Groundviews

Dealing with two Asian superpowers: President Sirisena’s visit to China

Image courtesy Asia One

Sri Lanka stands to benefit enormously by dealing positively with the two Asian super powers, India and China. The two countries are potential rivals. The two Asian whales may not fight but a small fish can get crushed when whales dance. Sri Lanka has to be mindful of that when dealing with the two countries.

President Maithripala Sirisena will be in China this week on an official visit to hold bilateral talks with Chinese leaders and attend the Boao Forum for Asia (BFA) Annual Conference. The single major bilateral issue of immediate concern for the President is the Colombo Port City Project.

BFA Conference

BFA was established in 2001 under Chinese leadership as a non-governmental and non-profit organization to facilitate Asian poltical, business, academic and civil society leaders to meet and discuss common problems and challenges that the region and the world face. It is China’s answer to the better-known annual meeting in Devos, Switzerland that western powers dominate. Boao is a town in South China that is about 2,800 km south of Beijing. The secretariat of BFA is located there. The late Mr. Kingsley T Wickramaratna, Minister of Trade in the Chandrika Kumaratunga administration, participated in the first conference as a founder-member of the BFA.

China, the permanent host country, hopes that the annual meeting would develop “solidarity and cooperation among Asian countries and promote economic integration in the (Asian) region” (and) help accelerate the “building of the Silk Road Economic Belt and the 21st Century Maritime Silk Road — to increase communication and cooperation between Asia and the rest of the world.”  China has been very open about its intention to push for the Asian Silk Road and the Maritime Silk Road. China considers the development of the Hambantota Port as a part of the Maritime Silk Road.  The controversial $1.5b Colombo Port City Project also is viewed as a further step in the same direction.

This year’s BFA conference theme will be “Asia’s New Future: Towards a Community of Common Destiny.”  The Chinese President Xi Jinping will deliver the keynote speech.

Some Asian, African and European leaders including the president of Indonesia Joko Widodo and the Malaysian Prime Minister Najib Razak are expected to attend conference this week. For Sri Lanka what is more important is the context in which Mr. Sirisena is making his first visit to China as President and, given the strong links that Beijing developed with Colombo during the Rajapaksa administration, how he would handle Sri Lanka-China bilateral relations.

Economic Relations

China’s trade relations with Sri Lanka are lop-sided. In 2013 Sri Lanka exported a total of $131m worth of goods – 1.3% of Sri Lanka’s total exports – to China. In the same year China was only second to India as a source of our imports, accounting for $2,953m (16.4%). India accounted for $3,171 (17.6%). A significant share of imports from China was capital goods financed with Chinese loans.

During the Rajapaksa administration China became the principal funder for Sri Lanka’s infrastructure projects, mostly through loans. In 2013 Chinese project loans net of repayments totaled Rs 59.5b or about 85% of all project loans (net) that the government received from foreign sources. Given Sri Lanka’s need for infrastructure development, the country will need significant resources in the future as well.

New Asian Bank

In addition to bilateral assistance from China, Sri Lanka is likely to rely on the Asian Infrastructure Investment Bank (AIIB) that is to be set up in the course of the next twelve months. AIIB is a Chinese initiative announced in 2013 that will have around $50b or more as starting capital. In 2014 Sri Lanka signed on as a founding member. All the SAARC countries with the exception of Afghanistan and Bhutan have already agreed to join the Bank.

China, in keeping with its status as a growing major global economic power, has been keen to play a greater role in existing global multilateral financial institutions such as the IMF and the World Bank. However, USA has been reluctant to let that happen. AIIB is one way that China is answering back America’s intransigence.

USA has lobbied hard to persuade western countries not to join AIIB on the grounds that the latter would not maintain what it believes are the high standards in respect of good governance and environment. It also asserts that the World Bank (WB) and the Asian Development Bank (ADB) can meet the funding needs of Asia and, if needed, should be provided with additional resources. For a while America’s western allies went along with the American stand. But this month, UK, Germany, France, and Italy, broke ranks and signed on as founder members of AIIB, a significant set back for USA. Japan that has its own geo-poltical issues with China is unlikely to join. It may even provide additional funds to the ADB that is headed by a Japanese national to reduce the impact of its new competitor. However, both Australia and South Korea may reconsider their position and join.

Many believe that USA is shortsighted not to join the new bank. AIIB is certain to play a major role in Asia. The ADB in a report prepared in 2010 estimated that over the period 2010-20 Asia would require $8,000b. – about $800 million per year –  for investment in infrastructure. The ADB that had a total capital of $164b in 2013, provided $21b for projects in that year. The new AIIB will have plenty of opportunity to lend to countries such as Sri Lanka that are short of capital.

Colombo Port City

The Immediate issue with China that we have to handle with diplomatic finesse is the Colombo Port City Project. There are environmental, economic and diplomatic dimensions to it. We do not wish to comment on the environmental issue. On the economic side, for several reasons, the case for going ahead with project is weak. First, Colombo’s existing physical infrastructure to provide utilities such as water, sewerage and electricity for a large satellite city is simply not adequate. Second, Colombo city is not short of land per se. Much of the available land is grossly underutilized. What is required is better planning in the use of existing land together with parallel infrastructure development. Third, an isolated “luxury” satellite city makes very little economic or social sense when there is a crying need to improve the living conditions of Colombo’s lower income citizens that require improved facilities from housing to community amenities to schools. Fourth, a vast gap in income and living standards exists between Colombo’s rich minority of about 10% of the population and the rest of the Colombo community and, for that matter, the rest of Sri Lanka. The Port City that will widen that gap is not helpful for equity and social stability in a democracy. Fifth, the districts outside Colombo, perhaps with the exception of Hambantota, are starved of investment. Spending more on Colombo city is not a priority in an equitable development strategy.

The Rajapaksa administration appears to have signed the Port City deal in an opaque manner. There was no transparency, parliamentary consultation and public debate when the stakes are so high. The deal as signed allows China to literally own a part of the country in one of the most strategic locations on the Indian Ocean. This raises an important issue about national sovereignty. China has one aircraft career in operation and a second is under construction. A part of Colombo Port city under permanent ownership can be a valuable asset for China’s ambition to become a global naval power. Delhi is likely to view this matter with some concern.

President Sirisena will have to use all his diplomatic skills to resolve this issue in the national interest. Mid-level Chinese officials have made several statements in the last few weeks insisting that Sri Lanka must honour the written agreements and contracts and go ahead with the project. In theory this sounds very reasonable. But there is a small tip that Mr. Sirisena could take from Singapore’s Lee Kuan Yew who died this week. In 1994 Mr. Yew, who was a great friend of China while being a strong ally of USA, signed an agreement for $3.0b with China to open an Industrial Park in the city of Suzhou to showcase Singapore’s industrial prowess. The Chinese did not keep their part of the deal. Many years later in a reference to this failed project Mr. Yew is said to have remarked, “The Chinese have not accepted that when you sign an agreement, it is final.”

Sri Lanka has good precedence to follow!