China’s dubious trade diplomacy

Sri Lanka buckles under mounting Chinese debt trap

No other country in the contemporary times has mastered the skill of intricately entwining strategic interests with trade dealings as China does. Mounting evidences and an in-depth analysis of China’s expanding footprint across the countries clearly validates the fact. The “Middle Kingdom” which is fiercely ambitious of realizing the “China dream” scrupulously adhered to a long term foreign policy which though overtly benign had paved for its formidable hegemonic rise. China began its modest journey by fostering ties with resource rich nations initially to satiate the unquenchable appetite of its burgeoning economy. At the height of financial boom, China made deeper forays and strengthened trade ties with strategically important countries by extending loans and positioning itself as a benevolent power. As the mounting debts and economic downtrend began to loom large on China around 2010, China shifted gears. To keep its manufacturing sector running and to save its economy from decline, China unveiled high-profile infrastructure initiatives- 21^st century Maritime Silk Route (MSR) or One Belt One Road (OBOR). It quickly lapped up support of several Eurasian, East African, South Asian, and South East Asian countries with a promise of increasing connectivity and prosperity. Under OBOR and MSR China undertook major infrastructure projects like construction of airports, deep-water ports, highways, railways, oil and gas pipelines. This systematic engagement reached new heights with countries like Pakistan, Sri Lanka, Laos, Cambodia, Thailand, Malaysia, Central Asian countries, Africa, Latin American and Australia.

Through OBOR, China plans to connect land-based economic corridors of Eurasian region while MSR aims at linking the ports across the South China Sea, Mediterranean Sea, and Indian Ocean.  Through various phases China aims to reconstruct 2^nd Century BC, Han Dynasty rulers’ ancient silk route.

Phase 1: China to Mongolia and Siberia

Phase 2: Gaining access to Indian Ocean by connecting Western province of Xinjiang to Arabian Sea through CPEC (China Pacific Economic Corridor). Alternatively, a network of ports, railways, oil pipelines passing through India, Bangladesh and Myanmar, (BCIM corridor) will connect South Western provinces of China to Indian Ocean.

Phase 3: Unstinted connectivity to vital trading hub of around Malacca Straits, through China-Indo China Peninsula Economic Corridor. Through a series of ports and high speed rails China aims to stay connected with the financially robust South East Asian countries. Phase 4: two robust rail networks, one-connecting Henan province, Sichuan province and Xinjiang to economic corridors in Poland, Germany, and Netherlands via Central Asia, Iran, and Turkey. Second, a Eurasian Land Bridge reaching Europe through Russia.

Under MSR, China is also simultaneously developing a network of ports which include Djibouti, Kenya, Tanzania, and Mozambique to Red Sea passing through Greek Port of Piraeus, Central and South Eastern Europe (through a high-speed rail network to Serbia, Hungary and Germany). To implement and execute this massive infrastructure projects China had created financial institutions-AIIB and New Development Bank with lending capacity of $200 billion. It has precociously instituted a regional bloc and diligently groomed the group under the aegis of Shanghai Cooperation Organization (SCO) seeking the cooperation of all the key partners (Russia, Kazakhstan, Tajikistan, Kyrgyzstan, Uzbekistan and recently offered membership to India, Pakistan, and Iran) vital for implementation of its infrastructure initiatives. China which officially unveiled its plan in 2013 had prepared ground for realizing the 21^st century MSR by bringing several countries on board much earlier. To advance its geostrategic interests, China began effectively utilizing all the economic tools at its behest. It began offering huge amounts of loans for infrastructure development to developing countries which are strategically beneficial for China and not necessarily financially viable for the recipient countries. Eventually countries soon found themselves caught in a debt trap, subservient to Chinese overbearing.

In a case of classical neo-colonization by China, Sri Lanka is bearing the brunt. China, keen on establishing a foot hold in Indian Ocean region befriended Mahinda Rajapaksa of Sri Lanka facing a worst domestic insurgency. It helped Rajapaksa government to crush Tamil Tigers and later cemented the ties by offering Official Development Assistance (ODA) and Foreign Direct Investment (FDI) to a tune of $14billion between 2005- 2015. China extended ODA of $12 billion in infrastructure, energy, and services sector at an interest rate of 2-5%. The two flagship projects of China in Sri Lanka are the Hambantota Port Development and Colombo Port Project, both located along the strategically important trade routes. In 2005, China’s FDI investment was $16.4 million or just 1% but now it is $338 million making it 35% of FDI overtaking traditional aid providers Netherlands, Japan, India, Malaysia, and Singapore. Hambantota port built from $1.7 billion Chinese loans in 2008 hardly generates any revenue and even the Mattala Rajapaksa International Airport near Hambantota opened in 2013 soon became world’s emptiest airport. The huge infrastructure embellishments have now become white elephants. Sri Lanka in a bid to decongest the only international airport at Colombo and to reduce social and economic disparities between different regions of the country aspired to transform Hambantota into the second most important city of Sri Lanka. China capitalized on the aspirations of Rajapaksa who wanted to develop this city since it was his native region. While the interest rates on the loans is now reaching whopping $17 million a year, this immense infrastructure has hardly stimulated local economies. Needless to say, this colossal project failed to generate employment to locals since China would always bring its own manpower for management of their projects. While Sri Lanka is grappling mounting debt trap China is hardly worried as things are working the way it wanted. China wooed Sri Lanka to make the island a hub for MSR in Indian Ocean and it served another purpose of containing India.

Hambantota is 1300km away from India’s two strategically important ports at Visakhapatnam and Andaman &Nicobar Islands. It is 500 km away from India’s most prized scientific station, Sriharikota. With China in India’s backyard, New Delhi’s traditional contention of Indian Ocean its “sphere of influence” has ended. Though China, repeatedly asserted that Hambantota port will not be used for military purposes, things on ground are rather the opposite. In 2014, two nuclear submarines of China docked at Chinese operated Colombo port twice. New Delhi raised alarm and reminded President Rajapaksa that under the bilateral maritime deal Sri Lanka is mandated to inform India about port calls. But apparently, Sri Lanka neck in debt trap laid by China was helpless. As per a report, it is estimated that, the debt to GDP ratio of Sri Lanka is currently 75% and over 95% of government’s revenue goes towards debt repayment. Now with the euphoria of China collaborated infrastructure development dying down; the real intent of Dragon has become imminent. With expensive ports and airport registering losses, public outrage stoked by political opponents led to overthrowing of the pro-China, Rajapaksa government which turned the island into a Chinese colony in 2015. The new President, Maitripala Sirisena rode to power on the promise of scrapping all China-based projects. Upon assuming charge, he suspended major Chinese projects including the Colombo Port City citing the need for proper environmental clearance. Colombo part project is supervised by the China Communications Construction Company (CCCC), a subsidiary of China Harbor Engineering Company (CHEC) which was blacklisted by World Bank. Accordingly, the company was barred from participating in any constructions funded by World Bank implying that projects undertaken by CCCC will be entirely financed by China (which offers loans at high interests). With pressure of debts increasing, Sirisena needed fresh credit. He ordered for restarting the suspended projects, awarded new projects, and agreed to sell 80% stake in Hambantota port to China. But China stalled $1.1 billion investment for Colombo port development linking it to finalization of acquisition of 15,000 acres near Hambantota airport, 99-year lease of the 110 hectares reclaimed land and sale of 20-hectare land near the Colombo International Financial City. India uses Colombo port for more than 70% of its shipping and hence raised concerns over sale of 20-hectare land to CHEC. Sri Lanka’s bid to sell 15,000 acres near Hambantota is now facing stiff domestic and political opposition backed by Rajapaksa. Now the deal is challenged in court.

In past one decade, China successfully reduced the island nation into its conclave by replacing all its donors. It steadily emerged as its largest donor, investor, and biggest trade partner. Fearing the wrath of Western nations for human rights violations perpetrated in culling the Tamil Tigers, Rajapaksa embraced China. China shielded Sri Lanka against international condemnation by vetoing discussions at Security Council. Now by desperately reducing the island into its colony and deftly coercing Colombo to sell 15,000 acres near Hambantota port, China accomplished its goal of positioning at a strategically important location along the MSR. China has by now excelled the use of economic tools to coerce nations to fall in line. With its deep pockets, it slowly turned small nations into neighbor by capitalizing on their pitfalls.

Understandably so, hawkish strategic experts aren’t shying away from pronouncing China as the 21^st century East India Company. Undeniably, Chinese foreign policy reminisces the vicious strategies of the 19^th Century European Colonial powers. In the ensuing articles, which will run as a series, the intricate nuances of China’s foreign policy formidably rooted in trade diplomacy with various countries will be discussed.

@ Copyrights reserved.