China's Westward One Belt One Road Strategy

• The building of a Hong Kong-style metropolis on reclaimed land in Colombo using US$1.4 billion of Chinese money sits uneasily with some Sri Lankans
• They are still smarting from the loss of sovereignty involved in their last encounter with what critics call Beijing’s ‘debt diplomacy’

When the sun goes down, Galle Face Green – the seaside urban park south of the financial district of Colombo,

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’s capital – fills up with life. As makeshift stalls selling everything from tropical fruit to cheap clothes line the seafront, daytrippers, teenagers, and lovers throng the site next to the Indian Ocean.
Soon, the scenery they face will be quite different. Port City Colombo, an ambitious Chinese-funded project to build a new metropolis on a 665-acre island reclaimed from the sea, is set to rise just off the popular spot in a couple of decades. Rising in tandem, however, are

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– with the controversial China-backed Hambantota Port looming large in Sri Lankans’ memory.

The government is talking up Port City, which will add an area the size of central London to Colombo, nearly doubling its current size. “It’s the first time we got the opportunity to develop an entire new city on a blank piece of land,” said Jagath Munasinghe, chairman of Sri Lanka’s Urban Development Authority. “It’s a completely new experience we can learn a lot from.”

Renderings of the future city show a cityscape akin to leading Asian cities such as Hong Kong and Singapore. Gleaming apartment towers dot the skyline, with luxury hotels, glossy shopping malls, parks and canals giving way to fancy, low-slung residential units. Developers expect around 80,000 people will live in the city once it is completed, with another 250,000 commuting in daily.

Port City, part of China’s expansive

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, is the biggest foreign direct investment in Sri Lankan history. It is financed by a

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, the mammoth state-owned engineering firm that is also the belt and road plan’s biggest builder.

In its proponents’ view, the project aims to address a problem that has long dogged Sri Lanka. Still recovering from a 26-year civil war with an economic cost that many estimates place at US$200 billion, the island nation’s US$90 billion economy doesn’t create enough jobs, making it a net exporter of labour.

Each year, around 200,000 Sri Lankans, many of whom are highly skilled, leave the island nation in search of employment. The hope is that turning Colombo into a major financial centre will bring jobs and stem the brain drain.

“We lost our opportunity to Dubai and Singapore, and now we are trying to catch up,” Champika Ranawaka, Minister of Megapolis and Western Development, said last year.

Land reclamation for Port City was completed last January, and developers are confident the first buildings will appear within a few years. But as investors line up and land sales are set to begin next month, concerns are growing about China’s involvement and the project’s adverse impact on the environment and local economy.

CHINESE LARGESSE

The idea to expand Colombo’s commercial district seaward was first floated in 2004, in a plan involving the development of a small-scale offshore area next to the city’s harbour. Back then, however, the civil war was still raging and the scheme was put on hold.

The project resurfaced, bigger in size, five years later, when the war ended and Sri Lanka opened its doors to foreign investors. But political divisions and the spectre of conflict kept warding off most of them, except one – China.

“The Sri Lanka-China relationship dates back to the founding of both countries amid the backdrop of the early cold war,” said Kithmina Hewage, a political economist at the Institute of Policy Studies of Colombo. “After the war ended, it’s just been constantly on the rise, especially in terms of economic ties.”

China’s heightened interest in Sri Lanka is largely due to its geography. Sitting right below India’s southeastern tip, it has long been a major maritime trading junction across Eurasia. As Beijing shores up its presence across the Indian Ocean as part of its belt and road infrastructure scheme, Colombo could provide it with a strategic doorway to the Indian subcontinent’s rapidly developing markets.

Port City Colombo is just one Chinese-funded infrastructure project in Sri Lanka. Over the past two decades, Beijing helped fund and build motorways, airports, ports and railways across the island, lending Colombo over US$8 billion – most of which went to fund an ambitious infrastructure spree in the southern province of Hambantota, the hometown of former president Mahinda Rajapaksa.

Some of the ventures have attracted widespread criticism for their questionable usefulness. The Mattala Rajapaksa International Airport, built in 2013 some 220km from the country’s main Bandaranaike International Airport, has been dubbed “the world’s emptiest airport” and currently receives no commercial flights. The nearby Mahinda Rajapaksa International Cricket Stadium has a bigger seating capacity than the town in which it is based; built to host international events, just four international matches have been played there since 2011.

Another, the Hambantota Port project, offered a vivid glimpse of what critics refer to as China’s debt-trap diplomacy.

In December 2017, unable to pay back a loan that had been used to upgrade a structure that currently draws not even a ship per day, Sri Lanka handed over the seaport and 15,000 acres of land around it to China for 99 years, giving the nation the outright ownership of a territory a few hundred kilometres off the coast of its competitor, India.

More worryingly, these projects have left Colombo US$5.5 billion in debt to Beijing – more than 10 per cent of its total external debt.

In May last year, struggling with its upcoming debt payments, the country borrowed a further US$1 billion from China Development Bank; and in March, it secured a US$989 million loan from China’s Exim Bank to build a highway connecting Hambantota province to the central region of Kandy.

“The lure of belt and road money is hard to resist for developing nations as it provides something they are in bad need of – funding for infrastructure,” said Smruti Pattanaik, a research fellow at the Institute for Defence Studies and Analyses in New Delhi. “But Chinese largesse doesn’t come for free, and Sri Lanka is a classic example of this.”

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DOUBTS AND CONCERNS

The main risk, said Freddie Kleiner, senior analyst for London-based consultancy Alaco, is that of a debt-to-equity swap such as the one that occurred with the Hambantota Port. “It’s a very real possibility, though I think the Sri Lankan government would be very reluctant for a similar scenario to occur for Colombo Port City, particularly given the economic returns it hopes the project will generate,” he said.

Then there’s the sovereignty issue. Sarath Iddamalgoda, a coordinator of the People’s Movement Against Port City collective, was concerned over what kind power of power China would exert on the territory: “How is China going to behave – as the landlord or a tenant? Will it decide who is going to live there and under what conditions?”

Most of the concern over Beijing’s involvement comes down to a provision contained in the original agreement, where 50 acres of land within Port City were set aside to be given to CCCC in perpetuity. But in 2016, to ease anxieties, the Sri Lankan government renegotiated the deal and removed the clause. Under the new scheme, China will be given 270 acres on a 99-year lease with no freehold rights.

Opponents have also voiced concerns about the types of businesses Port City will draw. Sri Lanka currently ranks 100 out of 190 in the World Bank’s ease of doing business index, and authorities plan to separate Port City from the country’s broader tax and legal system to attract investment.

However, as no specifics of this plan have been disclosed so far, Sri Lankans fear Port City could turn into a hub for offshore gambling or even money laundering.

When pressed for details, CHEC Port City Colombo – the company handling the project – and government officials declined to comment.

ENVIRONMENTAL WORRIES

Sri Lankan environmentalists also maintain the Port City project is detrimental to both tourism and fishing.

Hemantha Withanage, director of the Colombo-based Centre for Environmental Justice (CJE), said while Port City might increase urban tourism by luring people seeking top-class entertainment and high-end shopping, it was likely to reduce the number of tourists visiting surrounding cities and rural areas.

Withanage also argues the project’s figures just don’t add up – the required sand and rock alone, he said, would cost about US$4.2 billion, almost three times the initial Chinese investment.

But it’s the effect on fishermen that is the biggest concern. The CJE contends that sand mining along Colombo’s coastline to create the foundations where Port City will rise isn’t just causing coastal erosion in other areas, it is disrupting the marine ecosystem and harming the fish stocks that provide a livelihood to the 15,000-strong local fishing community. “The decline in catches since dredging operations begun is a fact,” said Herman Kumara, national coordinator of the National Fisheries Solidarity Movement.

In 2016, a prolonged hunger strike by fishermen protesting against the development convinced the government to force dredgers farther offshore, but this seems scarcely to have helped. “Fishermen’s livelihoods haven’t improved since, [nor have] fish catches,” Kumara said.

In 2015, concerns over the disruption of Colombo’s coastline due to dredging played a key part in the government’s decision to halt the project, with environmentalists and fishermen welcoming the decision.

Barely a year after, an environmental impact assessment established that Port City would not cause coastal erosion and work restarted. The report, however, scored a minor victory for fishermen, as it conceded that dredging would temporarily affect some fishing activity, in turn forcing CCCC to allocate US$3.2 million to make up for economic losses in the impacted areas.

The debate on whether such a large-scale project will actually generate as much employment as marketed and the extent to which it will attract significant foreign investment will continue.

What is certain, according to Hewage from the Institute of Policy Studies Colombo, is that although “Sri Lankans have grown less wary of foreign finance, and many have started seeing projects like Port City Colombo in a positive light, the only thing they aren’t willing to bargain is national sovereignty”.

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A rendering of the Colombo Port City project in Sri Lanka, which is financed by the China Communications Construction Company. Photo: Handout

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China is investing 62 billion U.S. dollars in Pakistan through the China-Pakistan Economic Corridor (CPEC) as part of its Belt and Road initiative, which the Pakistani government and public believe as a game-changer for the country's destiny and senior government officials frequently speak highly of at local and international fora.

During the last five years since its advent in Pakistan, CPEC has enabled Pakistan to avert its energy crisis, besides building an elaborate network of roads and other infrastructure in its various parts. With increasing energy and diminishing distances, not only the lifestyle of people has changed, but economic activity also got a phenomenal boost.

With rapid progress being made in Pakistan through CPEC, several inimical voices started terming the multi-billion dollar project as a "debt-trap" for Pakistan, which will prove a back-breaking burden on Pakistan's economy.

Negating the misleading comments, Noor Ahmed, secretary of the Economic Affairs Division of Pakistan, told Xinhua that Pakistan's total foreign debt is about 106 billion U.S. dollars and Chinese loan accounts for a mere 10 to 11 percent of the total foreign debt, whereas the remaining 89-90 percent is from other sources IMF, Paris Club, and other western organizations.

"China has remained great support for Pakistan and always came to its rescue during the tough economic crisis. Though CPEC, China is building infrastructure in Pakistan to save its economy and to build its infrastructure, some of the money coming in the country is purely an investment, some are an interest-free loan, and other is on very easy and simple terms. If China lends money to Pakistan at one of the lowest interest rates in the world, how can it be a debt-trap?"

China has provided loans to Pakistan, and at the same time invested in Pakistan, and has planned to invest more in the next phase of CPEC, a win-win situation for both as with peace and economic stability in Pakistan, China will also benefit, he added.

Clapping back at CPEC critics, Pakistan's ministry of planning development and reform said in a statement last year that China stepped forward to support Pakistan's development at a time when foreign investment had dried up, and economic activities were being crippled by energy shortages and infrastructure gaps.

"CPEC-related government loans have an interest rate of only 2 percent and a repayment period of 20-25 years, and repayment of debt will begin in 2021. CPEC is not imposing any immediate burden with respect to loans repayment and energy sector outflows. All debt related outflows will be outweighed by the resultant benefits of the investments to the Pakistan economy," the statement read.

Referring to China's developmental project, the statement added that the infrastructure sector is being developed through interest-free or government concessional loans. Pakistan's Gwadar Port is a grant-based investment, which means the government of Pakistan does not have to pay back the investment amount for the development of the port.

In a talk with Xinhua, Syed Hassan Javed, director of Chinese Studies Centre, School of Social Sciences and Humanities at National University of Science and Technology, said that China has helped Pakistan a lot during the last 10 months by lending it money to save it from debt distress by enabling it to stabilize its foreign exchange reserves.

"Pakistan is so badly entangled in western debt-trap that it has to get a new loan to repay previous loans to them. By investing in Pakistan, China is enabling the Pakistani economy to stand on its feet and get out of the debt trap of western organizations."

Unlike Western loan with a high interest rate and with other painful conditions and even global power politics, Chinese loans are fairly concessional, devoid of any arm-twisting for the uplift of the Pakistani economy, he said.

Before CPEC, Pakistan was facing the worst energy crisis of its history. The project's early harvest phase has enabled Pakistan to avert the energy crisis by electricity generation from the country's very own resources including coal and solar energy.

According to the country's ministry of planning development and reform, Pakistan's existing energy mix is highly dependent on expensive fuels, like oil and gas, instead of coal and hydro generation. The country's 41 percent energy generation is dependent on expensive imported fuels, exerting a strain on the balance of payments.

Pakistani Prime Minister Imran Khan also said in a recent statement that dependence on imported fuels will be brought down from 41 percent to 30 percent in five years and less than 20 percent in 10 years using hydel, renewables and local fuels like coal from Tharparkar district in Sindh province, which is operating under the umbrella of CPEC.

"Through CPEC, Pakistan is utilizing its own natural resources to generate electricity which will gradually reduce the country's dependency on imported fuels. Foreign elements are not happy with Pakistan's increasing dependency on local resources through CPEC as it will result in the country's decreasing import of expensive fuels, hence releasing its strain on the balance of payment, and helping it to get out of their debt trap. CPEC is an emerging reality, critics cannot undo it," Javed said.

In a recent talk with Xinhua, Muhammad Muzammil Zia, policy head of job growth and human resource development in CPEC Centre of Excellence, an Islamabad-based think-tank, also said that that CPEC has created 70,000 direct jobs in Pakistan and is likely to create 1.2 million more jobs under its presently agreed projects, which will help poverty eradication in Pakistan.

Not only local, but foreign rating and economic organizations also see CPEC is a great benefit for Pakistan, rather than a debt trap. World's leading rating agency Moody's said that ongoing implementation of CPEC projects is likely to contribute 9 to 10 percent of Pakistan's GDP in the fiscal year 2018-2019.

Another international audit, consulting, advisory, and tax services agency Deloitte said that CPEC would add up to 2.5 percentage points to the country's growth rate.

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According to reports, violence that erupted between Bangladeshi and Chinese workers at a China-funded power plant in southern Bangladesh had cooled off by Wednesday.

China hopes the incident will be resolved based on local laws. But it also wishes that after comprehensive investigation into the cause and possible rumors in this case, the controversy that triggered the fight can be calmed in a thorough and just manner so as to create a safer environment for Chinese companies.

The trend can no longer be overlooked that from time to time opposition voices are raised among local citizenry as their governments sign deals with China under the framework of the

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Initiative (BRI). Lessons must be learned.

Contradictions and disputes could happen whenever there is cooperation between people from different countries. But opposition against Chinese companies operating overseas mostly stems from local residents' suspicions of Chinese motives.

Take the Jakarta-Bandung High-Speed Railway that Indonesia signed in 2015 as part of the BRI. Negotiations between developers and local citizens who owned the land had been time-consuming and arduous. More importantly, the hype by Western media played a vital role in complicating the situation.

Before any official information was released about the conflict in Bangladesh, a previous clash in 2016 was dug up. Both AFP and BBC noted that protests against the construction of two China-backed power plants. But any rational reader would wonder how come people from a place in urgent need of development would choose to boycott power plants? It is hard not to think malicious forces were stirring up troubles behind the scenes.

"Chinese institutions committed or offered to finance 13.8GW of coal-fired capacity in Bangladesh," reported the Financial Times. This would equal 90 percent of Bangladesh's power capacity, mirroring how crucial cooperation with China is to the country.

There have been some ridiculous rumors over the years about the BRI, such as the initiative is facilitating millions of unemployed Chinese to steal job opportunities from other countries, creating a debt trap and flexing its economic muscle for political gain. China must learn to clear up these rumors in a timely fashion.

When Chinese firms expand business overseas, they confront a more complicated social environment than they can imagine. Some countries do not understand China well with their deep-rooted traditional mind-set over the Middle Kingdom, while others are trapped in struggles among different interest groups. Against this backdrop, when rumors are hyped, forces with ulterior motives may make a big fuss about the BRI.

Yet these challenges won't stop the China-proposed initiative. The process of Chinese companies going global will not be smooth. It is believed they are prepared to take a long time before winning the trust and respect of people from other countries. But China-initiated projects will benefit local people in the long run.

The past six years have seen fruitful results between China and countries along the BRI. Take Bangladesh. Chinese companies are helping build the country's largest bridge, its first-ever under-river tunnel, a power grid network and other mega infrastructure programs, all of which are genuine efforts to boost the country's economy and development.

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• A deal signed between the Nicaraguan government and HKND Group includes a clause which would allow parts of the project to be cancelled this year
• But human rights advocates worry President Daniel Ortega’s administration may still push for the project, which aims to rival the Panama Canal

China and Iran flesh out strategic partnership
Staggered 25-year deal could mark seismic shift in the global hydrocarbons sector

Iran's foreign minister Mohammad Zarif paid a visit to his Chinese counterpart Wang Li at the end of August to present a road map for the China-Iran comprehensive strategic partnership, signed in 2016.

The updated agreement echoes many of the points contained in previous China-Iran accords, and already in the public domain. However, many of the key specifics of this new understanding will not be released to the public, despite representing a potentially material shift to the global balance of the oil and gas sector, according to a senior source closely connected to Iran's petroleum ministry who spoke exclusively to Petroleum Economist in late August.

The central pillar of the new deal is that China will invest $280bn developing Iran's oil, gas and petrochemicals sectors. This amount may be front-loaded into the first five-year period of the deal but the understanding is that further amounts will be available in every subsequent five-year period, subject to both parties' agreement.

There will be another $120bn investment in upgrading Iran's transport and manufacturing infrastructure, which again can be front-loaded into the first five-year period and added to in each subsequent period should both parties agree.

Chinese presence
Among other benefits, Chinese companies will be given the first refusal to bid on any new, stalled or uncompleted oil and gasfield developments. Chinese firms will also have first refusal on opportunities to become involved with any and all petchems projects in Iran, including the provision of technology, systems, process ingredients and personnel required to complete such projects.

"This will include up to 5,000 Chinese security personnel on the ground in Iran to protect Chinese projects, and there will be additional personnel and material available to protect the eventual transit of oil, gas and petchems supply from Iran to China, where necessary, including through the Persian Gulf," says the Iranian source.

$280bn — Chinese investment in Iranian oil, gas and petchems sector

"China will also be able to buy any and all oil, gas and petchems products at a minimum guaranteed discount of 12pc to the six-month rolling mean price of comparable benchmark products, plus another 6pc to 8pc of that metric for risk-adjusted compensation."

Under the terms of the new agreement, Petroleum Economist understands, China will be granted the right to delay payment for Iranian production up to two years. China will also be able to pay in soft currencies that it has accrued from doing business in Africa and the Former Soviet Union (FSU) states, in addition to using renminbi should the need arise—meaning that no US dollars will be involved in these commodity transaction payments from China to Iran.

"Given the exchange rates involved in converting these soft currencies into hard currencies that Iran can obtain from its friendly Western banks—including Europäisch-Iranische Handelsbank [in Germany], Oberbank [in Austria] and Halkbank [in Turkey]—China is looking at another 8-12pc discount [relative to the dollar price of the average benchmarks], which means a total discount of up to 32pc for China on all oil, gas and petchems purchases," the source says.

Another positive factor for China is that its close involvement in the build-out of Iran's manufacturing infrastructure will be entirely in line with its One Belt, One Road initiative. China intends to utilise the low cost labour available in Iran to build factories, designed and overseen by large Chinese manufacturing companies, with identical specifications and operations to those in China, according to the Iranian source.

Transport infrastructure
The resulting products will be able to enter Western markets via routes built or enhanced by China's increasing involvement in Iran's transport infrastructure. When the draft deal was presented in late August to Iran's Supreme Leader Ali Khamenei by Iran's vice president, Eshaq Jahangiri—and senior figures from the Economic and Finance Ministry, the Petroleum Ministry and the Islamic Revolutionary Guard Corps—he announced that Iran had signed a contract with China to implement a project to electrify the main 900km railway connecting Tehran to the north-eastern city of Mashhad. Jahangiri added that there are also plans to establish a Tehran-Qom-Isfahan high-speed train line and to extend this upgraded network up to the north-west through Tabriz.

Tabriz, home to a number of key oil, gas and petchems sites, and the starting point for the Tabriz-Ankara gas pipeline, will be a pivot point of the 2,300km New Silk Road that links Urumqi (the capital of China's western Xinjiang Province) to Tehran, connecting Kazakhstan, Kyrgyzstan, Uzbekistan and Turkmenistan along the way, and then via Turkey into Europe, says the Iranian source.

The pipeline plan will require the co-operation of Russia, as it regards the FSU states as its backyard. And, because, until recently, Russia was weighing a similarly all-encompassing standalone deal with Iran. So, according to the source, the agreement includes a clause allowing at least one Russian company to have the option of being involved, also on discounted terms, alongside a Chinese operator.

Benefits for Iran
The Iranians expect three key positives from the 25-year deal, according to the source. The first flows from China being one of just five countries to hold permanent member status on the United Nations Security Council (UNSC). Russia, tangentially included in the new deal, also holds a seat, alongside the US, the UK and France.

“[The deal] will include up to 5,000 Chinese security personnel on the ground in Iran to protect Chinese projects”
"In order to circumvent any further ramping up of sanctions—and over time encourage the US to come back to the negotiating table—Iran now has two out of five UNSC votes on its side. The fact that [Iran foreign minister Mohammad] Zarif showed up unexpectedly at the G7 summit in August at the invitation of France may imply it has another permanent member on side," he adds.

A second Iranian positive is that the deal will allow it to finally expedite increases in oil and gas production from three of its key fields. China has agreed to up the pace on its development of one of Iran's flagship gas field project, Phase 11 of the giant South Pars gas field (SP11). China National Petroleum Corporation (CNPC), one of China's 'big three' producers, added to its 30pc holding in the field when it took over Total's 50.1pc stake, following the French major's withdrawal in response to US sanctions. CNPC had since made little progress developing SP11—a 30pc+ discount to the global market price on potential condensate and LNG exports could change that.

China has also agreed to increase production from Iran's West Karoun oil fields—including North Azadegan, operated by CNPC, and Yadavaran, operated by fellow 'big three' firm Sinopec—by an additional 500,000bl/d by the end of 2020. Iran hopes to increase projected recovery rates from these West Karoun fields, which it shares with neighbour Iraq, from a current 5pc of reserves in place to at least 25pc by the end of 2021 at the very latest. "For every percentage point increase, the recoverable reserves figure would increase by 670mn bl, or around $34bn in revenues even with oil at $50/bl," the Iranian source says.

A final Iranian benefit is that China has agreed to increase imports of Iranian oil, in defiance of a US decision not to extend China's waiver on imports from Iran in May. China's General Administration of Customs (GAC) figures released in late August show that, far from reducing its Iranian imports, China imported over 925,000bl/d from the country in July, up by 4.7pc month-on-month, from an already high base.

The actual figure is still higher, according to the Iranian source, with excess barrels being kept in floating storage in and around China; without having gone through customs they do not show up on customs data, but are effectively part of China's Strategic Petroleum Reserve.

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