News & Media
China starts grappling with the boot on its throat

Last Updated:2015-03-17

By Geoff Raby

Former President Hu Jintao reportedly once described the Straits of Malacca as the "boot on China's throat". Knowing that the People's Liberation Army is at least 20 to 30 years away from being able to challenge the US in this area, Beijing regards the Straits as its major strategic vulnerability.

China is today the world's biggest importer of crude oil and of just about all the other raw materials it needs to sustain its economic growth. Last year, China also became the world's biggest importer of petroleum and liquid fuels. By 2030, China's import dependency for oil and petroleum is expected to rise to 85 per cent, far exceeding the US's maximum import dependency of around 60 per cent.

More than 30 per cent of LNG consumed in China is imported. Iron ore imports account for 60 per cent of ore used in steel making. Despite having the largest coal resources in the world, China is also a major importer these days. It is a far cry from when Australian policy makers feared that an opening China in the 1980s and early 1990s was preparing itself to snatch away our markets in Japan and Korea.

It was never intended to be this way. When Deng Xiaoping launched the Open Door policy in 1979, it was not to integrate China into the international economy based on Ricardian principles of comparative advantage. Rather, it was mercantilist in design – opening enough to attract foreign investment and, most important, technology on China's terms, and trading to build reserves to finance imports of necessities, but with the ultimate objective of import substitution.

China is rich in natural resources, including oil. But it has a big population. When people were poor, thanks to the turbulence and sometimes insanity of post-1949 policies, it could rely on domestic supply to meet its growing needs for resources and energy as the economy grew under Deng's reforms.

With the gathering pace of growth in the 1990s, however, things began to change. Starting from about the mid-1990s, China passed through a series of tipping points when it went from being largely self-sufficient to becoming an importer, and then quickly becoming by the mid-2000s the biggest global importer.

This is a nightmare for China's strategic and defence planners. It is not difficult to imagine that around the mid-2000s someone in Beijing's central leadership compound at Zhongnanhai, waking up in the middle of the night screaming at the ceiling: "What have we done!"

Over the past decade, China has begun to address its dependency on foreign resources and energy through massive investments to expand domestic supply, but these have not kept pace with rising demand. Overseas it has sought to put its foot on resources through investment into resource-rich countries, especially Australia, Africa and in Latin America, buttressed with massive diplomatic efforts.

To manage the strategic vulnerability of the Straits of Malacca, China has sought alternative transport routes, initially through oil and gas pipelines into Central Asia and more recently into Russia.

A new freight railway from Chongqing – a city of more than 30 million people, 1500 kilometres inland on the banks of the Yangtze River – to Duisburg in Germany began operating late last year, cutting the freight time by river and sea from 45 to eight days. While per-tonnage costs are greater by rail, higher-value goods in both directions can bear the higher costs, especially when reliability is also considered.

Beijing has also been looking for new routes directly to the Indian Ocean to access energy resources in the Middle East and Africa and to the markets of Europe.

China has constructed a new port in Pakistan at Gwadar near Karachi, and is rebuilding the highway from Xinjiang into Pakistan, opening a direct trucking route to the Indian Ocean for western China and land-locked central Asian neighbours.

A gas pipeline from the port of Kyaukpyu on Myanmar's coast to Kunming, capital of Yunnan Province in China's south-west, began operating in 2013, and last month the completion of an oil pipeline was announced. It is intended for Kunming to become a hub of distribution of oil and gas to south-western China.

While not strictly concerned with its strategic vulnerability, plans are well advanced for extending China's high-speed rail network from Kunming into neighbouring countries in south-east Asia.

As is often the case in China, the articulation of a policy lags behind its implementation.  Although first mentioned in the latter years of his predecessor, Xi Jinping has bundled all these activities, some of which are by now over a decade old, and badged them as the Belt and Road concept.  This comprises the Silk Road Economic Belt of land routes across Eurasia and the 21st Century Maritime Silk Road, extending into south-east Asia, Australia, and around the Indian Ocean to Africa and Europe.

Beijing has created a $US40 billion ($51 billion) Silk Road Fund to finance the Belt and Road concept and committed $US50 billion to establish the Asia Infrastructure Investment Fund.

While the scale, funding and boldness of the Silk Road policies are breathtaking, the accompanying diplomatic and political effort required to realise these ambitions will be tremendous.  So far, it is not without its setbacks, such as a distinct cooling of enthusiasm in Myanmar and the recent electoral defeat of the China-backed Sri Lankan president by an India-supported opponent.

China's quest to find security in a world where it is utterly dependent on the rest of the world for resources and energy and where US military power will prevail for decades, if not longer, is driving potentially big changes in regional political alignments and institutions and in trade routes and investment flows.

Beijing is not turning its back on the western Pacific, but rather it is giving itself strategic options. Over time, this more than anything else may change long-standing power relations and strategic calculation.

It may not be lost on China's leadership today that in 1497, when the Portuguese explorer Vasco da Gama sailed past the Cape of Good Hope, opening a sea route to India and the Far East, this was the beginning of the end for the Old Silk Road.

Geoff Raby is Chairman and CEO of Geoff Raby & Associates and a former Australian Ambassador to China.

This article first appeared in the Australian Financial Review: