July 19, 2004

The rise and rise of China is posing extreme economic challenges for Asian nations, and will continue to do so

KHOBAR, Kuwait, Aberdeen, Dhahran, Houston, Veracruz, Singapore; the global stars of the Big Oil firmament are easily recognisable to anyone with even a vague interest in what greases the world economy.

But here's another lesser-known locale to add to the mix, Hambantota. Its not a place that immediately falls from the lips in any geopolitical tour d'horizon of our backyard. But this tiny port on the southern tip of the equally forgotten Indian Ocean isle of Sri Lanka seems set to undergo a major transformation into an oil boomtown for the emerging powerhouse of the global oil industry -- China.

Today, sleepy Hambantota is perhaps best known as the stopping-off point for naturalists and expeditioners to nearby Yala National Park, where bears, elephants, leopards and monkeys gambol peacefully in one of Asia's last remaining wildernesses, all 1200sqkm.

But soon these animals could be sharing jungle with another beast, a giant oil production and refinery facility, a $2 billion project planned by China's state-owned oil giants Sinopec and CNOOC to create what will effectively be a virtual Chinese economic colony, another Hong Kong if you like, in one of the poorest parts of a country desperately needing investment.

China's proposal is simple, easy to understand in this difficult period for the oil industry where terror, war and piracy have combined to send oil prices spiralling to record highs. It's also a strategy that promises to redraw Asia's economic map, with huge implications for commodities-oriented economies like Australia, reliant on trade with North Asia to keep its own comfortable economy ticking over.

With a fast-industrialising economy expanding at about 10 per cent a year, and with the expectation of an unwieldy 1.2 billion population that brings, China is an increasingly thirsty and demanding oil consumer. China's internal stability depends on continually fuelling that expansion, meeting those expectations and their energy demand is an imperative in the world's most populous nation.

For Beijing's communist rulers, failure is not an option, lest it experience a re-run -- or worse -- of the turmoil that engulfed the capital in June, 1989, culminating in the infamous Tiananmen Square massacre that almost toppled the communist dictatorship. China has to feed its boom, and its people, or suffer the consequences.

China's oil now mostly comes from the Middle East, where war and terror have conspired to send prices soaring. China and its $US450 billion in foreign reserves -- the world's biggest treasure trove -- can live with high prices for a while but not with less-than-guaranteed supply, lest that economic expansion -- that's also motoring much of the rest of Asia -- slows dramatically.

For China -- and equally for its developed North Asia neighbours Japan, Taiwan and South Korea (four of Australia's top 10 trading partners) -- that actual oil supply has traditionally wended its way on supertankers from the Gulf along India's western coast under Sri Lanka and across the Indian Ocean through to the chokepoints of the narrow Straits of Malacca that separate peninsula Malaysia from the Indonesian island of Sumatra, en route to refineries in Singapore before the northward journey to Northeast Asia. The finished products that oil helps build -- cars, computers, whitegoods -- symbiotically sail to markets back the other way.

But the Malacca Straits are too proving vexatious for the oil and shipping industries, furrowing important brows in Beijing and Shanghai. The International Maritime Bureau says the region is the world's most dangerous hotspot for tanker seizures and acts of high-seas piracy. Washington and allies like Australia fighting the war on terror also fret that al-Qa'ida via regional associates like Jemaah Islamiah could easily seize a tanker, ram a port and block this crucial artery of global trade. Negotiations are now under way between the US, Malaysia, Singapore and Indonesia to examine ways of neutralising this threat, possibly involving regular patrols by the US Navy. While Beijing doesn't really want the Pentagon sniffing near its waters, its pragmatic enough to keep a diplomatic silence on trade issues.

Significantly, China also lurks in the background of dusted-off Thai plans to explore a massive Panama Canal-type project that would dissect Thailand's Kra Isthmus that connects continental Indo-China to Malaysia and Singapore. A canal here would by-pass the tumultuous Malacca Straits by running shipping lanes straight across the Gulf of Thailand to turn north at Vietnam, instead of Singapore well to the south as they do now.

While by no means anywhere near even an agreement to build it, a Kra Canal presents a fabulous proposition for Asia. In of itself, it would be likely the world's biggest construction project -- one estimate puts its cost at around $US30 billion. At its narrowest point, the Kra Isthmus is 44km wide (The Panama Canal by contrast is about 80km long). A Kra Canal could see up 5-7 days taken off the journey from the Middle-East to Northeast Asia, a significant saving for the oil and shipping industries. It would generate employment in a moribund part of the region and would almost certainly have the backing of rich, powerful governments in Tokyo, Seoul, Taipei, Hong Kong and of course Beijing.

Less in favour would be Malaysia, Singapore (which earns much of its existence as a shipping and oil centre) and, to a lesser extent, Indonesia. The canal plan also presents a dilemma for Thai authorities, who govern an overwhelmingly Buddhist country albeit one with a large and increasingly fractious Muslim community in the south near Malaysia, gathered mostly along the Kra Isthmus. By a quirk of geography, the narrowest point of the isthmus, where a canal would logically dissect, also happens to be the unofficial border between Muslim and Buddhist Thailand. A canal splicing the Thai terrain here would form an effective barrier between the two Thailands, leading to fears in Bangkok of an isolation of its Muslim community in the south, where there has been a recent series of bombing and religious-based killings.

Interestingly, this part of Thailand is set aside in plans devised by Osama bin Laden's al-Qa'ida network and associate Jemaah Islamiah and discovered in the wake of the 2002 Bali bombing and the prior plot to bomb Singapore targets as the cornerstone of a Southeast Asian Islamist superstate stretching from Thailand to Timor. It all raises the prospects of al-Qa'ida devising a terror attack in S-E Asia to help kickstart a breakaway Muslim Thai mini-state. Far-fetched? So was an attack on the World Trade Centre.

The Kra Canal is a very long way off, if at all, but not so China's efforts to secure its energy supplies. China is anxious to guarantee oil supply as much as possible and is moving to establish secure facilities that lessen its reliance on Middle-Eastern oil and those precarious trade routes.

Geological teams from the mainland are scouring sites across Central Asia including Afghanistan, Burma and Bangladesh, the latter two to effect a possible overland route into booming southern China. Trans-Asian pipelines through Russia, Central Asia to Pakistan and the Middle-East are also on the drawing board. Beijing's planned facility in southern Sri Lanka, just as ships turn the corner eastward after coming out of the Arabian Sea, is part of that wider strategy.

China's rise and rise is shifting alignments across the region. Beijing's courting of Burma, for example, might seem regionally insignificant in Canberra but it's a factor in what is driving both democratisation in Rangoon's ruling junta and a `progressive discord' between ASEAN and its partners, particularly in the West. ASEAN drew Burma into its bosom to partly offset China's influence in Burma's north, where mainland businessmen are everywhere, forging land bridges between Kunming and Burma's Indian Ocean ports. Mandalay, Burma's riverine second city, feels like it's being re-made to modern mainland specifications, all cheap, squat office towers and glass frontages. But semi-democratic ASEAN, with little going for it economically relative to booming Northeast Asia, hates the way the West beats it up over having Burma as a member, and as Indonesia, ASEAN's most persuasive member, continues to democratise, Burma will continue to be a lightning rod within the community. For the regional body, it's the lesser of two evils in keeping China at bay as much as possible.

China presents extreme economic challenges for other ASEAN nations, which have prospered from hosting Japanese and Western manufacturing. Singapore and Malaysia are losing jobs in middle and high-skills manufacturing to fast developing China, which is at least half as expensive as workers in Changi or Penang. Cheap Chinese goods are flooding low-wage places like Indonesia, Cambodia and Vietnam, which are are finding it hard to compete at the lower skills level.

China's massive population means things won't get better any time soon for its competitors in Southeast Asia. For every lineworker in Fujian or Shenzhen who gets `skilled up' and moves on to higher wages elsewhere, there's a mobile labour army of 100 million strong eager to fill his place for cheap wages. That translates into a constant deflationary pressure for the world economy, as China assumes a greater say in it.

In their response to China's rise, some countries are nicheing themselves. Thailand and neighbours are stressing tourism in a way that increasingly polluted China never can (though a Kra Canal near Phuket might give holidaymakers pause for thought) while the English-speaking Philippines, arguably Asia's most bumptious democracy and one which recently elected President Gloria Macapagal Arroyo to a second term, sees itself as the region's service centre, particularly in telecoms and call centres.

South Korea, the most wired society on earth with broadband in as many as 70 per cent of its homes, angles to be Asia's Silicon Valley. Singapore and Malaysia are are tipping massive investment into life sciences and intellectual oriented industries, ironic in Singapore for a country which has got rich on mid-level manufacturing and whose politicians has done their best to prevent their citizenry from thinking too much about such abhorrent (to the leadership) things as pluralist democracy and freedom of speech. Singapore Inc too is making huge bets in its immediate neighbourhood, which it traditionally neglected economically, in part because it wasn't welcome in Mahathir's Malaysia or was scared by fractious Indonesia. Its buying big stakes in Indonesia banks, media and telecoms infrastructure while -- improbably to lawsuit-battered regional journalists -- angling to be Southeast Asia's media hub.

India, no great friend of China, is being courted by Southeast Asian investors, partly as a foil to the Chinese. While India's one billion people present a massive market, the wider bet there is that peace overtures with Pakistan will evolve into a lasting treaty and Asia could eventually have its own common market on it doorstep.

But many would argue Asia already has one -- it's called China. And it's everywhere