Sri Lanka and China’s Indian Ocean Strategy


February 22, 2017

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Number 372 | February 21, 2017

ANALYSIS

Sri Lanka Suffers from China’s Indian Ocean Strategy

By Shiyana Gunasekara

Amidst local protests against the Chinese presence in the southern Sri Lankan town of Hambantota, Beijing insists that the town’s port project has been discussed in the “spirit of equality and mutual benefit, and follows market rules.” China’s activity in the Indian Ocean – particularly in Sri Lanka, which is a focal point in China’s One Belt One Road (OBOR) plan – appears to be predatory lending under the guise of economic development.

India needs to recalibrate its strategy towards the other South Asian countries for its own security, if not regional stability; however, Delhi has yet to offer a comparable alternative to doing business with China. Instead, India has taken its asymmetric power in the region and the de facto allegiances of its much smaller neighbors for granted.  With China’s recent track record of placing military vessels in traditionally commercial docks, India must take its role as the South Asian hegemon seriously.

Image result for hambantota port china

80% share of  Sri Lanka’s Hambantota Port goes to China

In October 2016, Sri Lanka’s Prime Minister Ranil Wickremesinghe announced that the China Merchants Holdings (International) Company Ltd. would hold an 80% share of the Hambantota Port in exchange for over USD $1 billion in the country’s debt.  This should be of particular concern to India, since China has used the Colombo South Container Terminal, owned by the same Chinese firm, to dock submarines, as opposed to the Sri Lanka Port Authority’s mooring designated for military vessels.  Previously, Colombo intended to hide visits of two other Chinese naval vessels from the media. With the majority of the Hambantota Port sold to China’s semi-private sector, India should be prepared for another visit by the People’s Liberation Army (PLA) Navy – perhaps for a much longer period of time.

The complete details of Chinese loans and other financial assistance have not been disclosed to the public, notably including details of the loan interest rates. China leads the country’s foreign inflows, with 98% of Chinese assistance to Sri Lanka being loans and only two percent as grants. China’s Export-Import Bank accounts for 77% of these loans, with 14% coming from the China Development Bank, and five percent from interest-free loans. China’s Export-Import Bank has notoriously given loans to countries on its OBOR initiative with strict self-serving procurement and contracting regulations: Chinese companies must be awarded the contract, both for the project itself and for procurement, and at least 50% of project procurement must be services, equipment, technology and materials from China.

Foreign direct investment and other forms of financial engagement from a G2 country to an emerging economy should be focused on market-friendly approaches to supporting economic development in the latter. Chinese investment in Sri Lanka, and other countries along China’s visionary trail would be a true boost to the local economy if the loan money were staying in the country through greater local employment and project procurement. Instead, Sri Lanka borrows money from China, which China requires to be used to contract largely state-owned Chinese companies. These companies provide salaries to Chinese employees who come to Sri Lanka to build infrastructure projects using mostly Chinese materials and technology.

The Mattala Airport and the Hambantota Port are prime examples of large-scale infrastructure projects financed by China that did not promote local economic development.These projects were purely gambles by the former Sri Lankan government, for which there was no guaranteed return on investment – a risky move for an economy coming out of an expensive three-decade war.

Sri Lanka, undergoing vast economic reforms outlined by the International Monetary Fund (IMF), might not be the only South Asian state that will have to be bailed out due to crushing Chinese-owned debt.  An IMF report on the Chinese-Pakistan Economic Corridor (CPEC), noted that import requirements of the project “will likely offset a significant share of inflows, such that the current account deficit would widen.” While the IMF acknowledges that the long run benefits may help mitigate said costs, such success is not guaranteed, as seen in Sri Lanka.  Hence Pakistan too should take into serious consideration the equity-for-debt swap that Sri Lanka was forced into due to the island nation’s ill-advised decisions and China’s over-eagerness to offer self-serving loans.

India is the largest power in South Asia in essentially every measure, and should continue to initiate deeper maritime collaborations with its neighbors for its own interests as well as for the benefit of the region. India can accomplish this goal by providing fiscal alternatives for its smaller neighbors to develop their infrastructures and human capital that are more favorable than Chinese-financed loans with unclear intentions.

China is a pragmatic power, and most likely foresaw Sri Lanka’s economic decline that resulted in Chinese ownership of the Hambantota port. China’s actions of fostering questionable loan conditions and blurring the line between commercial and military objectives do not correspond to its purported aim of establishing a positive public image. Ultimately, if China commits to increased transparency, its ambition to become a re-emerging global power will be better received.

About the Author

Shiyana Gunasekara is a masters candidate at Johns Hopkins School of Advanced International Studies focusing on international economics and Asian affairs, and was a Fulbright Scholar to Sri Lanka in 2014-2015. She can be contacted at Shiyana.Gunasekara@jhu.edu

The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue.

Established by the US Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.

The Asia Pacific Bulletin (APB) series is produced by the East-West Center in Washington.

APB Series Editor: Dr. Satu Limaye, Director, East-West Center in Washington
APB Series Coordinator: Peter Valente, Project Assistant, East-West Center in Washington

The views expressed in this publication are those of the authors and do not necessarily reflect the policy or position of the East-West Center or any organization with which the author is affiliated.

6 thoughts on “Sri Lanka and China’s Indian Ocean Strategy

  1. China is building ports in Sri Lanka, Myanmar, and Malaysia (in Malacca and Kuantan…?) in the Indian Ocean and beefing up its Blue Ocean Navy with aircraft carriers and destroyers to safeguard its strategic interests. –Din Merican

  2. While America is busy bombing, China is busy building. China is fast growing into history’s most extensive global commercial empire.

    Chinese-financed and -built dams, roads, railroads, natural gas pipelines, ports, and airports are either in place or will be from Samoa to Rio de Janeiro, St. Petersburg to Jakarta, Mombasa to Vanuatu, and from the Arctic to Antarctica. Many are built in service of current and prospective mines, oilfields, and other businesses back to China, and at times to markets abroad. While this grand picture suggests a deliberate plan devised in Beijing, it also reflects an unbridled commercial frenzy. Chinese companies are venturing out and doing deals lacking any particular order. Mostly, they’re interested in finding growth abroad that is proving difficult to manage at home. This, too, is typical for a fast-growing power.

    On land, Beijing has in mind a high-speed rail network. It starts in Kunming, the capital of Yunnan province, and connect with Laos and on into Cambodia, Vietnam, Myanmar, Thailand, Malaysia, and Singapore. Another overland network of roads, rail and energy pipelines begins in Xi’an in central China and head west as far as Belgium. Beijing has already initiated an 8,011-mile cargo rail route between the Chinese city of Yiwu and Madrid, Spain. Finally, another 1,125-mile-long bullet train starts in Kashgar and punch south through Pakistan to the Arabian Sea port of Gwadar.

    At sea, a companion 21st-century Maritime Silk Road would connect the South China Sea, and the Indian and South Pacific oceans. China would begin to protect its own sea lanes as well. On May 26, 2015 it disclosed a strategy for expanding its navy into a fleet that not only hugs its own shores, but can wander the open ocean. China’s maritime ambitions envision modern ports from Asia to Africa — in Cambodia, Malaysia, Burma, Sri Lanka, Pakistan, Tanzania, Mozambique, Gabon, Ghana and Senegal.

    China does not need to build all of these thousands of miles of railroads and other facilities. Much of the infrastructure already exists; where it does, the trick is to link it all together.

    Everywhere, new public works will be required. And to make its vision materialize, Beijing must be careful to be seen as generously sharing the big engineering and construction projects. Up to now, such contracts have been treated as rare, big profit opportunities for state-owned Chinese industrial units. If local infrastructure companies are excluded from the largesse, there will be push-back on almost every continent.

    I expect the United States to continue to instigate troubles in the East and South China Seas to disrupt this Chinese ambition. And India will do likewise in the Indian Ocean. Xi has invited Modi many times to join the OBOR initiative (especially the China-Pakistan Economic Corridor) but got cold shoulders in return. The protests in the Sri Lankan town of Hambantota had Indian fingerprints all over.

  3. Neo-colonialism?

    Neo-colonialism is the practice of using capitalism, globalization and cultural imperialism to influence a developing country in lieu of direct military control (imperialism) or indirect political control (hegemony)

    Yes, history does repeat itself by the strangest or most ironic of repeaters.

  4. Quote:- “China would begin to protect its own sea lanes as well”

    For the last few thousand years empires of all shapes and sizes, created mostly by conquest with raw military power often times with some kind of god leading or pointing the way, have never lasted or even survived very long beyond the death of the conquering monarch or general.

    Why?

    Because it is always easier to conquer than to keep the conquered conquered.

    Of course China is not conquering anyone, just doing a modern World wide version of Japan’s pre-war “Greater East Asia Co-Prosperity Sphere” We all know how that idea ended, namely the Americans thought it was a bad idea.

    Yes, believe it or not, history does have a very bad habit of repeating itself. And the Chinese of all people, (what with their 5000 years of proudly remembered history), forgot about that.

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