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?
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