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One Belt One Road – Roadmap to Understanding China

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China
One Belt
Roadmap
China
J. Scott Laprise
Independent Analyst
One Road – A
to
Understanding
+86 158 1048 7033
Twitter: @researchbeijing
Blog:researchbeijing.blogspot.com
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20 July 2017
What is the One Belt One Road?
It is a defensive policy There is a lot of confusion and misunderstanding around this strategy by
to protect the borders investors outside of China. A lot of analysts will say it’s an economic
of China
project and some will say it’s an expansionary vision of China. The One
Belt One Road in is a defensive measure with the goal to protect and
control the borders of China the best it can. This is the foremost issue that
the politicians and military think about every day, how to keep China intact
and not lose any pieces, something that has happened often in the past.
The government is focused on staying in power and not giving any reasons
for the population to want any change in leadership. A lot of the definitions
of which countries are included and other details have purposefully not
been set yet as this is not the primary goal so investors will need to remain
patient as the project unwinds.
Why is the consensus view of China usually wrong
To understand China This is a very difficult concept for foreign investors to understand because
you need to think like they usually are applying their own political thought to understand China.
the Chinese
This is why so often foreign-based analysts are wrong about China. The
2017 consensus foreign view for the Chinese economy was doom and
gloom and yet the Hong Kong market has jumped up over 20% year to
date. The more you can understand the point of view that Chinese are
coming from the more you can understand what decisions will be made in
China. I am writing this research note to try and give you insight around
what I have learned around the thinking of the Chinese and the
government. This note is slanted towards understanding the China
position.
The leadership of The Chinese market is a regulatory driven market and most of the policies
China wants to stay in make a lot of sense when looked at from the Chinese perspective. Another
power as long as it can
good example is the common topic of the shadow banking system and
large debt. Knowing that the central government wants a stable country
they will never let a bank fall under almost any condition. If that were to
let that happen we would likely be witnessing a regime change as likely no
leader could withstand the fallout. Those betting on financial collapse of
some sort in China are really betting the current government will soon be
gone and replaced. This is not likely to happen as central government will
put all the might and weight of the country behind it to get them to get the
desired outcome.
China historically is not an expansionary country
China historically has If we look back at history, China has continuously struggled through
been focused on trying expansion and contraction of the current area which is now called China. At
to control its own
borders times, some pieces are lost to another country and at other times China
has pulled in new territory. China though has always operated on the
concept of trying to manage the large area and big population while having
little interest in expansionary ideas. It even has a weak maritime history as
governments were not interested that much (except or a few periods) in
discovering and conquering new territory. Historically, China has not
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explored that much of the world such as England, France and Spain have
done through colonization. China has always felt it has been too difficult
just to manage and control its own territory and it has always remained
focused inward. It does tend to have border disputes as China shares its
border with 14 other countries.
China tends to follow old fundamental principles
Chinese policies tend China being a very old country, it really hasn’t swayed far from its history.
to be from tried and China normally follows the path that has been laid down for thousands of
true historical
principles years. If you use this approach to understanding the One Belt One Road,
then it gets a lot easier to understand what China is doing and why.
China is not trying to Investors are often confused why China is not trying to maximize profits.
maximize returns but Why are many of the loans given out to some countries look like they will
to maximize control
over its borders never be repaid. It’s a lot easier to understand that China is completely
focused on trying to control its own borders and is following a defensive
military approach, the other issues coming up are a product of that
thought.
A democracy is unstable for China
if you look through the lens of the long history of China, they have found it
most efficient to run the country under a clear hierarchical structure.
Chinese understand democracy and elections and with them the
advantages and disadvantages (they often use the Trump election as to
why democracy is not good). But in almost all of its history, China has
been run by a ruler called the Emperor today they call him the Chairman
(not much difference really). This type of governmental process has
tremendous advantages:

very stable.

fast acting.

better training for career politicians

allows for long-term planning.

long-term investments can easily be made.

no need to have to explain anything to an electorate that might not
be very well informed or able to make the best decisions.

focuses on the group and not the individual
I can tell you from my own personal experiences in China, it would take the
people some time to be able to understand a democracy, it is not part of
the history or culture. It is not the way families or companies are run. If
one day there were ever to be some form of democracy I would imagine it
as some kind of hybrid of the Western system.
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Democracies force short-term decisions
Decisions in China tend So for example, using the U.S., we can see every time they have an
to be longer term election there is often big changes in policy. A government can only have
sticking to a plan
an eight-year view to decision-making at most and often a re-election
makes that time horizon shorter. Second term Presidents are termed to be
a lame duck at some point while in China a second term Chairman is the
opposite, the most powerful. Policies implemented by one government a
year ago can be totally changed by another government a year later.
Looking at most Western countries, infrastructure these days is a common
problem. It is hard to justify spending so much money without short-term
tangible returns. But in China, the government knows they will be in power
for a very long time and therefore they can justify very long term decisions
and investments.
When I went back to my home in Montréal last summer, so much of the
city was under construction. The infrastructure is very old and barely
working. I remember arriving back in Beijing and all I could think about is
how new and efficient everything is here in China. Roads are in very good
condition and well-maintained. Telephone and Internet infrastructure is one
of the best in the world.
Why do countries want to contain China
One Belt One Road is The first thing you might say is that why are they doing all these
going to try to break investments outside of China, under the One Belt One Road concept.
China out from some of
the containment What China has learned is that some countries want to contain China and
be able to control it if needed. The clearest example of countries that want
to contain China are the United States, South Korea, Japan and India. The
thinking is to contain China would be to prevent war and change the
regime to a tolerant democratic China would be better for long-term peace.
For some reason, these countries think a political system that is different
from theirs is not good. This is the old issue of what I don’t know and
understand I don’t like. These countries push the United States to put in
proactive measures to make sure China does not go astray of their desired
policy. The government of China knows that the ambitions of these
countries are to change leadership and kick them out so needless to say
they are trying to counteract this.
China’s leadership has a goal to stay in power for a long time
Chinese leaders want Of course, the Chinese leadership will be focused on not letting this
to stay in power as happen. The Chinese political leadership’s main goal is to stay in power and
long as they can
they do not see any reason to make a change. So the irony is China has
learned that if it doesn’t control and have close relationships with its
neighbours then other countries will forever be able to dictate policy. It’s
kind of crazy but the West puts pressure here and China ends up reacting
over there like a game of whack-a-mole. In actual fact before when
countries just left China alone to focus on its internal development China
would likely just keep to itself. If it knew the shipping lanes were always
going to be safe and never have had threats to cut it off that they would be
worrying about things such as the Spratly Islands.
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For China it’s all about free and open shipping lanes
Free and open shipping But the South China Sea Islands have become one of the biggest
lanes are crucial to the motivating reasons for the One Belt One Road strategy. China can see
development and
future of China from the numerous allied military installations nearby, the war games with
South Korea, joint military exercises with the Philippines, the patrolled
waters by United States warships, the U.S. selling weapons to Taiwan and
others and the most recent THAAD radar installation. These issues create
concerns for the Chinese for a free and clear shipping lane in the South
China Seas. But in the Chinese eyes, selling weapons to the Taiwanese is
probably the most hurtful. China already holds a lot of U.S. debt so in
essence they are paying for the Taiwanese to be armed against
themselves. This is really just pushing things a little too far in their view.
Figure 1
Some of the major shipping lanes into China using Panama Canal route
Source: APL
China through its investments in the Port in Pakistan will now be able to
use the Suez Canal routes saving time and money as the Suez Canal fees
are cheaper.
THAAD a good example of the containment policy
China is upset that the
new radar system can
look into their
territory-almost no
country in the world
would accept that
The recent THAAD missile defence system installed by the U.S. is a big
problem for China. They do not have a problem with South Korea being
protected but they do have a big problem with the accompanying deep
radar system the AN/TPY-2 radar, that looks deep into China. China,
already very conservative, reserves 90% of air its air space for the military.
Letting a powerful radar system up against its borders is a huge concern
for the government and military. This also empowers the Chinese military
to further invest to defend against the U.S. making China less interested to
help the U.S. with cases like North Korea.
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Figure 2
China is worried about the THAAD radar pattern going into their territory and even Russia is hit
Source: https://newsonia.com/reader/report/why-moscow-and-beijing-are-afraid-of-the-us-thaad-in-south-korea/
The U.S. is showing signs of being very unstable
China looks at the U.S. Since Trump came to power, these concerns have only been heightened.
is being unstable One day all is well between the United States and China and another day
the U.S. is acting to threaten China’s interests with Taiwan, currency or
other issues. Stability for China is a primary concern but the U.S.
government is showing very unstable reactions to world events. It is hard
to believe that the U.S. is the unstable government while China is much
more stable. So the view in China is that they cannot afford to renegotiate
every time with the U.S. depending on who is in power. They are looking
for long-standing stable shipping lanes where they don’t have to negotiate
each time there is an election.
Why China is so worried about the South China Sea Islands
Every island in the The South China Sea islands, spans roughly the entire South China Sea, is
South China Sea is a dispute among many nations in close proximity to China that has access
important
to the shipping lanes. For the most part China has not encroached on these
islands though they have always laid historical claim to them. China has
figured out that it cannot let these islands fall into the hands of other
countries such as Vietnam and the Philippines because they are aligned
with the U.S. If one of these islands in the shipping lanes is controlled by a
U.S. ally, then China can be stopped from freely shipping goods in and out
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of the country. Also you must take into account that China believes that is
the rightful owner of Taiwan and therefore it has rights to the surrounding
seas of Taiwan.
9 dash line – The U.S. agreed to it after WWII
The 9 dash line - likely This is a complicated issue. China’s argument around the 9 dash line which
to be around for a encompasses as much as 90% of contested waters (originally 11 dashes)
while
consisting of 286 bits of rock and turf in the South China Sea, though a bit
excessive, is actually a very good one. The line was issued by the
Nationalist Chinese government in 1947. The Communist government
adopted it when it took power in 1949, and later dropped two dashes to
allow China and Vietnam to settle their claims in the Gulf of Tonkin. Since
then another dash has been added reflecting territorial claims made by
Taiwan. Back during World War II when Japan was the enemy, China put
out a map outlining control of the seas that the U.S., at that time,
expressed no objections. So arguing against it is arguing against a decision
by the U.S.
China so far is losing Last year, The Philippines took China to court contesting the claims at the
Permanent Court of Arbitration in The Hague, they ruled on the South
China Sea nine-dash line, which it denounced as “null and void” having no
legal basis. Adding to complexity, the decision was not about sovereignty
and almost no ruling by this court over the past 118 years of its existence
has ever been complied with by any country. China is now taking on the
strategy (maybe learned from Trump as he says he no longer wants to be
in any trade agreements only bilateral agreements) to proceed with only
bilateral negotiations. If you read analysis of this ruling they will all state it
is about resources. But for China it is about being able to defend itself and
they will likely give away resources for control to protect the shipping
lanes. A comment written in a detailed article by 2 Chinese government
officials gives a good indication of the thought in China: South China Sea
as an “important passage for the Chinese navy to sail the wider sea”. I
believe it all comes down to China being able to defend its sovereignty in
the face of containment by the U.S. and allies.
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Figure 3
China’s view on these islands is excessive but necessary to prevent containment from their view
Source: Council on Foreign Relations
There are secondary benefits that China can use in terms of natural
resources such as fisheries oil and natural gas.
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Figure 4
There are secondary benefits for China such as Oil and Natural Gas – important to provide for the large population
Source: Center for Strategic and International Studies
It is difficult to
imagine China letting
go of a single island
but negotiations will
be possible
China has been very stubborn in talks around these islands because a think
they cannot afford to lose any of them from the military point of view. If it
is decided that an island should go to the Philippines the U.S. would likely
put up a military installation to contain China. So the China strategy,
driven by military concerns, is to take over all the islands and make sure
no one can close down the shipping lanes. They plan to continue
negotiating with the other countries but will likely never cede any strategic
military base to a foreign country. My guess is we will see negotiations
finalized by sharing resources but turning over military control will not be
on the table.
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Figure 5
China puts up a military installation every chance they can on these islands
Every chance China This artificial island has an airstrip, likely to be outfitted with large antitries to build a aircraft guns and a cruise missile defense system. The U.S. never asked
defensive system on
every island China if they could install military bases and weapons around China. Now
China has taken the approach that they’re not going to ask for approval
from the U.S. or any other country. This is not a good way to deal with
your neighbours, but in China’s view they know they can make it up to
them over time. China does not look at things over a short time period but
over decades. They also know that while today the U.S. is imparting force
in Asia, they will not always be there. One day, as most other invading
forces have done in the past, they go back home. In the Chinese context,
the U.S. may not always be a significant power in the region if you look at
it in terms of decades or centuries.
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The South China Sea comprises a stretch of roughly 1.4 million
square miles in the Pacific Ocean that encompasses an area
from the Singapore and Malacca Straits to the Strait of Taiwan,
spanning west of the Philippines, north of Indonesia, and east of
Vietnam. The South China Sea islands number in the hundreds,
although the largest and most contentious territories include
the Spratly Islands, Paracel Islands, Pratas Islands, Macclesfield
Bank, and Scarborough Shoal, to which all of the six major
Southeast Asian nations lay various claims. The islands are
mostly uninhabited and have never had an indigenous
population, making the issue of historical sovereignty a thorny
one to resolve. Council on Foreign Relations
How much goes through these shipping lanes
This is the world’s busiest shipping lanes and it will only get busier as China
keeps growing so the importance will grow but alternatives need to be
found to mitigate the risk. About 50% of the wold oil tanker traffic goes
through these shipping routes. Shipping through these routes is much
bigger than all the traffic through the Suez and Panama Canal combined.
The biggest and busiest shipping ports are along these routes. The
population along these waterways is over 100 million people so the impact
is tremendous.
Figure 6
Live view of all vessels tracked by satellite – the importance of the shipping lines for China
Source: http://www.marinetraffic.com/en/ais/home/centerx:74.6/centery:29.8/zoom:3 green=cargo red=tankers orange =fishing
China is worried to lose an island to a containing country
This is a huge worry for the government of China and therefore the
government has taken a proactive measure to not wait and see if anymore
military bases would be installed by the U.S. While normally China prefers
to have peaceful relationships with its neighbours, in the case of these
islands they have decided they must take a stand and ensure they are not
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lost. This is why you can see China constantly building military installations
on these islands as they plan to use them to ensure that the shipping lanes
remain open. China is dependent on many goods such as oil, cutting off the
shipping lanes would bring China to its knees.
The U.S. would never tolerate a Chinese base near them
China is growing So again you can see from the military point of view, China is making these
impatient with so kind of decisions to ensure the internal safety and control of its borders.
many U.S. bases
around them Westerners then tend to misunderstand these moves as aggressive actions
on the part of China where in reality they are defensive from their point of
view. Americans would rightly be upset if there were numerous military
installations all around their country, they would get a lot more nervous
and aggressive. We have seen an example of this with the Bay of Pigs and
a very aggressive response from the U.S. China on the other hand has
lived for many years with this kind of containment as this was not a priority
before. But now that China is growing up, maturing and getting rich the
shipping lanes become a big risk to maintaining all they have achieved.
They also plan to grow much more from here so the shipping lanes
importance will only increase.
Extreme containment by the U.S. and allies
Most people don’t realize how much China is contained by the U.S. military.
When you look at a map of the US military installations in South Korea,
Japan, Philippines and many of the islands you can understand why China
is nervous. The United States focused on building a net around China and
China could do nothing about it. China has now decided better to take
action now and ask for forgiveness later.
Figure 7
The US military has Chinese worried about the US military – US military installations around China
China surrounded
Source: from the Documentary “The Coming War on China”
The military in China is an extremely strong faction of the government. The
most cherished title by the leader of China is to be the head of the military.
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China Global
Investments in $tn
China
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China trade deals to counter US containment
As part of China opening to the world in the realization that China wants to
be seen as a more open partner for trade, China almost singlehandedly is
trying to reopen the old Silk Road, out of history and what worked to
develop the region and in turn develop China.
China already has some major trade agreements and we will look at them
and their possible significance in changing the balance of power in terms of
trade. China currently has 14 free trade agreements with the Regional
Comprehensive Economic Partnership (RCEP) to be the most important.
The bigger trade plan is China’s ambitious One Belt One Road strategy,
the new Silk Road.
One Belt One Road (OBOR)–China’s chance to lead the World
Very ambitious helping This is really an ambitious and doable plan by the Chinese, which besides
many poor countries a acting as a defensive plan has huge business and political implications. It
chance to develop
along with China will involve 65 countries with over 60% of the world’s population. I have
personally driven the Chinese portion of the Silk Road using the original
route and no highways. That means you travel down dirt, sand and
riverbed roads taking a month to complete the journey. One of my best
friends drove last summer his motorcycle from my house in Beijing to
London driving the whole Silk Road, let me know if you have an interest in
his journey and I can send you details. It was a once in a lifetime trip for
me back in 2003 which helped me to complete my goal to visit every
province in China. For me, visiting every province in China was my way to
really try to understand all of China and the issues.
The map below is a busy one outlining the sea, rail, road and train routes
across Asia. Also the oil and gas pipelines and ports that will be key to the
strategy.
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Figure 8
One Belt One Road – China’s Plan and the Future of Trade
Source: https://www.merics.org/en/merics-analysis/infographicchina-mapping/china-mapping/
Shippers switching The impact of One Belt One Road will be far reaching and will tilt power
from the Panama to from the West to the East over time. The US, leader in worldwide trade,
the Suez Canal
had built a hub and spoke trading pattern that started in WWII. Now we
are seeing early signs of cracks in the trade systems such as in shipping.
Shippers like A.P. Moeller-Maersk A/S only using the newly expanded Suez
Canal as opposed to going the opposite way around the world using the
Panama canal.
One Belt One Road objectives are many for China:
A way to counter-act the US containment policy and be proactive.
 China positioning itself with the fastest growing economies over the next
10 years.
 Give China a new leadership role in their geographic sphere.
 Provide a more stable and prosperous region opening new trade.

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China is working closely with countries that have been on the outside of
U.S. influence: Pakistan, Bangladesh, Myanmar, Cambodia, and countries
throughout Central Asia. These countries have not benefitted from relations
with the U.S. and China will take advantage of this to the detriment of
India, Korea and Japan. These U.S. aligned countries hope to contain
China, as they feel threatened.
Trump is sending out
envoys trying to let
them know all is good
The new One Belt One Road from a business point of view, should be
good for all countries in the region, as more countries should get wealthier.
China, as opposed to the U.S., seems to understand that their neighbours
need to improve economically so they can buy more Chinese products.
Countries all over the world will be forming non-US strategies and this will
only help China with its policies and objectives.
China is focusing on The data for the chart below was made by The Center for International
the fastest growing Development (CID) at Harvard University analysing growth over a 10-year
economies over the
next 10 years period. China has invested most heavily into Africa and the new Silk Road,
where we find the fastest growing economies in the world. China needs to
improve relations with India as it is expected to be the fastest growing of
all countries. Even Mexico and China relations have improved tremendously
since Trump.
Figure 9
China has aligned itself with the fastest growing countries in the world – using 2014 predicting out to 2024
Source: https://howmuch.net/articles/atlas-of-economic-growth - Countries are scaled to potential growth in terms of size
India expected to be The data is a “measure of economic complexity, which captures the
the fastest growing diversity and sophistication of productive capabilities embedded in a
country in the next 10
years country’s exports, to generate the growth projections”. India comes out on
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top and most interestingly, Germany is at the bottom and Australia not too
far behind. Whether or not this analysis comes out to be correct, it is clear
China is banking on growing with the poorer countries in the world.
China’s alternative to the TPP
China is happy the U.S. China is putting together the Regional Comprehensive Economic
will not be included Partnership (RCEP), negotiations began in 2012. China was having a hard
time with the way the TPP was being written as the U.S. was trying to
make China conform to its rules. In this way, China avoids the U.S. and
opens up its closer neighbours. China has had a hard time making free
trade agreements with other Asian countries and the RCEP could achieve it
all in one go.
The 16 countries represent around 30% of global GDP and account for
around 25% of global exports, though smaller than the current TPP
proposal. But the potential from this group of countries over the next 10
years will be very good. They are going into the 17 th round of negotiations
with more planned in 2017 but with the end of the TPP this should push the
negotiations along. Even though Trump will try to make new bilateral
agreements, this will take a lot of time as he will need to do it one by one.
With the option of the RECP, the other countries will have leverage over
the US with a bigger and better option. Participating countries will be
worried to miss out as the alternative will be more trade with the US, and
US growth prospects over the long term do not look that good. The US has
a big market size but it lacks the potential growth possible with the RCEP
countries. India is a wildcard and would be great for the trade deal but
they have very restrictive policies similar to China. India might not see the
benefits of a group deal and follow more in line with the US and bilateral
deals.
Figure 10
16 countries will be Regional Comprehensive Economic Partnership (RCEP)
difficult for all to agree
Source: http://www.thegeotradeblog.com/2012/11/a-new-regional-comprehensive-economic.html
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What is interesting is the Chinese were initially unsupportive of the TPP as
they were worried about the U.S. using it to contain them further and
many of the terms were not possible to meet. China will now likely
continue to push free trade around the world and could possibly end up
being the world’s free trade supporter, talk about a complete 180 in policy
for the US and China.
Europe is likely going to have a hard time dealing with Trump and this
could open up trade opportunities with China. But China is still one of the
more difficult closed markets in the world and will need to make changes
for Europe which is much more open.
China-Pakistan Economic Corridor – Gwadar Port
The Gwadar port is the Pakistan is the key country to the whole One Belt One Road strategy,
most important part of without them, the rest might not be possible. In the US$46bn investments
the whole “New Silk
Road” made into Pakistan, the key jewel is the Gwadar Port. This new Port being
built by the Chinese (75% investment) and operated by China Overseas
Port Holding Company (COPHC) which used to be operated the Port of
Singapore Authority (PSA) until February 18, 2013. PSA was running the
port since 2007. China was involved in construction of this port beginning
in 2002 so they had a long history. It will be an important trade asset for
moving goods around South Asia, especially oil with 2/3 rd of the world oil
supply located in the region.
Shipping times to Currently, to ship goods to Europe through the Middle East using the Strait
Europe could fall from of Malacca takes 45 days, with this new port operational it could go down
45 to 10 days
to 10 days for some destinations. Oil tankers by rail from western China
could hit the Gwadar port within 48 hours if needed. PSA ran the port
under the direction of the U.S. but nothing much was done with the port
likely to limit Pakistan trade. India will now lose a lot of control of the
shipping routes in the area so they will continue to develop their counter
strategy.
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Figure 11
Currently shipping takes 45 days out of China - the new port could go down to 10 days for some destinations
Source: SCMP
Shipping speed improved and Muslim area developed
To keep the peace in Gulf oil has to go through 14,500km in order to reach Xingjiang province in
western China they China by the Straits of Malacca route. First, it takes 10,000km by sea and
need to develop it
more then 4,500km overland. Gwadar is expected to curtail the total distance by
almost 11,500km with Oman and Gwadar port included. It would be only
2,500km from Gwadar Pakistan to Xingjiang, China. This will lower costs,
shorten shipping times, and ensure a new supply route. It will also help to
continue to develop the west of China, which has been an important theme
for the government. This should also quell some of the uprisings coming
out of the Muslim-dominated western parts of China as they should be
positively impacted.
Pakistan benefits
Pakistan benefits as they become less contained by India and create a new
balance of power in the region. They will have the chance to become a
major trading centre of the world. Pakistan will also get revenue from
China as cargo passes through the country and fees will be collected.
Agreements of around US$46bn were made between China and Pakistan to
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develop the China-Pakistan Economic Corridor (CPEC). This corridor will
build power projects, roads, railways, and pipelines connecting Pakistan to
Kashgar, China.
Containing China by The beauty of this trade route for China is Chinese goods will go from
the US will get much China into Pakistan making it more difficult to stop Chinese goods by the
more difficult
U.S. without upsetting Pakistan. Oil will move to China at a lower cost from
the Middle East. The loser in this deal will be Dubai and Iran’s Chahbahar
port (only 76km from Gwadar port) as the Gwadar port will be the world’s
largest deep-water seaport. This port also will likely be one day a naval
base for China if they ever plan to implement a similar U.S. military
strategy of putting as many bases around the world. It will help China a lot
to monitor the U.S. military movements in the region but these changes
will upset the current balance of power as the U.S. is heavily invested in
the region.
Figure 12
Figure 13
Gwadar deep-water port – Dubai port could lose
Gwadar Port – on one of the busiest oil trade routes
Source: Google maps
The shape of Gwadar port is very interesting making it an excellent deepwater port. Currently, 100,000 people live in Gwadar but this is expected
to hit close to 2 million. It used to be part of Oman but was purchased
from them in 1958, a wise investment.
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Figure 14
Trains planes and automobiles to China – It will all be built
Source: Wall Street Journal
US working with Iran – Chabahar – the main port for Iran is the U.S. preference
now that is really How the world changes, Iran, the axis of evil for the U.S. is the preferred
strange
port of choice for India, Japan and the U.S. In order to offset the
development of the Gwadar port (and China), India and Japan plan to
upgrade and develop the Chabahar port in Iran. Japan is worried to be
limited in access to the Middle East and accessing energy so they are
pushing hardest for the development of the Iran port. A spanner in the
works is the trade sanctions by the U.S. on Iran. This will add to the
problems for the new Trump administration, as this port will be extremely
important to U.S. allies India and Japan. Who could believe that Iran’s port
would be helped along by the U.S.
India’s transport cost As with the case for Pakistan, this port would help to lower India’s
will fall shipping transport costs as the Indian economy is highly correlated with the price of
through Iran
nd
Oil. Iran is Indian’s 2 largest supplier of oil though China is the biggest.
India hopes to have better access to Afghanistan but they are already
aligned with Pakistan. There is an estimated US$1tr of resources in
Afghanistan and China wants to get a piece of that action if it can.
An MOU is signed but On May 2015, India and Iran signed an MOU. India had previously signed
could be delayed due an agreement in 2003 but they could not fulfil it due to sanctions by the
to sanctions
U.S. It is likely this port will not really ever get off the ground so long as
sanctions remain and it looks worse now than ever with the new Trump
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administration. But, it is interesting when you look back in history, these
two countries never seemed to have the stars aligned. When the Shaw of
Iran was in power, Iran was aligned to the U.S. and India with the Soviet
Union. Therefore, from the lessons of history, we know things can change
fast in the region.
Figure 15
Figure 16
Chabahar and Gwadar ports – access to the chosen land
A highway between Zaranj and Delaram is being built
with financial support from India.
Source: Google
The important highway India has already spent about US$100mn to construct a 218 km long (140to use the port is built mile) road from Delaram in Western Afghanistan to Zaranj on the Iran-
Afghan border to link up with Chabahar port. The port was partially built by
India in the 1990s to provide sea-land access to Afghanistan and Central
Asia, bypassing Pakistan.
The U.S. and Russia working together
The Gwadar port will
always have the
advantage of being a
deep water port
The Chabahar port development will give India and its allies skin in the
game to compete with the One Belt One Road strategy. This will be an
asset for the U.S. to continue its containment strategy of China. However,
another strange bedfellow here is Russia and former Soviet republics. The
bigger picture of this new port is it could eventually link up to St.
Petersburg Russia. China, though, has better relations and economics
interests with many of the old Soviet republics so this could give an
advantage to the Gwadar port. The Gwadar route is shorter therefore more
cost effective. The U.S. is supporting Iran and Russian interests (again who
would have thought this was possible) which limit China, we do live in a
crazy world. Another problem though is this will not be a deep-water port
like Gwadar. Gwadar is planned to have a 400m tonne capacity while
Chabahar only 12m tonnes.
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China is aligning itself Religion is also a complication for these deals. Iran being Muslim and India
with Muslim countries Hindu means the relationships will be fragile. China will be pushing to work
with Muslim countries like Iran and with their Muslim partner Pakistan
along with Muslim-Western China. This should allow China to more easily
make deals with Muslim led countries. Not to mention India aligned with
the U.S. and Iran having terrible relations with the U.S. is a bad omen for
the U.S. in the future for this region. This could be the moment in history
where we see the U.S. pull back and focus on its own territory.
China’s string of pearls – opening landlocked parts of China
China’s strategy is to try and unlock the landlocked provinces in western
China and they are addressing this by investing in China’s string of pearls,
a term used for the ports in Indian Ocean China has invested. Chinese
state-owned corporations have financed commercial ports in Pakistan
(Gwadar), Sri Lanka (Hambantota and Colombo), Bangladesh (Chittagong)
and Myanmar (Sittwe and Kyaukpyu). This has been the big concern for
India as they are starting to feel surrounded.
Hambantota Port gives 100-year lease to China
China investing in The deal just signed gives China a 100-year lease and 80% ownership plus
another port in Sri an industrial loan. In addition, the local airport will be run by a Chinese
Lanka though not
going as smoothly company. The original port was built using Chinese money but the local
people did not run it efficiently and the port is losing money. In an effort to
be able to pay back China, they had to find a new arrangement despite the
protests by the local people. In essence, this is turns out to be a small
Chinese colony developing around the port though there are worries that
China is taking over Sri Lanka. Maybe a bit overblown but this will be a
recurring theme until China can figure out how to placate the local people.
Sri Lanka’s total debt is around US$70bn and US$8bn is owed to China. A
lot of the debt was a result of large infrastructure projects mainly invested
in by China.
India has the most concerns as the worry of China gaining a foothold at
least in trade and some potential military concerns. At some point in the
future, China could begin to mix in military resources in with the
commercial ones giving China an increased position militarily in the region
and limiting the U.S.
I will be writing Part II of this research report and go into more depth
on the strategy of the Chinese, successes and failures to date. Please let
me know if you would be interested to buy this report. But remember the
need to apply a different set of thinking to the way China thinks of success
and failure in order to achieve their national interest. Their goals are not
always aligned with investors.
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Analyst introduction:
Scott Laprise
I am an independent analyst based in Beijing China covering the steel, autos,
education and healthcare sectors. I have been living here for 20 years with the past
10 years as a Senior Financial Stock Analyst at CLSA. I write reports on the Chinese
stocks plus I also look at how well foreign companies are doing in China such as
Mercedes-Benz, BMW, Audi, Tesla and others since the impact of their China
business is significant to the company overall. If you wish to contact me please
send
me
an
email
at
[email protected]
or
follow
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on
Twitter
@researchbeijing. I offer a yearly subscription plan if you wish to receive all my
research.
Note: In the interests of timeliness, this document has not been edited.
The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views
and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any
person/s in compiling such publication/ communication.
LTH and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research
reports. As a result, investors should be aware that LTH and/or such individuals may have one or more conflicts of interests that could affect the
objectivity of this report.
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