Published daily by the Lowy Institute

Japan and China wrestle for ascendancy in Southeast Asia's railway Great Game

Japan and China wrestle for ascendancy in Southeast Asia's railway Great Game

Luang Namtha in northern Laos is a sleepy wildlife reserve, popular with backpackers. In future it may become a vital geopolitical pivot point. Here the northern corridor to the Chinese metropolis of Kunming intersects with routes east into Myanmar, west into Vietnam, and south through Laos to Thailand, Malaysia and Singapore. It's been 15 years since I visited, but back then the main economic activity (besides tourism) appeared to be gathering rice and bundles of firewood. When Chinese bullet-trains roar over their paddies at 300km/h, the locals will be amazed. Their government in Vientiane has just committed to the first stage of the Kunming-Singapore line's construction.

The $6 billion Kunming-Vientiane section is part of China's Pan-Asia plan, three lines fanning from Kunming across southeast Asia and converging in Singapore 3900km to the south. The Laos section is on the initial central route. With the western and eastern legs, the South China Sea and Bay of Bengal will be the shores of this great network.

Beijing sees such projects as a 'soft power export' and has plans for many more worldwide. Japan too is competing for China's backyard. So determined are these rivals that economic considerations are subordinated to prestige and influence. There is a whiff of cheque-book diplomacy in the air. The decision of Vientiane to buy Chinese was never in doubt. Still, they negotiated low 3% interest rates , though the mortgaging of five potash mines to Chinese lenders has stoked grumbles over transparency.

The bidding in Indonesia and Thailand has been much livelier.

Bangkok, its junta also strongly pro-Beijing, wants to be a 'hub' in China's 'great artery', and it plans a spur to Burma along the infamous Death Railway route. Japan has a longstanding Thai presence and bid tenaciously until the very end. While now signed with Beijing , the $10 billion deal reportedly 'did not go smoothly' because 'given China's affluence, the (Thai) government has asked China to invest (more)' and at a lower interest rate. The Chinese disappointed the Thais by lowering the train's speed instead.

Indonesia's tender for the $5 billion Jakarta-Bandung express was even more hectic. [fold]

The entire project was canceled and then mysteriously reinstated after substantial concessions were extracted. Foremost among these was China's winning formula to forego any government guarantees whatsoever, an extraordinarily generous gesture. The Indonesians can't believe their luck; the Japanese are fuming. One Tokyo official questions whether 'China understands what it's doing.' One week into construction, the project has already hit serious bureaucratic snags. Expect more strife when Chinese workers turn up.

Attention now shifts to Kuala Lumpur, which is planning its section to Singapore. Whatever suspense surrounded the multinational competition mostly dissipated by late December when Beijing's prime contractor swooped in to relieve Malaysia's troubled 1MDB fund of a key property asset at a valuation that no-one can fully explain. This followed an equally fortuitous intervention two months earlier when Chinese interests expensively acquired 1MDB's power utility Edra, exempted from foreign ownership restrictions. Malaysian governance issues aside, the Chinese press sees the irony when the ruling party UMNO pursues anti-Chinese policies domestically while cutting business deals with Beijing.

The Japanese technocrats who splutter over China's bidding irrationality are missing the point. These projects don't pay back financially, so necessarily they become political decisions. Beijing can provide 'bundled' proposals with hidden inducements that no-one else can (or wants to) match. The politics becomes more obvious when it is realised that the two neighbours least friendly to China have opted for partnerships with Japan. India recently launched its inaugural shinkansen with 'highly concessional' 50-year financing from Tokyo. Vietnam had earlier announced a mammoth $55 billion Hanoi to Saigon project to be built and financed by Japan, but backed off in 2010 after unusually acrimonious parliamentary debate. Nonetheless, Japan has the inside running for any future railways partly because of criticism over Chinese performance building the Hanoi metro.

So battalions of bulldozers will cross the Laotian border soon to lay the key link in the Pan-Asia grid. Via Kunming, Beijing is offering its neighbours the gift of connection into its mighty domestic rail system. Francis Fukuyama marvels at this projection of the 'China model', which must necessarily be lubricated with a great deal of concessionary money. To paraphrase Archimedes, give me a financial lever long enough and I can cover the entire world with railways. Friendly ASEAN states are happy to access China's construction excellence and its fantastically cheap money. Spurning such an opportunity would be an act of geopolitical independence, defiance even. In Asia, not all railroads lead to Beijing, but most do.

Photo by Flickr user Tim Zachernuk.

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