Flypaper Colonialism

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China’s massive investments in South Asia pose a huge geopolitical challenge to India

THE MERE PRESENCE of snipers perched atop the watchtowers of Temple Trees, the Prime Minister of Sri Lanka’s heavily guarded residence in Colombo, tends to hush passersby mid-speech as they walk past the daunting iron gates along the A2 highway. Yet, the guards and their guns do little to silence the cacophony—which begins at dawn and doesn’t stop till dusk—in the vicinity. For, right next to Temple Trees lies Galle Face, Colombo’s claw-shaped beach road, which once housed high commissions and five-star hotels. Today, it is a vast construction site, complete with rumbling cement mixers and groaning cranes, cordoned off by blue scaffoldings.

The text on the boards is almost exclusively in Chinese logogram. Across the promenade that separates the Indian Ocean from land, four nearly-built skyscrapers tear above the city’s horizon. ‘One Galle Face’, reads a signboard in large Mandarin and smaller- font English; this is a multi-purpose, residential-cum-commercial complex. All 35 acres of the property is owned by Shangri-La Hotels and Resorts, a Hong Kong-based hospitality chain, and is in the final phase of its development by the Chinese Harbour Engineering Company (CHEC). This firm’s elliptical logo surrounds the premises, pasted over the artist’s futuristic impression of the complex and even a recently installed water fountain.

CHEC scales up its presence across the road, by the ocean—or in the ocean, to be precise. Commissioned by the Mahinda Rajapaksa government to build a port city, CHEC has reclaimed close to 700 acres from the sea, between South Port and Fort Lighthouse, and construction of the country’s most ambitious project is underway. Once ready, it will be known as Colombo International Financial City. But today, even as the sea breeze carries pans of grime and dust on to land, locals seated on the promenade squint in the direction of the rising city and call it ‘Chinatown’. Under a CHEC ‘Safety First’ signboard, engineers in yellow hard hats congregate for their hourly cigarette breaks. The cigarettes are Chunghwa, China’s most-smoked brand.

In post-civil war Sri Lanka, a country ripe for global investors, China’s presence in its capital of Colombo cannot be missed. It is most noticeable along Galle Face, but also in a popular working- class eatery below the city’s World Trade Centre, where the menu is primarily in Cantonese, and on billboards around the city of the Sri Lankan cricket team, whose main sponsor is now Huawei, the Chinese telecom company.

These are signs of a city on the move. China’s massive investments in Sri Lankan infrastructure have worked wonders. From roads to ports, both vital to a revival of the country’s economic fortunes, much has been built on Chinese largesse. But away from Colombo’s glitz is another reality: the spectre of a debt burden that Sri Lanka cannot afford. That danger is visible in Hambantota, a port city 230 km from the capital.

Hambantota is a port that straddles key sea lanes connecting the Indian Ocean with shipping lines in East Asia. The development of this port, launched with much fanfare in 2010 was based on a $1.3 billion development plan largely financed with Chinese money. Seven years later, the port did not attract the shipping traffic it expected. It has changed hands since. Under a 99-year lease, the port is now under the control of China Merchant Port Holdings Company (CMPHC). Under an agreement signed earlier last year, China agreed to pay over $1.1 billion for a debt-to-equity swap.

Beijing’s $62 billion investment planned for the China Pakistan Economic Corridor has raised international concern over Islamabad's ability to repay such a large sum

The arrangement is complex. On paper, the deal has been structured to show that Sri Lanka Ports Authority holds a nearly equal stake in two special purpose vehicles along with CMPHC, one for port security and the other for commercial operations. But in reality, CMPHC effectively controls the port as Sri Lanka’s majority holding in the security company is in effect backed by Chinese money. Soon after the swap agreement was signed, China declared Hambantota to be a part of its Belt and Road Initiative (BRI). This is China’s version of the Marshall Plan, the economic outreach programme of the US after World War II to help rebuild shattered European economies.

The comparison is illusory. For one, the reach of the BRI plan is vastly more ambitious. From Mongolia to Cambodia and from the eastern edge of China to the shores of the Caspian Sea, the BRI’s geographic span is immense. More worryingly, the extent of spending under the plan, backed by China’s deep pockets, is not commensurate with the ability of recipient countries to pay back their debt. Experts have thus begun asking questions about the danger of their descent into a debt trap and what China would demand in case they fail to cough up the money they owe. For India, these concerns are worrying. If China managed to prise away Hambantota from Sri Lanka, what will it ask of Pakistan, where the scale of its investment is in a bigger league?

The China Pakistan Economic Corridor (CPEC) is the centrepiece of the BRI in Pakistan. Billed as a project to shore up Pakistan’s weak economy, the $62 billion planned investment has raised concerns over Islamabad’s ability to repay that sum. Unlike Sri Lanka, where public opinion and domestic politics is fully aware of the dangers that accompany debt-fuelled growth, in Pakistan such voices are muted. The CPEC is held as an answer to the country’s weakness in keeping up with India. Still, some unease is palpable.

Pakistan’s signing of the second part of its Free Trade Agreement with China has been delayed. Islamabad first signed a free- trade deal with Beijing in 2006. Under the latest proposal, while the number of ‘sensitive items’ has been increased, the effective import tariff rates would be brought down to 25 per cent from 40 per cent. Trade and industry associations have repeatedly flagged worries about this turning Pakistan into a dumping ground for cheap Chinese goods. But these concerns have seldom affected policy in a country where key commercial decisions are often taken on geopolitical considerations, especially with China.

On April 12th, Christine Lagarde, managing director of the International Monetary Fund (IMF), echoed fears about Pakistan’s debt sustainability at a BRI conference held in Beijing. While these projects could provide much needed assistance to create infrastructure, she said, they “can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payment challenges”.

China's presence in Colombo can't be missed. It is most noticeable along Galle face, but also on billboards of the cricket team, whose main sponsor is Huawei, a Chinese telecom company

Husain Haqqani, a Pakistani public intellectual who is currently in exile, recently drew explicit attention to that risk in an interview with Open, saying, “The need for something to ‘feel good’ has been so strong that Pakistan’s decision-makers would rather have some activity than no activity for fear of huge debt. It is a kind of attitude that says, ‘We’ll deal with the debt problem later, let’s have the building done now.’ That said, CPEC can be transformative if Pakistan’s economy as a whole is re-oriented. The real fear here is that Pakistan ends up with the debt, with the infrastructure, but with no connectivity which is productive.”So far, there’s no sign that Pakistan has taken these dangers into account.

The Maldives is another South Asian country that China’s investments could leave under a raft of loans with no realistic possibility of being paid back.

In March, the Center for Global Development (CGD), a think- tank in the US, analysed the debt implications of the BRI plan. Of the 68 countries examined, 23 were found to be in the zone of risk. Of these, eight are in the high-risk category. In these countries, public and publicly guaranteed debt as a proportion of the economy is projected to rise sharply once BRI projects are implemented. Pakistan and the Maldives are among those classified as ‘high risk’ by CGD’s analysis.

LAST YEAR, AS part of a review of Pakistan’s economy, the IMF said that the foreign funds required by the country would go up dramatically from 2018 onwards. Notes this IMF report: ‘Pakistan will face increasing government and CPEC-related external repayment obligations, and external financing needs are projected to increase to nearly 7.5 per cent of GDP over the medium term, highlighting the need for macroeconomic and structural policies supporting competitiveness.’

Ordinarily, a country’s economic policy is of no concern to any other nation. But in these cases, India needs to keep watch. China is not a friendly country, but one with which Delhi ‘manages’ peace. The Chinese strategy of encircling India has been commented upon for a decade now. Of the three countries awash with Chinese debt, only Sri Lanka has displayed the kind of maturity required to grasp the political consequences of a borrowing binge. Pakistan and the Maldives are led by leaders who are democrats only in name—in the former, democracy matters little anyway when it comes to decisions on India—and are thus that much less likely to consider the broader implications of their actions.

If any territory of these countries ends up in China’s use for military purposes, it would be a threat to India. As of now, the region seems in no such peril. Back in Colombo, locals along the quaint ocean-front road of Kollupitiya, with its heavy Chinese presence, don’t seem to care. At the front door of Casino Marina, a middle-aged Sinhalese woman, draped in a traditional sari, folds her hands in welcome. But the greeting that emerges from her mouth is not in Sinhala. “Ni hao,” she says, Mandarin for ‘welcome’, trained as she is to be hospitable to the casino’s main customers. Inside, you would be forgiven for thinking you’re in some place between Guangzhou and Beijing.

The bartender is a local, but he serves Tsingtao on tap. The croupiers and dealers are locals too, but on the tables—occupied mostly by Chinese businessmen—they referee a game called Ban- Nag, Hokkien for Blackjack. This, of course, isn’t the only gamble involving the Chinese on Sri Lankan soil.