11 January 2019

Pathbreaking Article by Expert on the Security Implications of Infrastructure Finance: “Asia Rising: Ships of State?”

The commercial-strategic linkages and state support for PRC port and shipping ventures resemble a twenty-first-century version of the Dutch East India Company. These notionally commercial enterprises operate globally with the full financial and military backing of their home state, and the vessels that connect the ports are “ships of state,” functioning as instruments of Chinese national strategy while they sail as commercial carriers.

Christopher R. O’Dea, “Asia Rising: Ships of State?Naval War College Review 72.1 (Winter 2019): 62-94.

Backed by substantial financing and political support, China COSCO Shipping Corporation Limited (COSCO) emerged from the container shipping industry’s recent turmoil with one of the largest fleets of commercial vessels in the world and control of a rapidly expanding network of ports and terminals. This article argues that this expansion is a new and distinctly Chinese approach to maritime development and asks whether the state-owned shipping company has become the flagship of China’s ambition to become a global maritime power.

Chinese maritime and logistics firms, supported by state-subsidized capital deployed overseas, quickly are becoming a leading edge of China’s global influence. In recent years, Chinese state-owned companies have built a global network of shipping and port assets that suggests the country is using maritime commercial investments to advance its geostrategic priorities by establishing economic influence over countries in which Chinese- controlled port facilities are located.

These Chinese state-owned enterprises (SOEs) are creating one of the most extensive maritime networks in the world by acquiring strategically located port assets in the European Union (EU), Latin America, the Middle East, and the Indian Ocean. They provide the capital to build or up- grade commercial terminals; then they direct container traffic to those ports through shipping lines that are controlled directly by the port’s parent company or indirectly through companies associated with China’s strategic port owners through formal shipping alliances.

This commercial drive complements a well-documented naval expansion by the People’s Liberation Army Navy (PLAN) since at least the 1980s. The frame- work for Chinese naval policy in what China calls the “far seas”—the waters beyond the “first island chain”—has been examined comprehensively. Models of China’s potential basing requirements to support overseas naval operations also have been assessed, as have the use and organization of Chinese maritime law-enforcement resources.

This article argues that the port and shipping transactions of the People’s Republic of China are a major vector of a government policy to achieve global maritime power and commensurate political influence without resorting to, or at least while mitigating the risk of, a direct confrontation with the United States or other nations with global maritime interests. The commercial-strategic linkages and state support for Chinese port and shipping ventures resemble a twenty-first-century version of the Vereenigde Oost-Indische Compagnie (VOC) (Dutch East India Company). Chinese SOEs are today, as the VOC was in its time, notionally commercial enterprises that operate globally with the full financial and military backing of their home state. In this view, the vessels that connect these ports into an integrated network of commercial power are “ships of state,” functioning as instruments of Chinese national strategy while they sail as commercial carriers of manufactured goods and commodities.

China’s unique and assertive approach to maritime development has been described as the construction of military-relevant facilities rather than overtly military bases. As implemented in the “near seas,” the rapid construction of airfields and harbors on reefs in the South China Sea has enabled China to assert effective control over contested areas, in accordance with its idiosyncratic maritime-rights doctrine. As Chinese strategists turn their attention to the far seas, Chinese state-owned companies are developing ports around the world that can accommodate the very large containerships designed to create economies of scale in seaborne transportation. These facilities offer China a larger, more reliable logistics network with potential military applications related to the protection of overseas Chinese citizens and economic interests.

The first part of this article examines the recent rapid increase in Chinese port and shipping investments, focusing on transactions that COSCO has undertaken, in particular its acquisition of a controlling stake in a privatized port entity in Piraeus, Greece. Achieved through a series of investments and privatization transactions carried out over nearly a decade, this has resulted in a Chinese state-owned company—one that is viewed as the primary logistical supporter of the Chinese navy—having the ability to exercise maritime-development powers granted by the national government of an EU member state. This section also includes a review of how China exercises state control or influence through the agency of state-owned companies carrying out transactions and forming commercial alliances, as well as an assessment of the strategic implications of China’s approach to building a maritime commercial network that appears to be aligned with Chinese national security aims.

The second section of the article discusses key trends in the global shipping and logistics business and how stresses in those sectors have given rise to conditions conducive to China’s acquisition campaign. The primary focus is on the consolidation of global container shipping lines into the COSCO-dominated Ocean Alliance and two competing container shipping alliances; this encompasses an examination of how Chinese regulators used the country’s antitrust law to block a proposed alliance of Western shipping lines that could have challenged China’s efforts to acquire and consolidate maritime power. This section continues with a look at how Chinese state financial entities fund the development of China’s maritime network through strategic investments in non-Chinese companies and how Chinese state regulatory support of key transactions helps expand the network and formalize links between Chinese state companies engaged in the expansion campaign. A detailed analysis of the port, terminal, and shipping activities of CMA CGM, a French shipping and terminal company based in Marseille, illustrates how Chinese state regulatory action and state financial support played a role in CMA CGM becoming a member of the Ocean Alliance.

The global logistics industry is moving toward an integrated system in which land-based terminals hold increased importance as exchange points between ships and rail and road networks. In the emerging commercial shipping regime, marked by excess capacity in container shipping and increasing competition among ports for business from ever-larger containerships, it is essential for survival that companies control both shipping lines and well-equipped land terminals at suitably located port sites. This shift toward an integrated system favors concentration of maritime commerce at certain large hub ports; automation at every stage of the global supply chain; and, most importantly, control of the port territory and port authorities that decide how to develop ports. Ports themselves are potentially valuable, but the sector has become increasingly competitive since the financial crisis, largely owing to the high cost of modernizing facilities or building new terminals, and both institutional investors that own port assets and port operators have sold numerous assets to Chinese entities, with a notable acceleration of Chinese purchases around the world during 2017.

The third section raises several considerations arising from China’s progress so far and offers a perspective on the emerging risks to the open maritime domain posed by China’s state-backed investments in ports and shipping assets. While there are clear signs of unease about Chinese expansion—magnified by recent overt military action near one port—most resistance so far has been expressed through civil administrative channels; examples include allegations of tax law violations and the raising of diplomatic concerns about the transparency of Chinese purchases. The limited nature of these protests—focused as they are on narrow, if important, topics—has left China able to pursue its maritime expansion without sustained opposition on a global basis. … … …