Dynamics of Bangladesh-China Relations

During the visit, Sheikh Hasina was given a warm welcome, red carpet rolled out to receive her. The immediate outcome of the visit was the signing of nine bilateral agreements in the areas including aid for the Rohingyas, economic and technical cooperation, investment, power, culture and tourism.

Although Bangladesh’s initial relations with China were conditioned by the latter’s close ties with Pakistan, the two countries have since then come a long way to have independent ties based on mutual interests.

During the liberation war of 1971 and immediately after the emergence of Bangladesh, China had sided with Pakistan and also used its veto to block Bangladesh’s membership to the UN. China’s initial pro-Pakistan stance had an emotional impact on the people of Bangladesh. 

As military regimes in Bangladesh, led by Gen Zia-ur-Rahman and Gen Ershad developed friendly relations with Pakistan, China also acquired a firm foot-hold in Bangladesh through offers of liberal economic aid and free military supplies. Now, among the South Asian countries, Bangladesh is an important player in Beijing's political-military calculus.

China has helped Bangladesh in a number of important infrastructure projects, such as bridges, roads, power generation, mineral exploration and education. Chinese President Xi Jinping undertook a high profile visit to Dhaka in October 2016 when China signed 27 deals on cooperation with Bangladesh worth $24.45 billion in a number of key developmental projects. Large Chinese investments and loans for infrastructure figured in bilateral agreements. With this loan Bangladesh would build power plants, a sea port and railways and in the process boost China’s involvement in infrastructure projects in the country.

Since the visit of Chinese President Xi Jinping in 2016, $4.29 billion of Chinese loan have flowed into Bangladesh for five mega projects from Padma rail links to river tunnel in Karnaphuli to oil pipeline. Another $ 3.5 billion Chinese loan is expected to flow in this year.

Dhaka has to remain cautious, aware of the bitter experiences gained by many countries of Asia and Africa who sought to improve their lot with Chinese loan. For those who take part in the Chinese Belt and Road, the hey-day lasted as long as money poured in. When the time came to repay, the trouble began. Many countries like Pakistan and Sri Lanka found their coffers dry.

Much of the Chinese infrastructure loan glut is now being packaged as part of Chinese trillion-dollar ‘Road and Belt’ initiatives that seeks to connect countries from Asia to Europe on trade with China at its centre. Road in this context means a 6000 km sea route connecting China to South East Asia, Oceania and North Africa and the Belt  means railway and road infrastructure to connect China with Central and West Asia, the Middle East and Europe.

Chinese investment in Sri Lanka is causing major problems for Sri Lankan President Maithripala Sirisena and has become a source of tension in Sri Lanka-China relations. During the previous regime led by former Sri Lankan President Mahinda Rajapaksha, China extended huge loans to Sri Lanka to develop mega infrastructure projects. 

Critics apprehend that it would not be possible for Sri Lanka to pay back the huge loan. Colombo Port City Project is one such controversial project built by China Communications  and China may take control of those and other vital infrastructure projects. Colombo Port Construction Company (CCCC), a subsidiary of China Harbour Engineering Company, in cooperation with Sri Lanka Port Authority. The project that amounts to US $ 1.4 billion was awarded to CCCC which has been blacklisted by the World Bank on charges of corruption until 2017. The project commenced in September 2014.

Other infrastructure projects in Sri Lanka for which China extended huge loans include the Hambantota Port, Mahinda Rajapaksha International Air Port and a cricket stadium at Hambantona. All these projects have been found to be unproductive investments and are incurring heavy losses as these are not commercially viable. But failure of these mega projects indirectly serves China’s purpose.

Sri Lanka now spends 90% of all government revenue to service its debt. It does not know how to ensure these infrastructure projects make profits that would help pay back the loan. Now it is under tremendous pressure from China particularly on the Colombo Port City Project where CCCC is reportedly claiming to be losing US $ 380,000 a day. There is also pressure to abandon the Colombo Port City Project for lack of environment clearance. But China is not agreeable to it as the project gives it a strategic foothold in the Indian Ocean.

Having no other option, the Sri Lankan government has decided to sell 80% of the $ 1.5 billion Hambantona Deep Sea Port to a Chinese company on a Hong Kong-style 99-year lease. China has also been offered an investment zone in the region, in another bid to cut the debt problem. Recently, a group of demonstrators led by the Buddhist monks took to the streets protesting the creation of industrial zone for Chinese investments on the island. The main reason for the protests against the hand-over of a vast area of land for investment zone was the loss of autonomy to a foreign power as well as the potential land-grab that could be necessary to build the 15,000 acre industrial zone.

Reports from Sri Lanka indicate that the investment zone could be used by China for manufacturing a wide range of products which it will be able to export to India from Sri Lanka making use of the free-trade advantages that Sri Lanka enjoys with India. Moreover, the Sri Lankans are worried that the area could very well become a Chinese colony with the passage of time. In another instance, unable to repay the debt incurred to build Nirochcholai Power Plant the Sri Lankan government is now transferring its ownership to the Chinese, in a debt-equity swap.

While Hambantona Port is a crucial part of China’s Maritime Silk Route, Gwadar Port in Pakistan is fast becoming the nerve center of China-Pakistan nexus to exercise control over the sea lanes used for oil and gas supplies from Iran and Gulf states. The Gwadar Port has been leased to China by Pakistan till 2059. This project is being financed by Chinese loan estimated at $ 3.5 billion. The total costs of projects along the China Pakistan Economic Corridor (CPEC) are estimated at $ 51 billion. There are misgivings even within Pakistan about who the beneficiaries of the Chinese-funded economic corridor will be.

After the 2015 elections Sri Lanka is now reassessing the unviable Chinese projects which have now become a part of national political game. Pakistan also faces financial uncertainty after it has borrowed heavily from China to revamp its roads, ports and railways as part of its $ 62 billion plan known as the China-Pakistan Economic Corridor (CPEC) which is part of the Belt and Road Initiative.

The Chinese plan has pushed Pakistan’s deficits to an unsustainable level. Imports linked to CPEC have swelled its current account deficit by 50%. Pakistan’s Central Bank has devalued its currency twice and yet saw over the last fiscal year a third of the reserves evaporating. Pakistan’s external debt now stands at $ 91.8 billion – up fifty per cent in last five years. Unable to repay the loan Pakistan has got about two third of its early loans from China extended at as high levels as 7 per cent.

Now left with two months import bills in reserves Pakistan is seeking IMF bailout. The US, the largest contributor to IMF, is not eager to the bailout as it has indicated that it does not want IMF money to be going to China for loan payment.

Malaysia has just cancelled two Border and Road projects funded by China – a rail link to South China Sea and a gas pipe line – as the present Malaysian Prime Minister fears the projects are too costly for his debt-ridden country.

Djibouti in Africa looks about to give up control of a key port to a Beijing-linked company. Chinese loans to Africa have shot up steeply in the last five years as the China-Africa Research Initiative (CARI) at John Hopkins University School of International Studies indicates. Angola, Ethiopia, Sudan, Kenya and Congo are among the Chinese loan takers.

Recent data from the Centre for Global Development, an international think-tank, suggests eight Belt and Road initiative participants – Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan - are all in deep debt with China for their infrastructure projects.

Dhaka must keep in mind that debt-to-GDP ratios of these countries are going up and up and this sounds an alarm bell for all the recipients of Chinese loans.