importantly, the project -- estimated to cost between $18 billion and $27
billion -- is frozen, not abandoned altogether. Mahathir is 93 and has
pledged to clear the way for a successor in a year or two, and the question is
whether the next leader will stand as firm on China as he has. Malaysia is
already negotiating with China for new terms for the east coast rail link.

Under Mahathir, Malaysia has backed away from the debt-funded


infrastructure projects favored by his predecessor, Najib Razak, who faces
roughly 40 corruption-related charges in court next month.

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Malaysian Prime Minister Mahathir Mohamad has put a Chinese rail project in his country on hold "for now." ©
Reuters

China typically provides loans, not grants, for foreign infrastructure


projects, and takes possession of the project if the recipient is unable to
repay its debt -- as happened with a port in Sri Lanka. Such instances have
prompted critics in the West to accuse China of practicing "debt
diplomacy."

Despite such criticism, economists say Chinese-backed infrastructure


projects will carry on because Asia needs infrastructure investment and
covets access to the Chinese market.

"China will continue having significant capacity to finance infrastructure


investment abroad for the foreseeable future," predicts Nicolas Veron,
senior fellow at the Peterson Institute for International Economics in
Washington. "Even though China faces demographic challenges, like other
countries in the region, it is far from having extinguished its growth
potential. Its GDP per capita is still low and, based on the experience of
other countries in Asia and Europe, has a lot of catch-up potential."

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This has geopolitical as well as economic implications for Southeast Asia.


More transportation between nations deepens human and economic
contact between them, which "would ultimately begin to link massive China
and smaller nations of continental Southeast Asia," said Kent Calder,
professor at Johns Hopkins University School of Advanced International
Studies in Washington.

China has been keen to develop its inland and has invested heavily for its
westward push toward Central and Southeast Asia. The country's $1 trillion
Belt and Road Initiative is designed to create transport infrastructure for
China to import energy and other vital resources from, and export goods to,
other parts of the Eurasian continent without relying on its coastal area
that is vulnerable to potential Western sanctions or naval blockades, ICU's
Nagy said.

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China has only a decade or so of experience operating high-speed rail. But it


has already caught up with Japan's shinkansen -- the world's oldest high-
speed rail system -- in terms of technology, Japanese officials and experts
acknowledge. One measure of its success is its maximum speed: at 350
kilometers per hour, it ranks as the world's fastest. Japan's bullet train goes
up to just 320 kmh.

The dream of a trans-Asian railway dates back to colonial days when


Britain and France tried to develop a rail network connecting their colonies
in Indochina. In 1995, ASEAN members embraced a similar idea, reflecting
an aspiration to unify all of Southeast Asia under its initiative, said Seiya
Sukegawa, a former Japanese trade official and associate professor at
Kokushikan University in Tokyo.

Since the 1990s, Japan, in partnership with the Asian Development Bank,
helped ASEAN build transportation corridors across the region. Under the
Japanese model, Thailand was positioned as a platform for building
infrastructure links with other parts of inland Southeast Asia. Rail
connections with China were not a priority.

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Things changed when China arrived with money, manpower and


technology. Its pan-Asian railway network vision has been eagerly
embraced by ASEAN countries seeking a piece of China's gigantic economic
pie, even though access to China's vast market is conditional upon
countries toeing Beijing's line on key policy issues.

Chinese construction contracts in ASEAN totaled at least $19 billion in


2017, more than double five years ago, according to data from the American
Enterprise Institute and the Heritage Foundation.

Calder says China's railway push may not be "terribly efficient" in many
cases.

"It may be politically controversial," he added. "My forecast is, they will
build it. It will happen."

A costly line in Laos

Few have embraced China's assistance more wholeheartedly than Laos, the
tiny landlocked nation nestled between Vietnam, Cambodia and Thailand.

Laos has a population of less than 7 million and is classified as a "least


developed country" by the United Nations. But despite concerns about
Laos' ability to pay its part, China has backed a 160 kph high-speed railway
project in the country that would form the first leg of China's pan-Asia
railway network. If all goes to plan, the 417 km route will link the Laotian
capital of Vientiane to the southern Chinese city of Kunming.

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The project was approved by Laos' rubber-stamp parliament in 2012, only


to stall amid worries that it could not cover the total construction cost of
about $6 billion. Xi's Belt and Road Initiative, launched the next year, put
the project back on track. With China agreeing to shoulder 70% of the total
construction costs, the project broke ground in 2015 and construction
began in late 2016. The project was reaffirmed during Xi's visit to Laos in
2017.

A China-backed high-speed rail project in Laos has been beset by delays. (Photo by Marimi Kishimoto)

The Laotian government has embraced the project in hopes that improving
the country's railway system will cut transportation costs and jump-start
trade.

"We hope that the construction of the railway will encourage and promote
investment and cooperation, and bring benefits to the country," Prime
Minister Thongloun Sisoulith said in June 2018.

Laos' terrain poses its own challenges. The railway line will need 167
bridges and 75 tunnels to cut through the mountainous country.

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In the northern Laotian city of Luang Prabang, Chinese workers were


toiling in the summer heat on a huge iron bridge over the Mekong River.
The construction project had not created as many jobs as locals had hoped
for, since China sent its own engineers and workers. But Chinese money
still flowed into the local community.

A Laotian ferryman was waiting beside the bridge for Chinese managers,
flying the flag of China Railway Group. Taking passengers across the
river usually earns him just 5,000 kip ($0.59), per ride, but Chinese
managers are willing to charter a boat for $1,500 a month, he said with a
smile.

China Railway hired the ferryboats, office space and the services of a local
clinic for its construction workers. The company's orange flags were seen all
over the city.

Critics point to Laos' rising debt risk as evidence that it is in danger of


becoming a client state of China. The rail project's cost is split between
China and Laos by 7 to 3, but even this is a lot for Laos to shoulder: The
government has had to borrow $480 million from the Export-Import Bank
of China at a 2.3% interest rate, according to the government. Local reports
say that the loan is collateralized on revenues from bauxite and potassium
being mined in Laos, but the Nikkei Asian Review has been unable to verify
these reports.

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Sri Lanka has taken on a significant amount of debt to fund China-related infrastructure projects. © Getty
Images

In March, the U.S.-based Center for Global Development warned about the
country's dependence on China. It cited Laos as among the eight countries
with the highest debt ratio to China among the 68 countries funded under
its Belt and Road Initiative. The think tank noted that the China-Laos
railway represents almost half the country's GDP, with the International
Monetary Fund warning that the project "might threaten the country's
ability to service its debts."

Prime Minister Thongloun remains optimistic. "I am not concerned much


about the burden of debt or the construction of the high-speed railway," he
has said. Laos insists that it will repay its debt with profits from the railway,
which officials say will start making money in its sixth year of operation.

Just across Laos' eastern border in Vietnam, the attitude toward the China-
funded rail project is different.

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"Vietnam did not protest the Laos-China high-speed railway system," said a
former senior Vietnamese government official. "However, besides economic
development, it is necessary to think about national sovereignty of ASEAN
members, particularly neighboring nations."

China and Vietnam have a long-standing rivalry. The two countries fought a
brief war in 1979, and tensions continue to simmer over sovereignty of the
Paracel Islands in the South China Sea. When China erected an oil rig in
waters claimed by Vietnam in 2014, anti-China riots erupted across the
country, sparking attacks on Chinese industrial parks and factories.

Beijing responded by freezing its financing for power projects in Vietnam.


It was just one example of China's use of punitive economic measures
against countries that move out of step with its policy.

"China wanted to have economic influence over every area globally," the
former official said. "The concern is that China promised a 'win-win'
solution, but the facts did not prove this policy, including with Vietnam."

The China connection

With the largest ethnic Chinese population in Southeast Asia, totaling some
9 million, Thailand historically has close ties with China. Bangkok is home
to one of the world's largest Chinatowns.

In 2014, China was awarded a contract to build a high-speed railway from


Bangkok to Nong Khai, a border town with Laos. Progress has been slow,
however. The construction of the first 3.5k m leg that starts from Nakhon
Ratchasima, in northeastern Thailand, and runs to Bangkok began only in
December 2017.

Japan initially sought the project, but Bangkok leaned toward Beijing,
which was more sympathetic to Thailand's military-led regime that took
over in a coup in 2014.

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To officials in Tokyo, the growing Bangkok-Beijing ties came as a shock,


and drove home the message that the geopolitical landscape is shifting.

In the past 10 years, China replaced Japan as Thailand's biggest trading


partner and emerged as the second-largest foreign direct investor after
Japan. More than 10 million visitors from China a year also provide an
important source of foreign exchange for a country that has seen only
sluggish growth amid continued political turmoil.

But some in Thailand have voiced unease about the country's growing
dependence on China.

"Thailand must have a strategy to create a balance between investments of


different countries, not to depend on or be biased toward just a certain
country," Dr. Anusorn Tamjai, a former Bank of Thailand board member,
said. "If we lose the ability to maintain the balance, we could be
overpowered and influenced by the Chinese capital."

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Dr. Surachart Bamrungsuk, professor of political science at Chulalongkorn


University, said the rail links will have a major impact on Thailand's
national security. "Certainly, a high-speed train is a 'political train' since it
is part of China's strategic plan to connect Southeast Asia to China,"
Surachart said.

Workers inspect a new Fuxing bullet train on Jan. 4 before it goes into service the following day. The train has a
maximum speed of 350 kph. (Xinhua)

After nearly five years of military rule, Prime Minister Prayuth Chan-ocha's
junta is preparing for a return to democracy by holding general elections in
February, though they could be postponed, ostensibly to avoid disrupting
the coronation of the new king.

"The question is whether the Thai government after the post-coup period
will open to other countries to compete with China in terms of investment
for the rail system in the country," Surachart said.

China is also vying for a 220-km high-speed rail link connecting the two
international airports serving Bangkok -- Suvarnabhumi and Don Mueang
-- and a third alternate gateway in U-Tapao.

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A consortium that includes China Railway Construction is bidding for


the $7 billion project, even as Japanese companies, including Hitachi,
Itochu and construction company Fujita have decided stay out for now,
citing a lack of financial viability.

The Japanese companies were wary of a lack of support from the Thai
government, which has asked the bidders to find ways to make ends meet
through the railway itself and related real estate development.

"I don't think the deepening ties created by the railway would create a
fundamental transformation," Johns Hopkins' Calder said. "What they will
do is strengthen what already has been a strong tie for at least 200 years
between Thailand and China," he said. "It might be to the disadvantage of
Japan."

Additional reporting by Nikkei staff writer CK Tan in Kuala Lumpur

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