China's state firms cementing lucrative role in South China Sea, new research shows

HONG KONG/SHANGHAI (Reuters) - Beijing’s giant state-owned enterprises are playing an increasing role in China’s build-up in the South China Sea and could seek to cement their dominant position in coming years, according to new research.

The work by academic Xue Gong and published by Singapore’s ISEAS Yusof Ishak Institute this week sheds light on a little-examined element of rising tensions across the vital trade route, showing extensive work by Chinese SOEs in developing infrastructure and tourism, as well as oil and gas, some in hotly disputed areas.

Some experts and regional diplomats believe the strong commercial presence could further complicate any future regional solution should Beijing, which research shows has encouraged firms to operate, protect them politically and militarily.

China’s state-owned enterprises operated in a complex and often opaque environment, serving national strategic interests as they sought new opportunities, Gong told Reuters.

“They cannot operate independently but they are ultimately opportunists and when the policy environment is favorable, then they will go for it. And we have seen signs of that behavior in the South China Sea,” said Gong, who is based at Singapore’s S. Rajaratnam School of International Studies.

“If the Chinese government can maintain an upper hand and leverage while achieving stability, there might well be greater opportunities.”

China’ Foreign Ministry said there was nothing wrong with Chinese companies’ carrying out of “normal commercial activities” on Chinese territory.

“The Chinese government manages and regulates Chinese companies in accordance with the law,” the ministry said in a statement sent to Reuters.

While the research notes the difficulty in obtaining financial information, it suggests turning China’s seven reefs and cays in the Spratlys archipelago into man-made islands was a multi-billion dollar effort.

It cites state media estimates that building up Fiery Cross island alone, now home to a 3km runway and military facilities including missile and radar installations, cost around $11 billion.

The on-going build up of the seven islands deep in the maritime heart of Southeast Asia has alarmed the United States and other regional powers.

China’s so-called nine-dash line claim covers much of the South China Sea, overlapping claims of Vietnam, the Philippines, Malaysia, Brunei and Taiwan.

Gong’s research shows how China Communications Construction Corporation (CCCC) and its subsidiaries seized on policies advocated by President Xi Jinping in 2012 to expand its maritime capabilities via the South China Sea, in part by developing some of the world’s largest dredgers.

CCCC planned to list its dredging operation in 2015, but its application later lapsed, according to the Hong Kong stock exchange.

CCCC has formed new units centered on the Paracels, which China disputes with Vietnam, that are eyeing expansion in tourism, logistics, fishing as well as on-going construction business, according to the paper.

(For a graphic on 'South China Sea construction' click, tmsnrt.rs/2J3cWne)

It has earmarked $15 billion for investment across various sectors - a plan that “stems from the fact that it has quietly benefited from land reclamation in the South China Sea through implementing national tasks”, the research states.

CCCC also collaborated with other state firms, including China Travel Service Group (CTSG), to develop a nascent cruise ship and tourism industry in the Paracels after state leaders in 2012 overcame earlier reluctance to back such moves.

CCCC, which has units listed in Hong Kong (1800.HK) and Shanghai (601800.SS), did not respond to requests for comment. China National Travel Service, which oversees CTSG after a series of mergers, did not respond to requests for comment.

More than 70,000 tourists have traveled on four cruise ships that ply the South China Sea since the Paracels route was opened in April 2013, the Hainan Maritime Safety Administration said in January.

Some 680 commercial flights landed on the expanded runway at Woody Island, where Sansha City is now the administrative hub of China’s South China Sea operations, in the year ended December 2017.

The Singapore research also details how China National Offshore Oil Corp (CNOOC) lobbied for funding and greater Chinese involvement in the South China a decade ago after facing criticism from scholars concerned at activities by rival claimants.

CNOOC later earmarked $32 billion for exploration, and built a giant deep water drilling rig which was placed off central Vietnam in 2014, sparking tensions with Hanoi.

According to its first quarter filings of listed unit CNOOC Ltd which is in charge of all the group’s exploration and production business, the South China Sea’s share of the company’s total oil and gas output rose to 45 percent - up from 43 percent last year. That was second only to its Bohai operations off north China.

CNOOC’s latest annual report listed eight new discoveries in the South China Sea, out of a total of 19 struck offshore China in 2017.

Some players like CNOOC “appear more skilful and effective in mobilizing resources to influence state policy, while some actors, such as enterprises in the tourism industry, respond only when the state provides incentives,” Gong noted.

In a statement to Reuters, CNOOC Ltd (0883.HK) said it had a deep water development strategy for the South China Sea and planned to extend investment on future exploration and development.

“All oil and gas companies among the globe are welcomed to jointly invest and operate in offshore China and to achieve success together with the company,” CNOOC Ltd said.

A host of other state firms are reportedly eyeing slices of the South China Sea action, from nascent nuclear energy programs, telecommunications, fisheries and banking.

Ian Storey, a South China Sea expert at ISEAS, said the work showed “Beijing is incentivizing companies to become major players in the South China Sea.”

“This is something that China can do that the other claimants cannot do, particularly on this scale,” he said.

“The dispute is absolutely no closer to resolution, either a legal or a political resolution, and the role of China’s state owned enterprises only highlights that.”

Reporting by Greg Torode in HONG KONG, Brenda Goh in SHANGHAI and Ben Blanchard and Aizhu Chen in BEIJING. Additional reporting by SHANGHAI Newsroom. Editing by Lincoln Feast.

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