THE DRAGON’S GRIP

The One Belt, One Road is rapidly ex­pand­ing China’s pres­ence in the South Asian re­gion. How can New Delhi re­spond?

India Today - - INSIDE - Ananth Kr­ish­nan in Bei­jing

China is mak­ing deep in­roads into South Asia. Does In­dia have a counter?

HINA’S PRES­I­DENT XI JIN­PING took Prime Min­is­ter Naren­dra Modi by sur­prise when he pulled the PM aside, dur­ing their long walk at Xian’s Gi­ant Wild Goose Pagoda in May 2015, and pro­posed link­ing China and In­dia through Nepal. Modi lis­tened as Xi out­lined a plan for a Hi­malayan cor­ri­dor of roads and rail­ways, which would be part of his pet project to re­vive the old Silk Road that once orig­i­nated from Xian. Since that visit, the Modi gov­ern­ment has made plainly clear its wari­ness at Xi’s grand ‘One Belt, One Road’ (OBOR) plan. In­dia was the only ma­jor ab­sen­tee at May’s Belt and Road Fo­rum hosted by Xi in Bei­jing. China, none­the­less, is pow­er­ing ahead.

Dur­ing the first phase of OBOR that co­in­cided with Xi’s first term, China launched in­fra­struc­ture projects around its pe­riph­ery, send­ing trains across Cen­tral Asia to Eu­rope, build­ing a rail­way deep into Thai­land and Laos, and in­vest­ing in ports across South­east Asia. Now, ahead of Xi’s sec­ond term, the Com­mu­nist Party has scaled up its OBOR am­bi­tions by writ­ing the plan into the Party Con­sti­tu­tion at the Com­mu­nist Party Congress on Oc­to­ber 24. This means, say of­fi­cials in Bei­jing, OBOR is here to stay as a cen­tre­piece of China’s diplo­macy. And as Xi starts his sec­ond term, South Asia is the next fron­tier.

IN OUR BACK­YARD

Pak­istan has al­ways been China’s ‘all­weather’ ally in South Asia, but to­day, Bei­jing is cast­ing its net wider. From Nepal to Sri Lanka, and Bangladesh to the Mal­dives, China is go­ing for­ward with am­bi­tious plans for in­fra­struc­ture projects worth bil­lions of dol­lars. It has al­ready sur­passed In­dia as the big­gest source of for­eign in­vest­ment and aid in Nepal and Sri Lanka. Its in­fra­struc­ture projects will ce­ment that sta­tus. Many of these projects, economists in Bei­jing ad­mit, aren’t be­ing driven by an eco­nomic ra­tio­nale. The mo­ti­va­tions are strate­gic, as ev­i­dent in their se­lec­tion: ports that will emerge as fu­ture hubs for Chi­nese com­mer­cial and mil­i­tary ves­sels in the In­dian Ocean, and pipe­lines that will bol­ster China’s en­ergy se­cu­rity by open­ing up ac­cess to the Ara­bian Sea

via Pak­istan and to the Bay of Ben­gal through Myan­mar.

Top of the list of Bei­jing’s new projects is what its of­fi­cials de­scribe as a “game-chang­ing” rail­way link­ing China and Nepal. For China, the rail­way rep­re­sents the clear­est sym­bol yet of Bei­jing’s soon-to-be per­ma­nent pres­ence in South Asia. That plan took a ma­jor step for­ward on Septem­ber 7, when both coun­tries reaf­firmed tak­ing for­ward the rail­way as “a pri­or­ity project” fol­low­ing talks be­tween Chi­nese For­eign Min­is­ter Wang Yi and his coun­ter­part Kr­ishna Ba­hadur Ma­hara in Bei­jing. A fea­si­bil­ity study will be com­pleted at an early date, an­nounced Ma­hara.

The elevation of OBOR will give fresh im­pe­tus to these projects, an­a­lysts in Bei­jing say. On the sur­face, the projects are merely aimed at bridg­ing South Asia’s in­fra­struc­ture gap. China says it will help its com­pa­nies, strug­gling with over­ca­pac­ity and a slow­down at home, find new mar­kets in coun­tries in dire need of in­fra­struc­ture. But dig deeper, and they have wider ram­i­fi­ca­tions. Most of these projects will be funded by Chi­nese loans, not through do­mes­tic fi­nanc­ing. This as­sis­tance isn’t aid, but lent at mar­ket or near-mar­ket rates. As is the case in many low-yield in­fra­struc­ture projects in de­vel­op­ing coun­tries, pay­ing back loans is by no means a given.

And in in­stances where coun­tries are un­able to do so, a stake in the as­sets is usu­ally trans­ferred to the Chi­nese lender—usu­ally a state-run en­ter­prise—of­ten along with op­er­a­tional con­trol.

THE SRI LANKA MODEL

Sri Lanka is per­haps the far­thest down the road in South Asia in em­brac­ing Chi­nese loans for in­fra­struc­ture. Be­tween 2000 and 2014, Sri Lanka re­ceived $12.6 bil­lion in Chi­nese fi­nanc­ing, ac­cord­ing to AidData, a re­search lab at the Col­lege of Wil­liam & Mary, United States. It is the sec­ond-high­est re­cip­i­ent of Chi­nese fi­nanc­ing in South Asia and the fifth-high­est in the world. The two big­gest re­cip­i­ents are Rus­sia and Pak­istan, $36.6 bil­lion and $24.3 bil­lion re­spec­tively. Most of Sri Lanka’s fi­nanc­ing from China was lent at mar­ket rates.

In the case of some projects, the deals were agreed shortly be­fore the 2008 fi­nan­cial cri­sis. One deal for a new air­port at Ham­ban­tota, for in­stance, was agreed to at an in­ter­est rate of 6.3 per cent. It ap­pears there was lit­tle trans­parency and lit­tle due dili­gence on the part of the Sri Lankan gov­ern­ment. A decade on, the Mat­tala air­port is far from the in­ter­na­tional hub con­ceived by then leader Mahinda Ra­japaksa in his home con­stituency. A pris­tine ter­mi­nal that can hold 1 mil­lion pas­sen­gers a year has only one in­ter­na­tional flight ser­vice to­day, af­ter sev­eral air­lines can­celled plans cit­ing no de­mand. The nearby Ham­ban­tota port, which cost $1 bil­lion, is sim­i­larly strug­gling with low traf­fic. The Sri Lankan gov­ern­ment, un­able to either earn money or pay back the Chi­nese, now owes Bei­jing $8 bil­lion.

THE NEPAL DILEMMA

The prob­lems in Sri Lanka haven’t stopped other coun­tries, such as Nepal, from seek­ing China’s eco­nomic em­brace, largely be­cause of the lack of al­ter­na­tives. A se­nior Nepal of­fi­cial says, “There are sim­ply no other vi­able op­tions. And we badly need these projects.” Nepal cer­tainly needs roads and do­mes­tic rail­ways to fa­cil­i­tate its eco­nomic de­vel­op­ment. Yet it is an in­ter­na­tional cross-bor­der rail­way to Ti­bet that the coun­try is now pur­su­ing as a ‘na­tional pri­or­ity’.

China has pledged Nepal $8 bil­lion for roads and rail­ways, although the terms of loans for all the var­i­ous projects haven’t yet been dis­closed and are vary­ing. The big­gest in­vest­ment will be the cross-bor­der rail­way, for long a dream of China’s plan­ners, but held up on ac­count of Nepal’s def­er­ence to In­dia’s sen­si­tiv­i­ties. That ob­sta­cle was re­moved in March 2016 when the China-friendly gov­ern­ment un­der then PM K.P. Sharma Oli gave the go-ahead.

On Septem­ber 7, Wang, the Chi­nese for­eign min­is­ter, an­nounced a ‘one rail­way, two high­ways, three bor­der ports’ in­fra­struc­ture plan for Nepal, which will see Chi­nese com­pa­nies de­velop do­mes­tic rail­ways in ad­di­tion to the cross-bor­der one, as well as re­fur­bish high­ways and build trade zones at bor­der ports, start­ing with Zhangmu, through which the rail will pass, and Gyirong.

China has sim­i­larly of­fered the Mal­dives ‘one road, one bridge, one run­way’. Here at least, the sums are mod­est. The big­gest in­vest­ment is for the ‘one run­way’, which refers to the ex­pan­sion of Male air­port, for which

China is ex­pected to of­fer around $300 mil­lion in loans—a con­tract that was ini­tially awarded to In­dia’s GMR Group—to in­crease its ca­pac­ity to 7 mil­lion pas­sen­gers a year.

China has now firmly drawn the Mal­dives into its eco­nomic or­bit. The Mal­dives ar­gues that Chi­nese in­vest­ments will in­crease tourism rev­enue man­i­fold. What isn’t said is that tourism-de­pen­dence is now be­com­ing China-de­pen­dence. China is al­ready the big­gest source of over­seas tourists to the Mal­dives. Bei­jing has suc­ceeded in mov­ing closer to sign­ing a free-trade agree­ment, agree­ing to a mem­o­ran­dum of un­der­stand­ing in Septem­ber that would make the Mal­dives the sec­ond coun­try in the neigh­bour­hood, af­ter Pak­istan, to sign an FTA with it.

STRATE­GIC RA­TIO­NALE

Of­fi­cials and aca­demics in Bei­jing pri­vately ad­mit that the eco­nomic ra­tio­nale for many of the OBOR projects is weak. They point to the $46 bil­lion China-Pak­istan Eco­nomic Cor­ri­dor plan, but add that these are driven by strate­gic con­sid­er­a­tions with in­tan­gi­ble long-term ben­e­fits to China, such as sta­bil­is­ing a trou­bled western neigh­bour in the case of Pak­istan, ac­cess­ing ports for Chi­nese com­mer­cial/ mil­i­tary ves­sels in the In­dian Ocean in the case of Sri Lanka and Bangladesh, or pipe­lines that pro­vide al­ter­na­tive path­ways to en­sure China’s en­ergy se­cu­rity, which have been built in Myan­mar and are planned for Pak­istan.

Ad­vo­cates of the plan say even poorly-per­form­ing projects have longterm ben­e­fits. In Ham­ban­tota, for in­stance, Sri Lanka’s in­abil­ity to re­pay the loans has re­sulted in a Chi­nese firm ac­quir­ing a 70 per cent stake in the project. But Zhang Yun­ling, a lead­ing Chi­nese econ­o­mist at the Chi­nese Academy of So­cial Sciences, who ad­vised the gov­ern­ment on OBOR from the in­cep­tion, re­cently said there were, still, other risks not be­ing fully ad­dressed. “In Ham­ban­tota, yes there were prob­lems, but the process of re­vi­sion has restarted, and I be­lieve the long-term prospects are good,” he said. “I think we need to fully ad­dress the risks when mak­ing in­vest­ment de­ci­sions. We need to jointly share the risks with the host coun­try.” Now, he says, Bei­jing is “in­creas­ing re­search on risks and the risk eval­u­a­tion mech­a­nism” for fu­ture projects to pre­vent such a sit­u­a­tion.

ALARM BELLS FOR IN­DIA

China’s in­roads are a wake-up call for In­dia’s neigh­bour­hood pol­icy. These in­roads are “chang­ing the bal­ance in our im­me­di­ate neigh­bour­hood,” says for­mer for­eign sec­re­tary Shyam Saran. “The only an­swer for us is to sit down and work out where our as­sets and li­a­bil­i­ties are.” He adds, “If you take these coun­tries, we have the ad­van­tage in terms of prox­im­ity and strong cul­tural affin­ity. We are a huge mar­ket that’s more ac­ces­si­ble and prox­i­mate than China is.”

In­dia’s re­sponse so far has been two-pronged: forg­ing closer part­ner­ships with other re­gional pow­ers like Ja­pan, and mak­ing a force­ful case for why the re­gion should be wary in its em­brace of OBOR. On the for­mer, In­dia and Ja­pan have put for­ward an ‘Asia Africa Growth Cor­ri­dor’ that is en­vis­aged as an OBOR al­ter­na­tive. This is a wel­come, if over­due, ini­tia­tive, but it’s far from clear whether the plan has either the fi­nan­cial mus­cle or the ca­pac­ity to ex­e­cute projects in the way China has. Saran cau­tions that In­dia’s fo­cus should be on the neigh­bour­hood, rather than at­tempt to check China’s in­roads else­where. “We should fo­cus on first con­sol­i­dat­ing our po­si­tion in the neigh­bour­hood be­fore think­ing of large en­gage­ments else­where,” he says. “We also need to make choices of how we lever­age our mar­ket as a big at­trac­tion for those neigh­bours. We need to at­tach much higher pri­or­ity to what we are do­ing in our own neigh­bour­hood be­cause it is much more cru­cial for us than other theatres are con­cerned.”

In­dia has been vo­cal in high­light­ing the down­sides of OBOR. Here, Delhi’s ap­proach ap­pears to be bear­ing fruit. Three years on, the gen­er­ally pos­i­tive global re­sponse to OBOR, which

Un­able to earn from the new Ham­ban­tota port and air­port, Sri Lanka now owes China a stag­ger­ing $8 bil­lion

saw coun­tries from Asia and Africa to Eu­rope sign­ing on, has given way to a wait-and-see ap­proach and more vo­cal crit­i­cism about the plan’s down­sides, in­clud­ing from early en­thu­si­asts such as Aus­tralia. With even the US and Ja­pan at­tend­ing the first Belt and Road Fo­rum, Chi­nese an­a­lysts had de­clared In­dia as iso­lated. That proved to be a pre­ma­ture as­sess­ment. Wash­ing­ton’s po­si­tion has aligned more closely with In­dia’s, which has in­volved mak­ing a case about the opac­ity of China’s in­ten­tions and the ‘debt bur­den’ left by projects. In Oc­to­ber, the US sig­nalled a more ro­bust op­po­si­tion. De­fense Sec­re­tary Jim Mat­tis de­clared that in a glob­alised world, “there are many belts and many roads” and “no one na­tion should put it­self into a po­si­tion of dic­tat­ing ‘one belt, one road’”. Then, Sec­re­tary of State Rex Tiller­son warned of OBOR’s “preda­tory eco­nomics”.

How­ever, merely mak­ing a case against OBOR will count for lit­tle un­less like-minded coun­tries are able to of­fer a cred­i­ble al­ter­na­tive. This re­mains far from cer­tain. As much as the Trump ad­min­is­tra­tion has been more as­sertive in chal­leng­ing China on the mil­i­tary front—for in­stance, by more force­fully push­ing free­dom of nav­i­ga­tion op­er­a­tions in the South China Sea—it has hinted at with­draw­ing eco­nom­i­cally, start­ing with leav­ing the Trans-Pa­cific Part­ner­ship, a trad­ing deal that has been the big­gest re­gional ef­fort till date at coun­ter­ing China. In May, US of­fi­cials said they would re­vive their Afghanistan-fo­cused ‘New Silk Road’ plan—first un­veiled by Hil­lary Clin­ton in 2011 but widely seen as a failed ini­tia­tive—as well as start an ‘Indo-Pa­cific Eco­nomic Cor­ri­dor’. This was hailed as a ma­jor OBOR counter. But in the six months since, there has been lit­tle in­di­ca­tion of either plan pro­gress­ing, all while the Chi­nese jug­ger­naut has rolled on.

IN­DIA’S OP­TIONS

Rather than seek to out­bid China on projects that may or may not end up be­ing vi­able, In­dia should build on its strengths, says Ashok Kan­tha, who was In­dia’s en­voy to China un­til Jan­uary 2016, a for­mer en­voy in Sri Lanka, and is now di­rec­tor, In­sti­tute of Chi­nese Stud­ies, New Delhi. To start with, In­dia should be more will­ing to of­fer non-re­cip­ro­cal terms to neigh­bours. “China does not per­mit open borders with Nepal or of­fer its cit­i­zens na­tional treat­ment or pro­vide em­ploy­ment to 6 mil­lion Nepalese na­tion­als, as In­dia does,” he says. “In­dia has al­lowed these link­ages to re­main un­der-de­vel­oped or even get eroded, thereby creat­ing space for oth­ers.” In­dia also needs to im­prove its track record of de­liv­ery, Kan­tha adds, and could be­gin with em­pow­er­ing the ex­ter­nal af­fairs min­istry’s De­vel­op­ment Part­ner­ship Ad­min­is­tra­tion with req­ui­site fi­nan­cial re­sources and tech­ni­cal ex­per­tise to eval­u­ate projects and en­sure they are com­pleted in a timely and ef­fi­cient man­ner.

Kan­tha be­lieves In­dia must seize the op­por­tu­nity at a time when con­cerns about Chi­nese projects are be­gin­ning to emerge. “Sri Lanka has be­come a cau­tion­ary tale on what kind of prob­lems Chi­nese projects can cause,” he says. “Sri Lanka is clearly in China’s debt trap. Ma­jor Chi­nese-aided projects like Ham­ban­tota port and Mat­tala In­ter­na­tional Air­port have turned out to be huge li­a­bil­i­ties for Sri Lanka, which can’t gen­er­ate rev­enue even to meet their op­er­at­ing cost, let alone pay for prin­ci­pal and in­ter­est on loans taken from China. The neg­a­tive fall­out is be­ing recog­nised, and Sri Lanka is Ex­hibit A.”

This, Kan­tha says, should give pause for thought for coun­tries like Nepal, which is now rush­ing head­long into a bil­lion-dol­lar rail­way project. Nepal, he says, should be ask­ing “what kind of eco­nomic en­gage­ment with Ti­bet could jus­tify this kind of huge in­vest­ment”, or whether the rail­way could end up just as the projects in Ham­ban­tota did—a van­ity project that will leave the coun­try in debt. But de­spite the risks ex­posed by Sri Lanka’s fail­ing projects, the trend of coun­tries in the re­gion seek­ing Chi­nese fi­nanc­ing is likely to only in­crease rather than sub­side, given their lim­ited op­tions for fi­nanc­ing else­where. They are wait­ing for an al­ter­na­tive, and In­dia’s time starts now.

In­dia’s re­sponse so far has been to forge closer part­ner­ships with re­gional pow­ers and build a case against OBOR

PALASH KHAN/SIPA USA/AP

GRAND WEL­COME

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