Belt & Road: China's Indian Ocean push

Debt-laden Sri Lanka's deal to sell its southern port of Hambantota to a Chinese SOE extends China's geopolitical influence in the Indian Ocean.

By investing $1.12 billion in the southern Sri Lankan port of Hambantota, China is looking to create a key staging post as it forges ahead with its Belt and Road masterplan to better connect the Middle Kingdom with Europe and Africa. 

Occupying a prime location, the city could help with the transit of goods to and from China’s eastern coast or inland city of Kunming via Myanmar.

But, in an uncanny echo of its contested geopolitical ambitions in the South China Sea, it also happens to be extending its political and economic clout to the Indian Ocean, putting pressure on rival nuclear power India.

Sri Lanka is strategically important to China due to its location since China doesn’t have a lot of investment in South Asia, because of its poor relationship with India,” Han Ning, China director for Drewry Shipping Consultants, said. “Any investment in South Asia stands out because of its obvious strategic purposes.”

After several months of delay caused by local protests over Colombo’s excessive reliance on Chinese investment and a perceived loss of sovereignty, state-owned China Merchants Port will pay $973.7 million to acquire an 85% stake in Hambantota International Port Group, with the remaining $146 million investment reserved to cover operational expenses, according to a statement last Tuesday.

The joint venture between the Chinese state-owned enterprise and the Sri Lanka government to develop and manage the port includes a commitment to turn Hambantota into a regional hub with an attached 15,000-acre industrial zone. That could mean an additional $5 billion investment and help create 100,000 jobs.

So far, so good. But the Chinese terminal operator is getting a concession to operate the facilities for 99 years: the same time frame China signed over Hong Kong’s New Territories in 1898.

Local protests

So it is not surprising that the plan angered some locals and sparked protests when first revealed, not least because China already has a 35-year lease on a container terminal and a 99-year lease on a 269-hecture plot in the Sri Lankan capital. India, and some members of the Sri Lankan government, also voiced concerns that China would misuse the harbour for military ends.

Unfortunately for indebted Sri Lanka, just eight years out of a devastating civil war, it holds a weak hand; the south Asian island-country needs the Chinese money as badly, if not more, than China wants the port. That's because it urgently needs to pay down some of the $65 billion it owes external debtors, including at least $8 billion in the hands of Beijing, with some of the loans due in 2017 and 2018.

“The Sri Lankan government has been in a weak position when negotiating with the Chinese government,” Fan Ming, a shipping analyst at Guotai Junan, said. “It expects China to bring capital to stimulate the local economy and bring resources to promote the local employment.”

According to Moody’s, which assigns a B1 credit rating to Sri Lanka and a negative rating outlook, the country has made little progress reducing its external vulnerability. As a result, Sri Lanka has to resolve the debt burden through debt-for-equity swaps with China.

“Part of (the deal) is debt forgiveness,” said Christian Zhang, infrastructure analyst at BMI Research. “It allows Sri Lanka to divert the money with paid to China and service the debt for the port and its other uses.”

Even so, to help ease some of the local concerns, the revised deal announced last week by Sri Lanka created a new company, Hambantota International Port Services Company (HIPS), to take charge of port security. What this means is that China Merchants Port manages the operations of the port while the Sri Lanka government has control over the security of the port, along with navigation and ship approvals.

India steps up

Whether that is enough to satisfy India is unclear but the South Asian superpower is also vying for regional influence through outward infrastructure investments, for it too has a continent-crossing plan.

By building the North-South Transport Corridor, a 7,200-kilometer multimodal trade corridor linking the Indian Ocean and Persian Gulf to the Caspian Sea, India expects to boost trade with neighboring countries such as Russia.

“In some ways, because both Sri Lanka and Bangladesh have [stronger ties with] India than China, occasionally Indian companies may be better positioned to take advantage of certain types of deals,” BMI’s Zhang said.

Discussions were held in April between New Delhi and Colombo, according to the Times of India, to allow India to develop Sri Lanka's northeastern port of Trincomalee, as a geopolitical counterpart to China’s Hambantota deal.

“Obviously, the scale of China’ initiative through the Belt and Road is an order of magnitude larger than India’s, but it is important to note that India is engaging in outward infrastructure investment,” Zhang said.

Apart from China Merchants Port, many other Chinese SOEs are pouring billions of dollars to accelerate its acquisitions of overseas ports as China greatly expands its maritime footprint. 

According to Reuters, a consortium led by China’s CITIC Group has proposed to take a stake of up to 85% in a strategically important sea port in Myanmar, the $7.3 billion deep sea port of Kyauk Pyu on the Bay of Bengal.

In Malaysia, Chinese companies have set out plans for three projects along the Malacca Straits, where 80% of China's oil imports pass through, posing a threat to the Port of Singapore's local dominance – the $7.2 billion Melaka Gateway, the $2.84 billion Kuala Linggi port, and the $1.4 billion Penang port. 

A $590 million project to develop the Kalibaru terminal in Indonesia is also on the way by state-owned Ningbo Zhoushan Port.

“The SOEs have a plan. They are hoping to invest in a significant number of ports in the next five years,” said Drewry's Han, who has been advising SOEs on overseas acquisitions.

For Chinese SOEs, overseas infrastructure investment often goes hand in hand with a much wider commercial plan, such as high-speed-rails and real estate development. This gives analysts confidence that China Merchants Port can recoup its investment in Hambantota in two years

“The CICT port in Colombo is very well run by China Merchants Port,” said Fan, referring to a container terminal owned by a joint venture since 2013. “The company has a good understanding of the Sri Lankan economy.”

Last month, China’s top policy-making National Development and Reform Commission put forward plans for three ocean-based “blue economic passages” – crucial strands of its maritime Silk Road.

“As China moves to engage in large-scale infrastructure development in many of these Belt & Road countries, the process would entail trade to support such infrastructure development,” Kim Hock Ang, a principal at Baker McKenzie Wong & Leow, said in an email to FinanceAsia. “As these developing economies are upgraded through the infrastructure development, the economic growth unleashed by such infrastructure development could help to spur further trade with China and that is the long-term goal of the Belt & Road Initiative."

But it can take time for the general public to recognise the long-term benefits of such projects and show support.

“The protests over the port in China illustrate that public opinion of Chinese investments can change very quickly, especially if people begin to see the deeper theme of investments as more exploitative in nature,” Zhang said. “The economic nature of infrastructure projects is also that their economic impact will only be felt over a five-year, 10-year, 20-year horizon. So it’s difficult to demonstrate to members of the public in many of these countries that there is immediate economic benefit.”

It's also difficult to demonstrate that China has altogether benign intentions. 

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