China-owned port in Sri Lanka could alter trade routes
Financial Times
China’s ambitions for sleepy Hambantota could shift world trade routes
One of China’s largest and most powerful state-owned companies, China Merchants Group, with total assets of $855bn, is in the final stages of completing the purchase for $1.1bn of a 99-year lease for a majority stake in a seven-year-old lossmaking deepwater container port. It was built for more than $1bn on a turnkey basis by Chinese state-owned contractors. It is owned and operated by the Sri Lankan government’s Port Authority.
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China Merchants’ plan to turn things round will rest on two prongs. Its port operations subsidiary, Hong Kong-listed China Merchants Port Holdings, will take over management of Hambantota. It is the largest port owner and operator in China. Almost 30 per cent of all containers shipped into and out of China are handled in China Merchants’ ports. The ports business earned a profit of $850m last year. China Merchants has what the Sri Lankan government’s Hambantota port operator could never muster: the operational skill, clout, capital and commercial relationships with shippers inside China and out to attract significant traffic to Hambantota. China’s state-owned shipping lines deliver more containers than those from any other country.
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In addition, China Merchants will enlist other large China State-owned enterprises (SoE) to invest and set up shop in an 11 sq km special economic zone abutting the Hambantota port. The SEZ was created at the request of the Chinese government, with the promise of $5bn of Chinese investment and 100,000 new jobs to follow. China Merchants is now drawing up the master plan.
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Hambantota is only 10 to 12 nautical miles from the main Indian Ocean sea lane linking the Suez Canal and the Malacca Straits. Most of China’s exports and imports sail right past. An average of 10 large container ships and oil tankers pass by every hour of every day. From the Hambantota port office building, one can see the parade of huge ships dotted across the horizon. Along with transhipping to India and the subcontinent, Hambantota will provide maintenance, oil storage and refuelling for shipping companies.
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This should make Sri Lanka the ideal transshipment point for goods and natural resources going into and out of the (Indian) subcontinent.
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The Port of Singapore is now the region’s main transshipment centre. It is three to four times as distant from India’s major ports as Hambantota.
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China Merchants has been trying for four years to close the deal there. China Merchants Port Holdings is a powerful presence in Sri Lanka. It already built and operates under a 35-year Build-Operate-Transfer contract a smaller, highly successful container port in the capital Colombo. It opened in 2013. It’s one of the few large-scale foreign direct investment success stories in Sri Lanka. The future plan is for the China Merchants’ Colombo port to mainly handle cargo for Sri Lanka’s domestic market, while Hambantota will become the main Chinese-operated transshipment hub in the Indian Ocean.
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During the Hambantota negotiations, the Sri Lankan government blew hot and cold. The country needs foreign investment and Chinese are lining up to provide it, as well as additional infrastructure grants and loans. Chinese building crews swarm across a dozen high-rise building sites in Colombo. Chinese tourist arrivals are set to overtake India’s. The main section of the unfinished highway linking Colombo and Hambantota was just completed by the Chinese.
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Rarely if ever in my experience do OBOR projects have the crisp commercial logic of Hambantota. Assuming ships do start to call there, Hambantota should prove quite profitable, as well as a major source of employment and tax revenue for Sri Lanka.
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Hambantota should lower prices and improve supply chains across the entire region, and so drive enormous growth in trade volumes — assuming power politics don’t intrude.
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Hambantota should allow India’s manufacturing sector to be more closely intertwined with Chinese component manufacturers and supply chains. That is consistent with India’s goal to increase the share of GDP coming from manufacturing, and manufactured exports, both still far smaller than China’s. But, India will almost certainly push back, if Hambantota leads to a big jump in its trade deficit with China.
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By itself, a Chinese-owned and operated Hambantota will almost certainly reconfigure large trade flows across much of Asia, Africa and Europe, benefiting China primarily, but others in the region as well. It is a disruptive occurrence. While much of China’s OBOR policy remains nebulous and progress uncertain, Chinese control of Hambantota seems more than likely to become a world-altering fact.
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