China’s debt trap diplomacy

For India, China's growing presence around its periphery will continue to pose challenges.

 Sirisena, Xi, Chinese, Harsh Pant, Hambantota, Strategic Studies, Debt Trap

Sri Lankan President Sirisena with Chinese President Xi

With Sri Lanka Ports Authority agreeing to sell a 70 percent stake in the Hambantota port to China Merchants Ports Holdings last week, Sri Lanka finally concluded its $1.12 bn agreement with the state-run Chinese firm to operate the port in the southeast of the country. The government gave its consent almost six months after the framework agreement was signed as the deal got bogged down in local protests. Now the stage is set for China Merchants Ports Holdings to run the workings of the newly constructed port over a 99-year lease.

For China the Hambantota port has long been a strategic priority given its Maritime Silk Road ambitions and Beijing has been quite active in trying to salvage this deal. Sri Lanka is located on the critical sea route for oil shipments travelling from the Middle East, making energy security an important reason for China to invest. It has been suggested by the Chinese firm that “with these maritime infra-structure investments, and other diverse investments such as the proposed international maritime center, Sri Lanka will be well positioned to play a strategic role in the one-belt-one-road initiative of China.”

For Colombo, however, the project has turned into a nightmare since its opening in 2010. Sri Lankan Ports Minister Mahinda Samarasinghe had made it clear that Sri Lanka “cannot afford to continue to pay” back the loans without better returns at the port. The Sirisena government has blamed the debt on former President Mahinda Rajapaksa, whose government was keen on Beijing getting this project. The Export-Import Bank of China had provided a large chunk of more than $361 million of its construction financing. With the signing off the final pact, the Sri Lankan government is confident that it would be able to repay the loans with $1.12 billion even as the Chinese firm is expected to invest an additional $600 million to make Hambantota port operational.

There have been local protests for months now against what the local opposition viewed as a plan to take over private land for the industrial zone in which China will have a major stake as well as anger at the Chinese control of the port. Reservations have also been expressed by the opposition parties with some demanding that the agreement not be signed till it is debated in the parliament.

After the Sirisena government came to power in 2015, it was quite vocal in its desire to reduce Sri Lanka’s reliance on China, but financial pressures became too hard to ignore. With the island nation’s total debt standing at $64bn, almost 95% of all government revenues go towards debt repayment. China presented itself as an easier lender of last resort.

India, along with other states like the US and Japan, had also raised the issue of security with Colombo. Sri Lanka has assured India that there are no security issues over the port, which it says will only be used for commercial purposes. According to the Sri Lankan government, “no naval ship, including Chinese vessels, can call over at the Hambantota Port without our [Colombo’s] permission.” The revised deal with China provides for the formation of two companies to split the operations of the port in which China will run the company that will be in charge of business while Sri Lanka will have a major stake in the firm dealing with security. This is an attempt to allay Indian concerns.

Sri Lanka has been sensitive to Indian security concerns vis-a-vis China’s presence in the Indian Ocean in recent years. The Sirisena government and the Modi government have engaged each other substantively. Whereas in 2014 China docked its submarines at Hambantota, much to India’s annoyance, Colombo refused to allow China to dock a submarine at Colombo port earlier this year in May.

Sri Lanka’s case is a text-book example of the Chinese modus operandi in pursuing its strategic interests. Other countries are also facing similar dilemmas. Cambodia’s external multilateral public debt, for example, now stands at US$1.6 billion, while its bilateral public debt with China is US$3.9 billion. And 80 per cent of this is owned by China. China has emerged as Cambodia’s largest military and economic partner, having disbursed about US$3 billion in concessional loans and grants to Cambodia since 1992. Questions are also being raised in Malaysia about Chinese investments and their future.

Using its own brand of “debt trap diplomacy,” China is now forcing smaller states to abide by its dictates. This will have pernicious consequences for these states and is likely to bounce back on China. But for India, China’s growing presence around its periphery will continue to pose challenges if New Delhi does not get its own act together. Blaming Beijing is the easier option. Getting ready to challenge China’s profile by enhancing its own regional role as an economic and security actor is the need of the hour for India. At a time when China is strangling India in the north with its attempts to change facts on the ground, it is imperative for India to strategically think of using the maritime sphere to break Beijing’s growing dominance in its periphery.

This commentary originally appeared in Mail Today

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