Chinese Investment and the BRI in Sri Lanka


24 March 2020

China’s Belt and Road Initiative (BRI) is having profound impacts on recipient countries. This paper examines the benefits and costs of the BRI and its projects to Sri Lanka and the lessons that may improve future BRI projects in Sri Lanka and elsewhere.

Ganeshan Wignaraja

Executive Director, Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI)

Dinusha Panditaratne

Non-Resident Fellow and former Executive Director, LKI

Pabasara Kannangara

Research Associate, LKI

Divya Hundlani

Independent Researcher

GettyImages-106945018.jpg

Summary

China’s expansive Belt and Road Initiative (BRI) has led to greater Chinese outbound investment in Asia, including in Sri Lanka. This investment has recently come under scrutiny, due to intensifying geopolitical rivalries in the Indian Ocean as well as Sri Lanka’s prime location and ports in the region.

There are claims that by accepting Chinese outbound investment, Sri Lanka risks being stuck in a ‘debt trap’ and the displacement of its local workers by both legal and illegal Chinese labour. There are also concerns that Chinese investment has led to environmental damage and increased security risks for Sri Lanka and the neighbourhood. Furthermore, there is criticism that institutional weaknesses in Sri Lanka, including a lack of policy planning and transparency, are resulting in nonperforming infrastructure projects funded by Chinese investment.

The pattern of Chinese investment in Sri Lanka reveals a nuanced picture of benefits and costs. Similarly, it shows that a matrix of Sri Lankan, Chinese and multilateral policies are required to maximize the benefits and minimize any risks of Chinese investment. Sri Lanka is not in a Chinese debt trap. Its debt to China amounts to about 6 per cent of its GDP. However, Sri Lanka’s generally high debt levels show the country needs to improve its debt management systems. This step would also reduce any risk of a Chinese debt trap in the future.

Specific projects have contributed positively to Sri Lanka’s economy. Some have brought greater benefits than others, such as the Colombo International Container Terminal (CICT), which has allowed the Colombo port to grow at a rapid pace. However, imports from China for projects in Sri Lanka have widened the trade deficit between the two countries. In addition, there have been only limited economic spillovers for Sri Lanka, including knowledge transfer in the local labour force.

The number of Chinese workers in Sri Lanka is rising but remains a very small percentage of the total labour force. While illegal migration is a concern, there are significantly fewer illegal residents from China than from neighbouring countries. Sri Lanka has relatively strong rules on outward migration but can better regulate inward migration based on labour market demands and economic priorities.

The environmental implications of Chinese investment projects in Sri Lanka are mixed. While earlier projects were more harmful, recent projects such as the CICT and Port City in Colombo have adapted to stricter environmental standards. To ensure consistently high environmental standards, Sri Lanka should strengthen its domestic regulations and seek more investments from green-friendly partners.

Concerns that China will use ports and other projects for military purposes are, in part, driven by geopolitical anxieties. In response, Sri Lanka has strengthened its naval presence at the Hambantota port. Continual oversight by technical experts is required to guard against security-related concerns and ensure public trust in the projects. Such trust will also grow by improving transparency and by pursuing a long-term, national infrastructure development plan.

Source: chathamhouse.org “Chinese Investment and the BRI in Sri Lanka”

Note: This is chathamhouse.org’s article I post here for readers’ information. It does not mean that I agree or disagree with the article’s views.


China Moving Export-oriented Enterprises to Silk Road Belt


In its article “Industries may relocate to Pakistan due to covid-19” on March 12 Pakistan media Tribune quotes State Bank of Pakistan (SBP) Deputy Governor Dr Murtaza Syed as saying that after recovery from coronavirus, the world is likely to reconsider the global supply chains to avoid concentration of industries in one country, China, which will create opportunities of relocation of some industries to Pakistan.

Syed hopes that industries will move from China to Pakistan. That is precisely what China wants in its Belt and Road initiative. China is now switching from export- and investment-geared economic growth to innovation-, creationg- and consumption-led economic growth but it is hard to transform all its export-oriented enterprises into innovation- and creation-geared ones so that it has to move those it cannot transform to Silk Road economic belt including Pakistan.

Moreover, US trade war offensive is forcing China to move enterprises geared for export to the US out of China to avoid tariff hikes.

Pakistan, Myanmar, Bangladesh, Laos, Cambodia, Vietnam, etc. are all destinations for such removal as they are all in Silk Road economic belt. Syed is wise to see and wants to grab the opportunity.

Comment by Chan Kai Yee on Trubune’s article, full text of which can be viewed at https://tribune.com.pk/story/2174277/2-industries-may-relocate-pakistan-due-virus/.


CPEC: The ball is in Pakistan’s court


Afshan SubohiUpdated February 10, 2020

China asserts that it is not wavering from its commitment to assist Pakistan in the second, people-centric phase of the China-Pakistan Economic Corridor (CPEC). — AP/File

China asserts that it is not wavering from its commitment to assist Pakistan in the second, people-centric phase of the China-Pakistan Economic Corridor (CPEC).

Despite being embroiled in multiple problems — the virus epidemic, growth moderation and trade spat with the United States — the Asian dragon is all set to commit $1 billion in the current calendar year to kick-start the next phase of CPEC.

In an exclusive interaction with Dawn, China’s Consul General in Karachi Li Bijian was open and clear about the mutual relationship and its future. He dismissed the perception that China is disillusioned by the Pakistani leadership and has adopted a wait-and-see strategy before committing support for CPEC’s second phase.

This is a figment of some naïve elements’ imagination. Nothing can be far from the truth. I can confirm that China has helped Pakistan close physical infrastructure gaps in the first phase and wishes to see benefits of this massive investment flowing to Pakistani youth, farmers, labour and disadvantaged segments in the second phase,” he asserted.

He declined to comment on a possible US role in peddling doubts about CPEC and its cost.

We can’t order private investment. We know well it will not be persuasion but the profit expectation and risk coverage that will mobilise them,’ CG Li

The second phase of CPEC is focused on public and private collaboration in industrial, agriculture and social sectors (poverty alleviation, training and research to transform industrial/agriculture sectors to improve productivity and competitiveness). The specifics of commitments for the identified projects have yet to be finalised, but about $1bn is expected to land in the country over the next 11 months.

In the first phase, the thrust was on bridging the physical infrastructure deficit (electricity, logistics and the port). Big-ticket projects close to $21bn in energy, transport infrastructure and Gwadar Port are either complete or about to finish shortly.

Expanding on his argument, the consul general stated: “The relationship between the two countries is not transactional. We are long-term partners who share the common dream for a just and inclusive order that affords decent living standards for all citizens. China chose Pakistan to be the first stop for its One Belt, One Road vision.”

If there was some confusion in the party that assumed power after the 2018 general elections, it has been cleared. We know the current leadership in Pakistan understands and acknowledges CPEC’s value for the country and its future,” he added, putting to rest the perception of deliberate reluctance on either side.

He also mentioned the revised China-Pakistan Free Trade Agreement (FTA) that has added 301 items to the list of articles enjoying duty-free access to the gigantic Chinese market. “It can translate into $6bn worth of additional export from Pakistan to China if the potential of the facility is properly leveraged,” Mr Li elaborated.

To a question regarding little interest among private Chinese companies in relocating their operations in Pakistan, the consul general was not apologetic. He attributed it to a lack of suitable business environment that had de-motivated even local investors.

We can’t order private investment. Yes, we are encouraging companies. We know well that it will not be persuasion but the profit expectation and risk coverage that will mobilise them. We are engaging with the relevant quarters in Pakistan to work out an incentives package for Chinese investors in special economic zones (SEZs).”

About $1bn is expected to land in Pakistan over the next 11 months as part of the second phase of CPEC

Elaborating on multiple factors that influence the decision of Chinese companies about the destination of their overseas investment, he mentioned the low quality of workforce in Pakistan. “Finding workers with required skills was identified as a big challenge by prospective Chinese investors. We intend to initiate more skill training programmes for workers in Pakistan to ensure the availability of employable youth for Chinese companies setting up shop here. Currently, we are setting up one such facility at Gwadar.”

Commenting on the current slump in Chinese funding, the consul general mentioned multiple challenges that his home country is facing. “Taking care of I.4bn- strong population is not a mean challenge in itself, especially when the GDP growth rate has moderated to 6.1 per cent from over 8pc annual average. The global slowdown and trade frictions with the United States are there. The fear of a virus epidemic in a country of high population density has soaked up the government attention. In this environment, China can’t afford to be too generous. Like others, we also need to justify to our people the resources diverted to other countries.”

He said the next Joint Coordination Committee meeting is still on the agenda. “The tradition of top-level exchange of visits will be maintained this year. Such frequent bilateral visits will further promote and strengthen the existing relations and cooperation.”

Experts involved in CPEC-related affairs agree that sometimes China raises issues, but it would be wrong to interpret those as second thoughts on Pakistan. “The problem is on Pakistan’s side. The PTI leadership took long to absorb the value of Chinese support to the economy that is on a slippery slope. All members of the leading team might still not be fully convinced by the official line to make CPEC fly. This, however, has proven to be insufficient.

The Khan government is still struggling to put in place a workable mechanism acceptable to all federating units for implementing the second phase of CPEC,” a well-connected source in Islamabad commented.

Several attempts to reach retired Lt Gen Asim Saleem Bajwa, chairman of the China-Pakistan Economic Corridor Authority (CPECA), for his input did not succeed.

Zafar Hasan, federal secretary for planning, was upbeat about the future of CPEC. He confirmed that the incentives package for local and Chinese investors in SEZs was in the works in collaboration with Chinese counterparts.

He defended the newly established autonomous authority that he said would be sufficiently empowered and made financially independent to coordinate and streamline dealings with all relevant departments and ministries and lower tiers of the government in CPEC-related projects across Pakistan.

As for the past and present inflow of funds from China, Mr Hasan said working out the exact quantum was a little difficult and involved monetising goods and services associated with CPEC projects. He did not confirm or dismiss the projection of $1bn worth of support in 2020 mentioned by the Chinese consul general.

The intent might be there but the pace of progress is woefully slow. It is almost criminal. The government must immediately remove irritants delaying the arrival of Chinese investment that might ease economic stress through job creation or the strengthening of social protection programmes,” commented a senior officer anonymously.

Published in Dawn, The Business and Finance Weekly, February 10th, 2020

Source: Dawn “CPEC: The ball is in Pakistan’s court”

Note: This is DAWN’s article I post here for readers’ information. It does not mean that I agree or disagree with the article’s views.


Pakistani PM Prioritizes Implementation of CPEC Projects


PM Khan chairs a meeting. Photo: APP

In its report “PM Imran reviews CPEC progress, directs ministries to fast-track projects” on January 29, Pakistan’s geo.tv says that Pakistani Prime Minister Imran Khan told officials at a high-level review meeting to ascertain progress on different CPEC projects that the China Pakistan Economic Corridor (CPEC) should be completed on a fast-track basis.

The report says, “Lauding the time-tested friendship with China, the premier said China had always supported Pakistan during difficult times and the CPEC was a manifestation of the partnership between the two countries” and “‘Chinese experiences in the social sector, especially for the eradication of poverty and promotion of agriculture, must be fully explored,’ the prime minister said, according to the media wing of the PM Office.”

CPEC and the China-Myanmar Economic Corridor are of vital strategic importance in China’s Belt and Road initiative (BRI) as they will provide vital trade routes to China’s west. The BRI railway connections to China’s west through Central Asia and Russia lack volume and are slow and too expensive to accommodate China’s huge volume of trade with Europe, the Middle East and Africa. BRI’s 21st century maritime Silk Road through Pakistan and Myanmar will provide shortcut to bypass the Malacca Strait. The route through CPEC is especially secure due to Iran’s friendship with Russia and China and enmity against the US. Iran may protect China’s trade route there.

Comment by Chan Kai Yee on geo.tv’s report, full text of which can be viewed at https://www.geo.tv/latest/269622-pm-imran-reviews-progress-on-cpec-directs-ministries-to-fast-track-projects.


China’s Xi Ensures Bypassing Malacca Strait


I have mentioned in my post “US Helpless as China Has Turned South China Sea into Its Lake” yesterday that with the deployment of J-20 for air supremacy and the construction of artificial islands, China has turned the South China Sea into its lake. The US is simply unable to win a war by direct attack at Chinese homeland.

However, powerful US military is still able to cut China’s trade lifelines though the oceans controlled by powerful US Navy. The trade lifelines through the Indian Ocean is especially vital for Chinese economy especially the imports of oil and gas from the Middle East and China’s shipping to EU, Middle East and Africa through Indian Ocean.

For security of China’s trade lifelines China has first to bypass the Malacca Strait, which can easily be blocked by US troops stationed in Singapore.

To do so, China has three alternatives, the best is to build a canal through Kra Isthmus (Kra Canal), which will shorten shipping route by 2,000 km for China, Japan and South Korea. However, as France, UK and USA all have to finally waive their ownership of Suez and Panama Canals, China certainly knows that it cannot own Kra Canal even if its construction is entirely funded by China. Build a canal all with its own funds to benefit not only itself but also Japan, South Korea, etc. is not a good idea. Moreover, Thai politics are not stable enough to ensure secure use of the canal.

Another alternative is a pan-Asian railway through Laos, Thailand and Malaysia to the west coast of Malaysia. China is building sections of the railway in Laos (China-Laos Railway) and Malaysia (East Coast Rail Link), but the construction of the section through Thailand has not been ensured. Moreover, there will certainly be political risks and diplomatic difficulties for a route through three foreign countries.

Therefore, the third and practically best alternative is the construction of a port at Kyaukpyu, Myanmar and a railway between Kyaukpyu and China’s Ruili.

This shortcut to bypass the Malacca Strait is much simpler as it goes through only one foreign country Myanmar, which is now politically stable and has close ties with China due to Western pressure on it over the Rohingya issue.

Reuters’ article “Myanmar, China ink deals to accelerate Belt and Road as Xi courts an isolated Suu Kyi” on January 18 says China and Myanmar signed 33 deals during Chinese President’s recent visit to Myanmar.

Among the deals are the projects of a deep sea-port in Kyaukpyu China has been building and a railway linking the port with China. Xi has thus ensured Southwest China’s trade route to bypass the Malacca Strait. That will be a major section of China’s 21sta century maritime Silk Road, the Road in China’s Belt and Road.

Reuters says that China is courting Myanmar, but from the video footage about Myanmar people’s enthusiasm in welcoming Xi, we see Myanmar is courting China for win-win cooperation with China to lift them out of poverty. China is courting Myanmar with its Chinese model of lifting people out of poverty and improving people’s living standard. That model has much greater impact than Rohingya issue. It is the major factor that enable the success of China’s BRI in Central Asia, Pakistan, Bangladesh, Sri Lanka, etc.

Another major section of the maritime Silk Road is the China-Pakistan Economic Corridor that links Northwest China with the Middle East and Africa.

Comment by Chan Kai Yee on Reuters’ article, full text of which can be viewed at https://www.reuters.com/article/us-myanmar-china/myanmar-china-ink-deals-to-accelerate-belt-and-road-as-xi-courts-an-isolated-suu-kyi-idUSKBN1ZH054


High expectations for Xi Jinping’s visit to mark 70th anniversary of China-Myanmar relations


Two-day trip could be ‘milestone’ for relations if progress on Rohingya refugee crisis and stalled US$3.6 billion Myitsone dam project can be made

Xi’s visit could involve ‘dozens’ of cultural, political and economic agreements

Keegan Elmer

Published: 7:37pm, 13 Jan, 2020

Updated: 11:27pm, 13 Jan, 2020

Chinese President Xi Jinping will try to kick-start stalled Belt and Road Initiative projects and attempt to mediate in the Rohingya crisis during a two-day visit to Myanmar this week to mark the 70th anniversary of relations between the nations, analysts said.

Ties between Myanmar and China – its biggest trading partner – have strengthened rapidly in recent years, although violent conflicts and one of the world’s largest refugee emergencies pose major challenges to Beijing’s goals in the Southeast Asian country.

Xi’s visit is expected to begin on Friday, the first by a Chinese leader since Jiang Zemin 19 years ago, and may be a “milestone” for bilateral ties, according to Beijing’s senior envoy in Naypyidaw, Myanmar’s capital.

Xi would meet the country’s senior military and political leaders, and the two sides were expected to sign “dozens” of agreements in culture, politics and the economy, state newspaper Global Times quoted Chen Hai, China’s ambassador, as saying on Sunday.

He said Xi would meet President Win Myint and attend a banquet hosted by State Counsellor Aung San Suu Kyi, the country’s de facto political leader since 2016 and head of the ruling National League for Democracy (NLD).

Xi will also meet Min Aung Hlaing, commander of Myanmar’s armed forces and still a powerful political player following the country’s transition to democracy from military government in 2015.

The visit is expected to touch on topics such as long-stalled investment projects including the Myitsone dam, and Myanmar’s border crisis with Bangladesh.

Dr Renaud Egreteau, of the department of Asian and international studies at City University of Hong Kong, said that the trip would be a major diplomatic move by China’s leader.

President Xi certainly seems to want reassurance from Myanmar that under the NLD, the country will continue to adhere to its commitment to engage in an array of belt and road projects – some having lingered for more than a decade,” Egreteau said.

On Friday, Suu Kyi made a rare visit to northern Kachin state, which borders China and where the US$3.6 billion Beijing-funded Myitsone dam project has been idle since 2011 after residents protested about having to abandon homes, land and farms.

At a meeting to announce Xi’s trip to Myanmar, foreign vice-minister Luo Zhaohui said China and Myanmar were “still maintaining close communication” on the dam.

The northwestern state of Rakhine, a region of armed conflict and the heart of the Rohingya refugee crisis, will also figure in Xi’s visit.

An oil pipeline to Kunming in China’s southern Yunnan province and a seaport on the Indian Ocean are two belt and road infrastructure projects in Rakhine, where Myanmar’s military and thousands of ethnic Rakhine rebels clash.

Listing priorities for cooperation with Myanmar, Chen said China would “help Myanmar and Bangladesh resolve the Rakhine issue through negotiations”.

The biggest issues aren’t between China and Myanmar, but between Myanmar and Bangladesh,” said Wang Dehua, researcher at the Chinese Association for South Asian Studies, referring to the hundreds of thousands of Rohingya refugees who have sought shelter in Bangladesh. “China will try to mediate, this is clear,” he said.

But China has been the only major world power to support Myanmar’s handling of the crisis which has brought strong international criticism down on Nobel Peace Prize winner Suu Kyi.

Half a million minority Rohingya Muslims fled after Myanmar military attacks in 2017, which United Nations High Commissioner for Human Rights Zeid Ra’ad Al Hussein called “textbook ethnic cleansing”.

I think there are numerous expectations for Xi’s visit, but there is also trepidation that the high-level visit is predicated on China cashing in on its diplomatic support for Myanmar over the Rakhine crisis, and unsticking stalled CMEC [China Myanmar Economic Corridor] projects,” said David Mathieson, an analyst based in Yangon.

The Western opprobrium heaped on Myanmar was not mired by China, who balanced its strategic interests with shoring up support for the NLD government, and now it’s time for China to use that support to get its trade and infrastructure projects moving faster.”

Source: SCMP “High expectations for Xi Jinping’s visit to mark 70th anniversary of China-Myanmar relations”

Note: This is SCMP’s article I post here for readers’ information. It does not mean that I agree or disagree with the article’s views.


Iran, Russia, China to Hold Joint Wargames in ‘Message to the World’


Adam Kredo – November 27, 2019 1:25 PM

Iran, China, and Russia will hold in the coming weeks their first-ever joint war drills, which leaders say are meant to send a “message to the world” about increased military cooperation between the rogue countries.

The commander of Iran’s navy, Rear Admiral Hossein Khanzadi, said Wednesday that the Islamic Republic will team up with Moscow and Beijing within the next month to hold the mass war drills.

“When we talk about joint wargames, we are talking about two or more countries with a high level of relations in various political, economic and social fields, which culminate in cooperation in the military sector, with wargames usually being the highest level of such cooperation,” Khanzadi was quoted as saying in remarks to Iran’s state-controlled press.

“A joint wargame between several countries, whether on land, at sea, or in the air, indicates a remarkable expansion of cooperation among them,” the military leader said.

The joint war drills will be aimed at sending a message to the world, particularly Western nations, like the United States, that have sought to constrain Iran’s expanding military ambitions.

“The joint wargame between Iran, Russia, and China, which will hopefully be conducted next month, carries the same message to the world, that these three countries have reached a meaningful strategic point in their relations, with regard to their shared and non-shared interests, and by non-shared I mean the respect we have for one another’s national interests,” Khanzadi was quoted as saying.

The Iranian military leader emphasized the importance of performing military drills in the sea, where the Islamic Republic has been particularly troublesome for Western nations. Iranian naval vessels routinely harass American military ships and have played a role in various sabotage efforts aimed at disrupting international shipping lanes.

“The wargame seeks to deliver this message to the world that any kind of security at sea must include the interests of all concerned countries. We do not condone the kind of security that only caters to the benefits of one specific country at a specific time and which disregards the security of others,” Khanzadi said. “Seas, which are used as a platform for conducting global commerce, cannot be exclusively beneficial to certain powers.

Source: Washington Free Beacon “Iran, Russia, China to Hold Joint Wargames in ‘Message to the World’”

Note: This is Washington Free Beacon’s report I post here for readers’ information. It does not mean that I agree or disagree with the report’ views.

This blogger’s note: With China-Pakistan Economic Corridor (CPEC), Gwadar Port, and Iran, China and Russia’s joint protection of sea route in the Middle East, China’s maritime Silk Route through the Indian Ocean is secured.