When China Shanghais Your Port

Do foreign purchases of critical global infrastructure constitute a security risk?

Hamburg’s 883-year-old port has a history of state ownership. That state has hitherto been the Free and Hanseatic City of Hamburg. Soon, it may instead, in part, be the People’s Republic of China.

Terminals change hands all the time. There’s nothing different about this, is there?

In September 2021, Zhang Dayu, Managing Director of COSCO Shipping Ports, and Angela Titzrath, Chairwoman of HHLA, which operates the port of Hamburg, announced they had struck a deal. COSCO would pay €65 million for 35 percent of the shares of the Tollerort container terminal. One of COSCO’s people would be on the HHLA board of directors. HHLA would profit from additional COSCO sailings and growth in Chinese trade.

Since COSCO’s shipping operations are Chinese state-owned enterprises, however, market demands are only suggestions. It was within COSCO’s discretion – and power – to redirect cargo from ports in which it did not have a stake toward its newfound darling.

But is that so bad? After all, Maersk and MSC operate a terminal in Bremerhaven, and one often finds Maersk and MSC vessels docked there perhaps instead of somewhere else.

Germany has a history, in past decades, of courting Chinese business interests. German news magazine Capital reported that 7.5 percent of German exports, worth more than $100 billion, now go to China, up from one percent in 2001 – only the U.S. imports more. Germany is the target of 11.4 percent of Chinese direct investment in Europe, according to a German Parliament research paper. Since 2005, Chinese investors spent €449 billion buying European companies. These are often strategically relevant, like German robotics company Kuka, which was bought by Guangdong-based Midea in 2016.

Geopolitical Considerations

Perhaps the port of Hamburg is more than just a workaday terminal to COSCO. Perhaps it’s pursuing some undisclosed political aim. The German Foreign Office suggested this when it filed a note of protest with the port’s chief executive subsequent to the COSCO deal, pointing out “significant risks when elements of European transport infrastructure can be influenced and controlled by China, while China in turn continues to reject any German participation in Chinese ports.”

The HHLA purchase has a “geopolitical” aspect since China, it stated, is not pursuing strictly economic objectives.

Two programs, the Belt and Road Initiative and the New Silk Road, are the monikers under which China has been expanding its control – globally, not just in Europe – of critical infrastructure. China is the world’s biggest exporter with a 15 percent market share. The next biggest is the U.S. with eight percent, so perhaps it’s a natural fit for China to vertically integrate that facet of its economy. But what if the German Foreign Office is right? It turns out that a third of ports in which China made economic investments have hosted and also resupplied military vessels of the People’s Liberation Army Navy.

In an era of peaceful coexistence between China and the rest of the world, this would be unremarkable. Friendly nations will often extend hospitality to visiting allies’ military vessels. I remember, some years ago, spotting the French aircraft carrier Charles de Gaulle in Abu Dhabi. But China is overt about its intention to annex Taiwan. It continues to lend non-military aid and comfort to Russia as it invades Ukraine, and it’s in conflict with India, Japan and Vietnam in its own region.

There’s the added wrinkle that China may make use of foreign ports it owns – or has major stakes in – without asking permission, seeing as it controls the shares of those ports and could potentially compel their cooperation.

Hamburg will be the 96th foreign port in which Chinese state-owned companies have a major stake, joining Le Havre, Dunkirk, Piraeus, Naples, Bilbao, Valencia, Zeebrugge, Rotterdam and Antwerp, to name a few. COSCO holds large stakes in many. Hamburg was worried about being left out. Ms. Titzrath made this point unabashedly: “In order to survive international competition, we have to ensure that even shipping companies like COSCO remain bound to us for the long term.”

What if prospering economically requires hosting People’s Liberation Army Navy warships?

Hamburg will be the last of the major seaports in the Nord Range, which stretches from Normandy in France to Hamburg at the Elbe River, from the Atlantic Ocean to the Baltic Sea, in which China will have taken an ownership interest. These ports are vital to Northern Europe’s economy.

Following the lead of the German Foreign Office, five more German government ministries joined the opposition to the HHLA sale to China, even as they were pressured to give a green light by Chancellor Olaf Scholz – a kind of political courage almost unheard of in Germany. Evidently, hesitant bureaucrats were less afraid of defying their boss than being linked to a politically fraught deal.

In the end, COSCO has now been offered a compromise solution: It can buy a stake in Tollerort, but only 24.9 percent. It will also not be given a board seat, as originally planned. The German ministries believe this will be sufficient to bar COSCO from involvement in important decisions, but time will tell.

Ships of State

So, to revisit the earlier question, what’s the difference between COSCO and MSC or Maersk?

For one, MSC and Maersk don’t staff their ships with party officers. COSCO, on the other hand, has 1,000 Chinese Communist Party commissars, who cycle through from ship to shore. Ten thousand crewmembers are, themselves, members of the Chinese Communist Party, and there are 150 “special cadres,” who are, more or less, higher-level bureaucratic watchkeepers.

According to COSCO Shipping Seafarer, a publication issued by the company for onboard reading, “the ship's party branch” not only “educates its members about the latest theoretical achievements of the Party” but is also "a core for uniting the masses and a fortress for overcoming difficulties." It layers on: “Crew must prevent the planting of false evidence by foreign hostile forces and safeguard their own rights and interests….”

This doesn’t sound like a normal, everyday merchant vessel. An article published by the United States War College notes that the “vessels that connect these ports into an integrated network of commercial power” – such as, for example, those operated by COSCO – “are ‘ships of state,’ functioning as instruments of Chinese national strategy while they sail as commercial carriers of manufactured goods and commodities.” These notionally independent enterprises, pretending to be part of a free market, in fact benefit from the full financial and political backing of the Chinese government.

Both the Belt and Road Initiative and Chinese state-controlled banks fund COSCO’s acquisitions. The accusation is that these deals are valued at well above market and that the anticipated returns do not justify the cost. The imputation is that COSCO is acting as a proxy, and the acquisition is not being made for strictly commercial reasons. If that is true, it would make sense that China expects to gain some additional political or strategic leverage through the purchase.

Chinese state-owned road and railroad builders are often enmeshed with these efforts, like with the 2019 Belt and Road Initiative loan made to Montenegro for a highway to the port of Bar. Locals there have expressed concern that China, seeking to build up a deepwater harbor on the eastern Adriatic Sea, would possibly use concession clauses in the loan agreement to force Montenegro to give up sovereignty over specific desired land. The interpretation of this concession clause would be subject to Chinese law and take place in a Chinese court.

Business as Usual?

Of course, what can be construed in a sinister way can also be perfectly understandable. As a growing commercial power, it makes sense for China to safeguard its global interests. That means mitigating the many risks it faces to its far-flung shipping interests, ensuring that its wares can reach customers even as they pass through hotspots like the Strait of Malacca and Hormuz or the Suez.

Given the domestic instability the Chinese Communist Party faces whenever it cannot manifest the growth it promised under its various Five Year Plans, is it fair to expect China to meekly rely on the goodwill of its trading partners even as their suspicion of Chinese motives continually increases? Better to buy and consolidate the many various assets required in order to ensure the desired outcomes.

Differences in politics and culture should be addressed and resolved through diplomacy, making room for China to grow as it struggles to find its place in the world order. With temperatures running hot worldwide, though, these moves are more likely to trigger a defensive reaction.

While non-Chinese competitors are beholden to shareholders and quarterly results, COSCO can make bold, uninhibited moves that entail significant financial risk. These, of course, also enhance COSCO’s – and China’s – competitive position, which engenders resentment among those left in the cold. Globally, in 2017, Chinese entities were behind over half of terminal acquisitions. What other free market competitor can draw on a $26 billion line of credit? All it took for COSCO is an item in China’s Thirteenth Five-Year Plan, and the China Development Bank mobilized that money at request.

Drawing the Line

In an ideal world, it would raise everyone up to have significant investments being committed to critical infrastructure like ports, roads, railroads and maritime trade. But that positive perspective is darkening. China is not guided by, as Adam Smith wrote, the “uniform, constant and uninterrupted effort of every man to better his condition.”

In the face of a concerted, worldwide effort to wrest control of and steer a maritime network to favor a tiny, select number of state-backed, state-owned Chinese companies, who can blame other countries, and other interests, for finally daring to say “Yes, but…?”