Mapping Chinese Investment in South Asia 9819913845, 9789819913848

Table of contents :
Acknowledgements
Contents
Abbreviation and Acronyms
List of Figures
List of Tables
1 Introduction
Chinese Investment in Afghanistan
Chinese Investment in Bangladesh
Chinese Investment in India
Chinese Investment in Nepal
Chinese Investment in Pakistan
Chinese Investment in Sri Lanka
China’s Growing Strategic Influence in the Region
References
2 The Belt and Road Initiative in South Asia: Benefit for China or Threat to Participants
China’s Trade and Investment with BRI Participants
Foreign Direct Investment
Chinese FDI in South Asia
BRI Projects in South Asia
Pakistan
Afghanistan
Bangladesh
Nepal
Sri Lanka
Maldives
BRI and China’s Trade Agreements
Why BRI Is Being Criticised?
The Debt Trap Diplomacy
Inflated Cost
Ambiguous Bidding Process and Widespread Corruption
Environmental Degradation
Slow Down of BRI
Reaction of Non-participants to BRI
Conclusion
Annexure 2.1
Select BRI Projects
BRI Projects in South Asia
References
3 China’s Conundrum in Afghanistan
Evolution of Diplomatic Ties
Sino-Afghan Economic Engagement
Sino-Afghan Trade Ties
Chinese Investments in Afghanistan
Chinese Development Aid to Afghanistan
Afghanistan as a BRI Partner
Challenges to BRI in Afghanistan
Concluding Thoughts
References
4 China in Bangladesh: Developing Infrastructure or Deepening Influence
Developing Diplomatic Ties Since Liberation
Extending Defence and Military Cooperation
Indian Influence on Sino-Bangladeshi Ties
Developing Economic Cooperation or Deepening Dependence
Current Scenario of Bilateral Trade
Foreign Direct Investment in Bangladesh
The Policy Milieu
FDI Inflows in Bangladesh
Capturing Chinese FDI in Bangladesh
Chinese Infrastructure Investment in Bangladesh
Navigating BRI in Bangladesh
Conclusion
References
5 Growing Sino-Indian Economic Ties: Under the Shadow of Border Tension
Sino-Indian Relation: Flourishing over Time
India-China Economic Relationship
Why Countries Are Apprehensive of Chinese Capital?
Trend of Chinese FDI Flows in India
Why India Did Not Participate in BRI?
Territorial Integrity
Security Concern
The AIIB Factor
Conclusion and Policy Implication
References
6 Chinese Investment in Nepal: Capturing the Himalayan Hills
Establishment of Diplomatic Relation
Nepal-China Economic Engagement
Nepal-China Trade in the Contemporary Period
China’s Aid and Assistance to Nepal
FDI Inflows in Nepal
Nepal’s Engagement in Belt and Road Initiative
Challenges to BRI in Nepal
Concluding Remarks
References
7 Chinese Investment in Pakistan: Approaching Towards Bankruptcy
Establishment of Diplomatic Relationship
Sino-Pakistani Military Ties
China-Pakistan Economic Relation
Sino-Pakistani Trade Relation in Twenty-First Century
China-Pakistan Investment Relations
Foreign Direct Investment in Pakistan
FDI Inflow in Pakistan
Chinese Infrastructure Investments in Pakistan
BRI in Pakistan: A Game Changing Opportunity or Threat to Pakistan?
Implementing Critical Projects Under CPEC
Gwadar Port and the Port City
Energy Cooperation Through Establishing Power Plants
Establishing Inland Connectivity
Challenges to CPEC
Conclusion
References
8 China’s Investment in Sri Lanka: Trap of Debt
Development of China-SL Bilateral Relationship
China as the Biggest Investor in Sri Lanka
Sri Lanka as FDI Destination
Volume of Chinese Investment in Sri Lanka
Strengthening Relations Through BRI
Critical Assessment of BRI in Sri Lanka
Burdening Sri Lanka with Chinese Loan
Hambantota Case Study
Colombo International Port City
Summary and Conclusion
References

Citation preview

Mapping Chinese Investment in South Asia Rahul Nath Choudhury

Mapping Chinese Investment in South Asia

Rahul Nath Choudhury

Mapping Chinese Investment in South Asia

Rahul Nath Choudhury Indian Council of World Affairs New Delhi, Delhi, India

ISBN 978-981-99-1384-8 ISBN 978-981-99-1385-5 (eBook) https://doi.org/10.1007/978-981-99-1385-5 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: © Alex Linch shutterstock.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgements

The idea of this book germinated during an occasional faculty meeting with Dr. TCA Raghavan, the former Director of the Indian Council of World Affairs. During the meeting, we discussed the growing Chinese investment in the Indian startup ecosystem. This influenced me to delve into the issue in Indian context from a broader perspective. Later, while I was going through the literature, I decided to expand the horizon of my research to the South Asian region. Over the time the idea of this book evolved and become a reality. This book could not have been completed without help of a great number of friends, colleagues, and well-wishers. First and foremost, I would like to extend my sincere gratitude to the ICWA for providing me space and necessary support to complete the manuscript over the last one year. I would like to express my gratitude to my friend Dr. Amit Ranjan from the National University of Singapore for being a constant motivator in my journey of writing this book. His guidance has immensely helped me in conceptualising the book and conducting the research with great enthusiasm. I am thankful to my colleagues at the ICWA, especially Dr. Teshu, Dr. Himani, Dr. Sanjiv, and Dr. Anwesha. My discussion with them on various topics has greatly helped me to develop my understanding about complex international relation issues. My literature survey has been benefitted immensely by the books I borrowed from Dr. Sanjiv. v

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ACKNOWLEDGEMENTS

My research for this book has been greatly benefitted by the extraordinarily rich library at the ICWA extending to the library staffs, especially Dr. Shashi Rawat, Manju Rathore, Gurpreet, and Priyanka who have all gone several extra miles to arrange books for me. I am indebted and grateful for their generous support. I am thankful to Ms. Sandeep Kaur, editor at the Palgrave Macmillan, New Delhi and the anonymous reviewers for keeping their faith in me and the project since the proposal stage and pushing me to complete the task. My wife Darshana has constantly motivated me to complete the manuscript on time overcoming all personal and professional challenges. She has taken the pain of reading the draft and making necessary corrections. She owes my highest gratitude. Last but not least, I would also like to thank the Almighty or the unknown superpower for His blessings not only to undertake this journey, but also to complete it. Rahul Nath Choudhury

Contents

1

1

Introduction

2

The Belt and Road Initiative in South Asia: Benefit for China or Threat to Participants

13

3

China’s Conundrum in Afghanistan

43

4

China in Bangladesh: Developing Infrastructure or Deepening Influence

65

Growing Sino-Indian Economic Ties: Under the Shadow of Border Tension

95

5 6 7 8

Chinese Investment in Nepal: Capturing the Himalayan Hills

121

Chinese Investment in Pakistan: Approaching Towards Bankruptcy

145

China’s Investment in Sri Lanka: Trap of Debt

175

vii

Abbreviation and Acronyms

A.D AAGC ADB AEI AIIB API APTA ASEAN AUKUS B3W BCIM BGHPP BIDA BIPA BIT BMICH BNP BOI BOO BOT BRI BRICS CATIC CCCC CCP CCWAEC

Anno Domini Asia-Africa Growth Corridor Asian Development Bank American Enterprise Institute Asian Infrastructure Investment Bank Active Pharmaceutical Ingredients Asia Pacific Trade Agreement Association of Southeast Asian Nations Australia, United Kingdom, United States Build Back Better World Bangladesh, China, India Myanmar Economic Corridor Budhi Gandaki Hydropower Project Bangladesh Investment Development Authority Bilateral Investment Protection Agreement Bilateral Investment Treaties Bandaranaike Memorial International Conference Hall Bangladesh Nationalist Party Board of Investment Build-Own-Operate Build, Operate, and Transfer Belt and Road Initiative Brazil, Russia India China South Africa China National Aero Technology Import and Export Corporation China Communication Construction Company Chinese Communist Party China Central and West Asia Economic Corridor ix

x

ABBREVIATION AND ACRONYMS

CGGC CHEC CIS CMBEC CNPC CPEC CPI CPPE CPTPP DoT DPIIT DSE DTAA DWT EIU EPZ EU FDI FOCAC FPI FTA GCL GDP GVA GVC ICFA ICT IGETC IPEF IPR ITC JEC KM LAC LDC LKR MFN MoU NATO NCCCI NPR OBOR OECD

China Gezhouba Group Corporation China Harbour Engineering Company Commonwealth of Independent States China Major Bridge Engineering Company China National Petroleum Corporation China-Pakistan Economic Corridor Corruption Perception Index China Petroleum Pipeline Engineering Comprehensive and Progressive Trans-Pacific Partnership Department of Telecommunications Department for Promotion of Industry and Internal Trade Dhaka Stock Exchange Double Taxation Avoidance Agreement Deadweight Tonnage Economic Intelligence Unit Export Promotion Zones European Union Foreign Direct Investment Forum for China-Africa Cooperation Foreign Portfolio Investment Free Trade Agreement Government Concessional Loan Gross Domestic Product Gross Value Added Global Value Chain India-China Friendship Association Information Communication Technology Inter-Governmental Economic and Trade Committee Indo-Pacific Economic Framework Intellectual Property Rights International Trade Centre Joint Economic Commission Kilometers Line of Actual Control Least Developed Country Sri Lankan Rupee Most Favoured Nation Memorandum of Understanding North Atlantic Treaty Organization Nepal–China Chamber of Commerce and Industry Nepalese Rupee One Belt One Road Organization for Economic Co-operation and Development

ABBREVIATION AND ACRONYMS

OFDI PBC PCJCCI PE PLA PQI PRC PTA PTI QCG QUAD RCEP RMB SCO SCRI SEMA SLCBCC SLPA SOE SPA SUV THEC TNC TPP TTA UAE UK UN UNCTAD US USA USSR WTO

Outward Foreign Direct Investment Pakistan Business Council Pakistan China joint Chamber of Commerce and Industry Private Equity Peoples Liberation Army Partnership for Quality Infrastructure People’s Republic of China Preferential Trade Arrangement Press Trust of India Quadrilateral Coordination Group Quadrilateral Security Dialogue Regional Comprehensive Economic Partnership Agreement Renminbi Shanghai Cooperation Organization Supply Chain Resilience Initiative Strategic Enterprises Management Agency Sri Lanka-China Business Cooperation Council Sri Lankan Port Authority State Owned Enterprises Singapore Port Authority Sport Utility Vehicle The Himalayan Economic Corridor Translational Corporations Trans Pacific Partnership Transit and Transportation Agreement United Arab Emirates United Kingdom United Nations United Nations Confederation on Trade and Development United States Unites States of America Union of Soviet Socialist Republics World Trade Organization

xi

List of Figures

Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

2.1 4.1 4.2 4.3 4.4 5.1 5.2 6.1 6.2 7.1 7.2 8.1 8.2

Cost of BRI projects in regions Bangladesh’s export to China Bangladesh’s import from China Gross FDI inflows in Bangladesh Chinese FDI in Bangladesh Chinese FDI inflows in India Chinese PE investment in India Nepal’s export to China Nepal’s import from China Pakistan’s export to China Pakistan’s import from China Trends in FDI inflows in Sri Lanka Major Investors in Sri Lanka 2010–2019

17 76 77 79 80 109 112 128 128 154 155 182 183

xiii

List of Tables

Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table

2.1 2.2 2.3 3.1 4.1 4.2 5.1 5.2 5.3 6.1 6.2 6.3 7.1 7.2 7.3 8.1 8.2 8.3 8.4 8.5

Export to China by South Asian BRI nations Chinese direct investment in BRI economies China’s bilateral investment treaties China-Afghanistan bilateral trade Bangladesh’s trade with China Proposed China-funded projects in Bangladesh Bilateral visits by State/Government heads India’s trade with China Chinese investment in Indian start-up firms Nepal-China trade Chinese FDI in Nepal BRI projects in Nepal Pakistan’s trade with China FDI inflows in Pakistan Select list of BRI projects in Pakistan FDI inflows in Sri Lanka Sector-wise inflow of FDI in Sri Lanka Utilisation of Foreign funds for project development Select Chinese-funded projects in Sri Lanka Sri Lanka’s external borrowing

20 22 22 50 76 83 98 102 111 129 134 136 154 157 165 184 186 189 192 197

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CHAPTER 1

Introduction

Chinese investment in South Asia is known to be growing rapidly and constantly since the last decade. Within a very short span China has become one of the largest sources of foreign capital in all the South Asian nations. China has invested or committed investment of more than US$150 billion to these nations (excluding India) during the last decade (Bhandari & Jindal, 2019). Chinese investments to these countries ballooned especially after the launch of Beijing’s highly ambitious plan Belt and Road Initiative (BRI). Chinese investment primarily targeted physical infrastructure projects, such as port, road, power generation in most of the countries in the region. However, contrary to this, in India, Chinese investment has been very limited in physical infrastructure. China’s primary investments in India are in the manufacturing (motor vehicles, mobile, and electronics) and services sector. In addition, Chinese investments in other South Asian countries have been channelised through State-Owned Enterprises (SOE), whereas in India, Chinese private sector has taken the lead. BRI played a critical role in boosting Chinese investment in South Asia as this region holds a great importance to this initiative. Here the continental ‘belt’ connects the maritime ‘roads’ via land and through the Indian Ocean. Except India and Bhutan, all other South Asian nations have participated in the BRI. Pakistan and Sri Lanka are among the largest BRI partners in the world. China-Pakistan Economic Corridor © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 R. N. Choudhury, Mapping Chinese Investment in South Asia, https://doi.org/10.1007/978-981-99-1385-5_1

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(CPEC), one of the six BRI corridors, passes through Pakistan connecting China with the Eurasia. Interestingly, BRI faces a great dichotomy in this region as it has one of the largest projects CPEC in Pakistan while India vehemently criticises the initiative (Anwar, 2020). Sri Lanka, a large receiver of BRI loans, had to handover the Hambantota port to China as it failed to repay the loan. This led to the highest level of criticism of BRI worldwide. Chinese investments have strenuously been criticised for exposing the participating countries to huge financial risk and finally pushing them to a debt trap (Chellaney, 2017). Several countries have questioned the viability of these projects, including the terms of extending loans and the rates of interest charged, among others. Widespread corruption, ambiguous bidding process, charging higher rate of interest, and degrading environmental balance are some of the major criticisms of BRI projects across the world including South Asia (Choudhury, 2022).

Chinese Investment in Afghanistan In Afghanistan, China has invested in some of the very critical areas. Chinese investment in Afghanistan started to increase in the last decade, especially after 2007, and by 2020, it became the largest foreign investor in Afghanistan (Haider, 2020). China is influenced by the large volume of untapped natural resources available in Afghanistan. These resources are particularly attractive to China as they can cater to its growing demand for energy and minerals. The very first notable investment by Chinese firm in Afghanistan took place in 2007 when Metallurgical Corporation of China (MCC) and Jiangxi Copper Corporation (JCCL) won a bid to operate the Ayanak copper-gold mine in the country’s eastern Logar Province. Geologists claim it to be the world’s second-largest undeveloped copper deposit. The Mes Aynak Copper Project was leased to China for 30 years. It was agreed that China would set up the infrastructure and import machineries needed to extract copper. Within a very short span, the Chinese companies expanded their operations in Afghanistan. According to the PRC Ministry of Commerce, as of 2008, the Chinese firms were working on at least 33 projects, including roads and telecommunications (Scobell, 2015). Although China has made a sizable volume of investment in war-torn Afghanistan, it remained substantially limited compared to its neighbouring countries in South Asia and Central Asia. Moreover, many Chinese-funded projects that started with great enthusiasm could not

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maintain their progress in the later stages. Also, these projects have been primarily affected by the fragile security situation in Afghanistan which still remains very insecure zone for any investment. Despite having so much interest in Chinese investment, Afghanistan government could not provide proper security to their capital. In fact, many of the Chinese project sites were victims of terrorist attacks on several occasions.

Chinese Investment in Bangladesh In Bangladesh, Chinese foreign direct investment (FDI) registered an exponential growth in foreign capital receipts since 2010. By 2018, China became the largest foreign investor in Bangladesh with US$1029.9 million. It surpassed the traditional industrial countries such as the US, the UK, and Japan. In 2021, the total Chinese investment amount in Bangladesh was US$407.88 million as per the data released by the Bank of Bangladesh. The stock of Chinese FDI as on end June 2021 was reported to be US$1078.71 million. Interestingly, China invested such a big amount despite global slowdown due to the outbreak of COVID-19 pandemic. Chinese capital initially targeted garment manufacturing, trading, and other manufacturing sectors; however, in the recent past, especially after 2016, significant volumes of Chinese capital were invested in the construction and power generation sectors. There are two factors that explain these rises in Chinese capital inflow in Bangladesh. First, in 2015 China unveiled its ambitious ‘Made in China’ plan. Through this initiative China aims to transform itself from a labour-intensive to a capital-intensive economy. Owing to this, a large number of firms that operate in the lower parts of the supply chain have shifted to other countries and Bangladesh is one of them. Second, in 2016 Bangladesh joined China’s mega-infrastructure plan, BRI. Under the BRI scheme, China started to build huge infrastructure projects in Bangladesh. This automatically generated demand for capital in the construction sector which was met by the Chinese firms through their investment. It is thus interesting to note that after joining BRI Bangladesh experienced a huge influx of Chinese capital into its economy. Apart from BRI projects, China has also invested huge amounts in several infrastructure development projects in Bangladesh. The country is actively engaged in building ports, roads, bridges, power plants, and other physical infrastructure in Bangladesh. Large volumes of Chinese investment have contributed to Bangladesh’s connectivity development and power generation. Moreover,

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many private Chinese companies have also signed separate contracts to build infrastructure projects in Bangladesh that are not funded by the China government.

Chinese Investment in India Chinese investment in India is primarily directed towards manufacturing sector in the form of FDI, while service sector investments are the portfolio investments dominated by technology and start-up firms. The Department of Promotion of Industry and Internal Trade (DPIIT), Government of India, data suggests that the total FDI inflow which was only US$1 million until 2010, had touched the value of US$173 million in 2019. In case of portfolio investment, the volume was US$3,423 million in 2019. As per the data and analytics firm GlobalData, India witnessed a 12 times growth of Chinese investments in its start-up firms between 2016 and 2019. Chinese investments increased from US$381 million in 2016 to US$4.6 billion in 2019. The same firm claims that a majority of unicorns in India (17 out of 24) are backed by corporate and pure-play investment firms from China (PTI, 2020). Our analysis suggests that all these capitals have been infused in technology-based companies rather than in traditional business format. Second, China primarily invested in those firms that are performing better than their rivals or are enjoying the market leadership position. Further, Chinese government tends to invest in business models which have been a success in their domestic economy. Finally, they prefer to invest in a sector where competition is limited. Similar to other South Asian nations, Chinese investment increased in India dramatically only after 2010. The rise in the Chinese capital inflow in India has been accompanied by an increase in the trade between these two neighbours by a significant volume. Data extracted from the UN COMTRADE reveals the trade between India and China increased from US$58 billion in 2010 to US$85 billion in 2019.

Chinese Investment in Nepal China features as the largest contributor to Nepal’s foreign investment in the last few years. China is the largest source of FDI in Nepal, calculated in terms of commitment amount, and the second-largest source as per the invested amount (Embassy of Nepal in Beijing, 2022). It has committed the largest volume of FDI received by Nepal with investment pledges

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of 22.5 billion Nepali rupees (188 million US dollars) in 2020–2021. However, in terms of FDI stock, India remained the top investor with NPR 62.45 billion followed by China with NPR 30.97 billion in 2020 (Nepal Rastra Bank, 2021). Interestingly, Chinese investment in Nepal had shown a positive trend even during the COVID-19 pandemic (Yadav, 2021). It has predominantly targeted the energy-based industries. More than 99% of China’s FDI stock is concentrated in hydropower projects and cement production (Nepal Rastra Bank, 2021). Other than the energy sector, other sectors like mining-related industries, constructionbased industries, forest-based industries, etc. have also performed fairly in attracting Chinese investment. Several infrastructure projects in Nepal are developed under the BRI initiative. It has been observed that Nepal’s relation with China strengthened especially after 2015. Incidences such as China’s generous support after the devastating earthquake in Nepal in 2015 and the unofficial economic blockade by India, and the signing of Transit treaty in 2016 have played critical roles in strengthening the bilateral ties between Nepal and China.

Chinese Investment in Pakistan Pakistan has traditionally received large volume of investments from Chinese companies. Data released by the Pakistan-China joint Chamber of Commerce and Industry suggests that the number of Chinese firms operating in Pakistan has increased from 50 in 2005 to more than 2100 by 2022. They have invested in wide range of areas such as oil and gas, information technology, telecommunications, power generation, engineering, automobiles, infrastructure, and mining, among others. China has also been a major participant in Pakistan’s infrastructure development. In fact, at the initial phase of the economic cooperation, China predominantly invested in several infrastructure projects in Pakistan. One of the very important projects funded by China at the beginning of the SinoPakistani economic cooperation is the construction of the Karakoram Highway (KKH). The 800 km Karakoram Highway was built at an estimated cost of Pakistani Rs 600 crores. Inaugurated in 1982, this road connects Kashgar in China’s Xinjiang Uighur Autonomous Region with Islamabad. China also participated in the construction of a hydroelectric plant in Tarbela, Baluchistan, discovering iron ore deposits in Baluchistan, and therefore developed a heavy industry project around these deposits. Civil nuclear plants were set up with Chinese assistance. To boost its

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manufacturing sector, China helped Pakistan in setting up sugar mills and fertiliser plants across the country. China has also developed one of the largest ports in Pakistan, Gwadar. Chinese investment was multiplied after Pakistan joined BRI. One of the flagship projects of BRI, the CPEC, passes through Pakistan connecting China with Central Asia. A large number of infrastructure projects are built under the umbrella of CPEC. Through BRI, China has committed US$62 billion loan to Pakistan which is considered one of the largest loans extended under BRI to a particular country. Analysis reveals that CPEC also brought a lot of inherent risks to Pakistan. From its inception it attracted opposition from India who considers the plan to be an illegal activity and intrusion to its sovereignty. CPEC has also been criticised for having lack of transparency, spreading corruption, displacing locals, and violating their rights. It has imposed heavy burden of unsustainable foreign loan and led Pakistan to the blink of debt trap. Pakistan is, therefore, in a dire position to repay the loans and has already approached bilateral and multilateral donors multiple times for a bailout package.

Chinese Investment in Sri Lanka Inflow of Chinese capital was considerably more in Sri Lanka than in any other country in the recent time. China funded Sri Lanka to undertake several mega projects to bridge its infrastructure investment gap which had never been supported by any other country earlier. Because of its limited economic strength and capacity to repay, multilateral organisations tried to keep distance from the island nation. Even if they offer any loan, it often comes with a series of tough and mandatory obligations and requirements of structural changes in the economy. They also come with handful of strict restrictions. In this conjuncture, it was easy for China to lure Sri Lanka with a loan which is comparatively easy to access, though it comes with a huge cost. Data reveals that majority of Chinese funds have been utilised in the transport infrastructure (road, bridge, port, rail), water supply & sanitation, health & social welfare, and energy generation, among others. China’s economic engagement with Sri Lanka boosted after the latter joined BRI. Following this, Chinese investment multiplied in the island state. Through BRI scheme, Chinese capital started pouring to Sri Lanka who was already attracting a large volume of FDI for a while. Several

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multimillion-dollar projects were launched which include both newly designed projects as well as extension of previously completed ones. One of the biggest projects launched in Sri Lanka with Chinese loan was the development of the Hambantota port. Chinese association with this project attracted global attention when Sri Lanka had to transfer the ownership of the port to a Chinese firm due to its inability to repay the loan. It has been observed that to Philip economic growth, Sri Lanka has opted for easy loans which led it to a debt trap and created a huge economic crisis. Mismanagement of funds, high corruption, and political rivalry further deepened the crisis. The loans availed under the BRI scheme are largely responsible, though not entirely, for the debt burden and the economic mess created in the island.

China’s Growing Strategic Influence in the Region With growing economic engagement, China also expanded its political and diplomatic dominance in the South Asian region. It has been observed that China has intensified its diplomatic engagement with all the South Asian nations during the last decade. The South Asian nations have increasingly come into contact with Beijing in the diplomatic, economic, and security domains. Many believe that China’s primary objective is to expand its strategic presence in the region which it aims to achieve through leveraging its economic influence and strong diplomatic and defence ties. The South Asian nations, therefore, will have to deeply consider the long-term implications of China’s growing presence and activities in their countries. China’s political and diplomatic dominance in the region can be observed from the succeeding discussion. China augmented its diplomatic activities after the COVID-19 pandemic. It supplied vaccines, testing kits, personal protection equipment, and medical supplies to all the countries in the region. It extended a US$500 million loan to Sri Lanka and sent a team of experts to Bangladesh to treat patients and train medical professionals (Pal, 2021). It also offered generous help to Afghanistan to fight against COVID19. China organised several multilateral dialogues with the South Asian countries (except India, Bhutan, and Maldives) for closer cooperation in fighting COVID-19 and coordinating their economic agendas, reflecting a new approach in Beijing’s outreach to the region (Ranjan & Haiqi, 2022).

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Through its military presence around Gwadar, PLA navy plans to maintain a permanent presence in the Arabian Sea and the Gulf of Oman, expanding the naval footprint and refuelling capabilities (Sutton, 2020). China voiced concerns about Jammu and Kashmir at the United Nations on behalf of Pakistan following the removal of special status of Jammu and Kashmir Province. China also proposed to mediate between India and Pakistan after the diplomatic dispute aroused between them due to the abrogation of Section 370 in Jammu and Kashmir in India. In Afghanistan, initially Beijing was interested only in extracting natural resources keeping distance from diplomatic interactions. But off late it realised the necessity of strengthening diplomatic activities. China offered to mediate between Afghan government and Taliban in their stalled efforts to engage in peace negotiations. In 2017, China sponsored the creation of a trilateral dialogue forum with Pakistan and Afghanistan (Haider, 2020). It also proposed setting up of ‘peace and reconciliation forum’ which subsequently resulted in the formation of the ‘Quadrilateral Coordination Group’ (QCG) comprising of Afghanistan, Pakistan, China, and the US focusing on Afghanistan’s security (Ghosh, 2019). Chinese President Xi has pledged to continue to help Afghanistan build its capacity in its fight against terrorism and thereby maintain stability (Grossman, 2020). The withdrawal of the US force from Afghanistan in 2021 smoothened its road to assert diplomatic influence in the war-torn country. China leverages its military ties combined with economic tools to assert dominance in Bangladesh. China is the largest arms supplier to Bangladesh and has also helped it in setting up military units and capacity building programmes through joint exercises. China has positioned itself as a key mediator to repatriate Rohingya refugees from Bangladesh (McPherson et al., 2020). The profound political and social disruption have facilitated Chinese influence in Nepal. China always had friendly ties with Nepali monarchs and later the influence of Marxist ideology among the ruling parties has broadened its avenues to assert dominance (Garver, 2012). China has been practising aid diplomacy in Nepal for a long time. In the recent time, frequent visits of Chinese leaders heightened the diplomatic association between the two countries. The very recent visit of Chinese Foreign Minister Wang Yi in March 2022 to Kathmandu following the visit of President Xi Jinping in 2019 reflects the growing importance of Nepal in Chinese foreign policy. China has emphasised its support for Nepal’s

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pursuit of independent policies in an effort to persuade the Himalayan country to keep a safe distance from the US (Ranjan & Haiqi, 2022). In Sri Lanka, China employed its economic muscle to assert dominance. Sri Lanka’s huge debt burden is created by Beijing by financing several economically unviable infrastructure projects. Beijing asserted its dominance while taking the control of Hambantota port. During the cold war in Sri Lanka, Beijing initially supplied weapons, aid, and diplomatic cover. Beijing has also allegedly tried to manipulate election in Sri Lanka by openly campaigning and channelling money into Mahinda Rajapaksa’s campaign in a bid to keep its ally in office. Chinese officials were also reportedly engaged with Sri Lankan media outlets and academia to counter negative perceptions about its state-backed infrastructure projects, reflecting a new awareness of the importance of public opinion (Custer, 2022). Several evidences suggest that China is expanding its spare of economic dominance as well as political and diplomatic influence in the South Asian region, applying similar tactics of using its economic power to assert dominance. China emerged as the major trading partner and investors in the region and made them largely dependent on its capital. Later, it leveraged its position to influence the countries and their policy framework. The dramatic increase of Chinese capital inflow in the region is welldocumented. However, we have a dearth of studies that estimate the volume and nature of the investment. We don’t have any reliable data showing the investment received by individual sectors. Many stakeholders are not aware of the exact form of the Chinese capital flowing to the region. Furthermore, Chinese investment has always been seen with some level of doubt, yet China is the primary source of foreign capital in majority of the nations in the region. Apprehension about Chinese investment has forced India to amend its FDI policy very recently. Till now the literature we have in this area is mainly in the form of commentaries from think tanks or newspaper articles. Obliviously many of these articles are well researched and make timely interventions. But they fail to provide us a detailed and in-depth analysis of the issue covering a broader perspective. They also suffer from the limitation of covering only a small time period in their analysis. There is a need to bridge all these gaps in the literature. It is important to assess China’s growing investment in the region, and the nature and objective of the investment. Investigation is

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also needed to find the sectors which are primarily attracting these capitals. A country-wise analysis would provide evidence if any kind of threat is associated with the Chinese capital as touted by a section of scholars and policymakers. A scholarly study can answer these questions and this book is an attempt to address that by delving into a greater detail for each of the South Asian economies (excluding Bhutan and Maldives) while devoting a chapter for each nation. The book is organised in nine chapters. Chapter 2 explores the Chinese investment in the South Asia though BRI. It discusses the how China conceived the idea of BRI and shared it with the world. It makes an investigation into how the South Asian economies have joined the initiative, and how their journey has been so far in this mega connectivity plan. Some of the initiatives undertaken to counter BRI are also discussed in this chapter. Chapter 3 explores how from an aid-donor China become one of the largest trading partners and investors in Afghanistan. China’s growing diplomatic engagement in this war-torn country is also discussed in this chapter. Chapter 4 analyses Chinese investment in Bangladesh. It finds how China becomes a dominant player in Bangladesh’s economy through its investment. The military cooperation between China and Bangladesh is also highlighted in this chapter. Chapter 5 delves into growing Chinese investment in India. It addresses India’s apprehension against Chinese capital and explores how Chinese investment in India is different in nature compared to other economies in the region. Chapter 6 addresses China’s growing closeness with Nepal. It analyses the factors that are facilitating China to make easier inroads to Nepal. Nepal’s efforts to reduce heavy dependence on India by using China a medium are addressed in this chapter. In Chapter 7, we discuss how Pakistan is almost at the brink of its bankruptcy by accepting huge volume of Chinese loan. The chapter addresses the issues of China’s flagship project CPEC and the controversies arising from the project. Chapter 8 analyses the Chinese investment in Sri Lanka. It throws light on how the island nation has accepted huge volume of investment from China for several economically unsustainable infrastructure projects that led the country to the financial crisis.

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References Anwar, A. (2020). South Asia and China’s Belt and Road Initiative: Security Implications and Ways Forward. In L. V. Alexander (Ed.), Hindsight, Insight, Foresight, Thinking About Security in the Indo-Pacific (pp. 161–178). Daniel K. Inouye Asia-Pacific Center for Security Studies. Bhandari, A., & Jindal, C. (2019). Chinese Investment in India’s Neighborhood. Gateways House. Chellaney, B. (2017). China’s Debt-Trap Diplomacy. Project Syndicate. https:// www.project-syndicate.org/commentary/china-one-belt-one-road-loansdebt-by-brahma-chellaney-2017-01?barrier=accesspaylog. Accessed on 25 May 2022. Choudhury, R. N. (2022). Economic Implications of BRI. In S. Kumar (Ed.), China’s BRI in Different Regions of the World Cooperation, Contradictions and Concerns (pp. 34–45). KW Publishers. Custer, S. (2022, May 12). China’s Influence in South and Central Asia: Competition in the Indian Ocean and China’s Engagement with Sri Lanka and the Maldives. Testimony by Samantha Custer, AidData Director of Policy Analysis, Before the U.S.-China Economic and Security Review Commission for a hearing on “China’s Influence in South and Central Asia” and the panel “Competing Visions for the Indian Ocean”. Aiddata. https://www.aiddata.org/publications/chinas-influence-insouth-and-central-asia-brief. Accessed on 20 September 2022. Embassy of Nepal, Beijing. (2022). Bilateral Relations. Ministry of Foreign Affairs, Government of Nepal. https://cn.nepalembassy.gov.np/bilateral-relati ons/. Accessed on 10 September 2022. Garver, J. W. (2012). The Diplomacy of Rising China in South Asia. Orbis, 56(3), 391–411. Ghosh, A. (2019, November 6). China’s Growing Influence in Afghanistan and Its Implications for the Peace Process. Indian Council of World Affairs. https://www.icwa.in/show_content.php?lang=1&level=3&ls_id=3856&lid= 2935. Accessed on 13 August 2022. Grossman, D. (2020). What China Wants in South Asia (Issue Brief No. 368). Observer Research Foundation. https://www.orfonline.org/research/whatchina-wants-in-south-asia-67665/. Accessed on 11 July 2022. Haider, S. F. (2020). China’s Deepening Diplomatic and Economic Engagement in Afghanistan. China Brief, 20(6), 25–29. https://jamestown.org/ program/chinas-deepening-diplomatic-and-economic-engagement-in-afghan istan/. Accessed on 9 September 2022. McPherson, P., et al. (2020, January 20). China Struggles in New Diplomatic Role, Trying to Return Rohingya to Myanmar. Reuter. https://www.reuters. com/article/us-myanmar-rohingya-china-insight-idUSKBN1ZJ0SY. Accessed on 3 July 2022.

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Nepal Rastra Bank. (2021). Survey Report on Foreign Direct Investment in Nepal 2019–2020. Nepal Rastra Bank, Economic Research Department. https://www.nrb.org.np/contents/uploads/2021/09/FDI-2019-20_ September-2021.pdf. Accessed on 2 September 2022. Pal, D. (2021). China’s Influence in South Asia: Vulnerabilities and Resilience in Four Countries. Carnegie Endowment for International Peace. https:// carnegieendowment.org/2021/10/13/china-s-influence-in-south-asia-vulner abilities-and-resilience-in-four-countries-pub-85552. Accessed on 12 August 2022. PTI. (2020, June 26). Chinese Investments in Indian Start-Ups Grow 12 Times to $4.6 Billion in 2019: GlobalData. https://www.financialexpress.com/eco nomy/chinese-investments-in-indian-start-ups-grow-12-times-to-4-6-billionin-2019-globaldata/2005389/. Accessed on 20 June 2021. Ranjan, A., & Haiqi, Z. (2022, April 20). China’s Diplomatic Investments in South Asia. ISAS Insights. Institute of South Asian Studies, National University of Singapore. https://www.isas.nus.edu.sg/papers/chinas-diplomatic-inv estments-in-south-asia/. Accessed on 12 September 2022. Scobell, A. (2015). China Ponders Post-2014 Afghanistan: Neither “All in” Nor Bystander. Asian Survey, 55(2), 325–345. Sutton, H. I. (2020, June 2). China’s New High-Security Compound in Pakistan May Indicate Naval Plans. Forbes. https://www.forbes.com/sites/hisutton/ 2020/06/02/chinas-new-high-security-compound-in-pakistan-may-indicatenaval-plans/?sh=5a70ae131020. Accessed on 2 September 2022. Yadav, D. (2021). Is the Growth of Sino-Nepal Relations Reducing Nepal’s Autonomy? China Brief, 21(5), 27–32.

CHAPTER 2

The Belt and Road Initiative in South Asia: Benefit for China or Threat to Participants

The Belt and Road Initiative (BRI), erstwhile known as One Belt One Road (OBOR1 ), is an ambitious plan launched by China in 2013 to develop infrastructure of trade routes connecting China with the rest of the world. Chinese President Xi Jinping announced the BRI plan in two different speeches delivered in Kazakhstan and Indonesia. In Kazakhstan, Xi explained his plan of restoring land routes from China to Central Asia and Europe which is also known as the Silk Route, while in Indonesia, President Xi shared his ambition to connect China to the Middle East and Europe through the sea route naming it as Maritime Silk Road. Following the announcement, China formed a group of experts as ‘Leading Group’ to promote the BRI worldwide, with an administrative office under the National Development and Reform Commission. The group published the ‘Vision and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road’ in March 2015 which was followed by the first Belt and Road Forum for International Cooperation held in May 2017. President Xi termed BRI as the project of the century (Kondapalli, 2021). The vision of BRI was 1 In Chinese language it is still referred as ‘One Belt One Road’ (一带一路). It only translated the version as Belt and Road Initiative for simplification. OBOR means two routes, a maritime road through the Indian Ocean and a land belt across central Asia.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 R. N. Choudhury, Mapping Chinese Investment in South Asia, https://doi.org/10.1007/978-981-99-1385-5_2

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promoted in several occasions such as Shanghai Cooperation Organization (SCO) meeting, Qingdao Summit, and Forum for China-Africa Cooperation (FOCAC), among others (BRI Leading Group, 2019). BRI has been divided into 6 economic corridors, China–Mongolia– Russia Economic Corridor, the New Eurasian Land Bridge, the China– Central Asia–West Asia Economic Corridor, the China–Indochina Peninsula Economic Corridor, the China–Pakistan Economic Corridor, and the Bangladesh–China–India–Myanmar Economic Corridor. Later, in 2019 the Bangladesh–China–India–Myanmar Economic Corridor was renamed as China–Myanmar Economic Corridor. Among all these corridors, the China-Pakistan Economic Corridor (CPEC) is the largest with an estimated value of US$62 billion. The map placed below gives us an overview of the routes and corridors (both land and sea) proposed to develop under the BRI plan. Identifying the old or existing routes the map gives us the input to compare the possible changes under the new initiative. The BRI is best summarised by President Xi: China will actively promote international co-operation through the Belt and Road Initiative. In doing so, we hope to achieve policy, infrastructure, trade, financial, and people-to-people connectivity and thus build a new platform for international co-operation to create new drivers of shared development. (Xi, 2017b) Map of BRI

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Note This is a representative Map and may not correctly mark borders. Source http://www.china.org.cn/opinion/2017-06/09/content_4099 7481.htm The Belt and Road Initiative aims to promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road, setup all-dimensional, multi-tiered, and composite connectivity networks, and bring diversified, independent, balanced, and sustainable development in these countries. The initiative to jointly build the Belt and Road, embracing the trend towards a multi-polar world, economic globalisation, cultural diversity, and greater IT application, is designed to uphold the global free trade regime and the open world economy in the spirit of open regional cooperation. It is aimed at promoting orderly and free flowing economic factors, highly efficient allocation of resources, deep integration of markets; encouraging the countries along the Belt and Road to achieve economic policy coordination and carry out broader and more in-depth regional cooperation of higher standards; and jointly creating an open, inclusive, and balanced regional economic cooperation architecture that benefits all.2 Over the last 9 years, since it was launched, BRI has been expanded to areas beyond trade routes such as economic and trade cooperation zones, industrial parks, finance and trade cooperation, innovation and technology, people-to-people, and cultural exchanges among others.3 BRI is home to 4.6 billion people with a combined GDP of US$29 trillion and contributes 40% of the country’s global export (Kyger, 2020; World Bank, 2019). BRI is an open arrangement where anyone is welcome to participate. Until March 2019, 173 cooperation agreements with 125 countries and 29 international organisations were signed as part of the global initiative (BRI Leading Group, 2019). BRI registered a sharp rise in its participants despite devastating effect of COVID-19 outbreak in 2020. Addressing the Asia and Pacific High-Level Conference on Belt and Road, on 23 June 2021, Chinese Foreign Minister Wang Yi mentioned that total 140 countries have joined BRI. He further revealed that the

2 State Council Information Office. (2015). Full Text: Vision and Actions on Jointly Building Belt and Road. Available at: http://english.scio.gov.cn/beltandroad/2015-03/ 28/content_76329478.htm. 3 Full text of joint communique of leaders’ roundtable of 2nd BRF. The State Council Information Office, Peoples Republic of China. Available at: http://english.scio.gov.cn/ beltandroad/2019-04/27/content_76349836.htm. Accessed on 2 March 2022.

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Chinese trade with BRI partners had crossed US$9.2 trillion while direct investment had surpassed US$130 billion by 2021.4 China spent around US$200 billion on BRI till 2017 and it is growing continuously (Chatzky & McBride, 2020). The American Enterprise Institute (AEI) and the Heritage Chinese Global Investment Tracker, which tracks Chinese construction and investment across all sectors, put the total figure roughly at US$340 billion during 2014–2017. Global investment banking giant, Morgan Stanley predicted that China’s total expenses for BRI could reach US$1.2–1.3 trillion by the time it completes in 2027 (Kyger, 2020). By 2019, BRI had ventured 2,631 projects with a combined value of US$3.7 trillion, involving around 2600 enterprises. By this time more than 80 overseas economic and trade cooperation zones were built, while 76 national level institutions in 28 BRI countries were established. Among all the ongoing BRI projects, transportation makes up 47.4%, while utilities (power and water) comprise 21.3% and real estate sector shares 17%. Other notable sectors are oil and gas sector and manufacturing sector (Refinitiv, 2019). A list of major BRI projects is presented in the Annexure 2.1 of this chapter. The data in the Fig. 2.1 shows that the maximum amount of Chinese capital has flown to Southeast Asia followed by Commonwealth of Independent States (CIS) and Africa. South Asia has attracted US$108 billion of BRI fund. It is reported that till 2019, BRI had 84 ongoing projects in Pakistan, 72 in Sri Lanka, and 62 in Bangladesh (Refinitiv, 2019). The BRI was launched at a time when the most of its participants were experiencing acute deficit in their infrastructure spending. It was a time when traditional financial institutions were shying away from financing infrastructure projects (Kondapalli, 2021). OECD estimates that the global infrastructure investment needs range annually between US$2.9 trillion and US$6.3 trillion (OECD, 2018). Asian Development Bank reports an investment need of around US$26 trillion until 2030 for infrastructure sector in Asia only. Globally, by sector, the largest investment needs lie in transport and energy infrastructure (ADB, 2017). They are followed by rail transport, telecommunications, and water infrastructure. Calculating the region-wise needs as a share of GDP scholars find, the number as the Pacific region 9.1% in South Asia, 8.8%, Central Asia, 4 Wang Yi Presides over Asia and Pacific High-level Video Conference on Belt and Road Cooperation. https://www.fmprc.gov.cn/mfa_eng/wjb_663304/wjbz_663308/act ivities_663312/202106/t20210624_9168252.html.

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17

10

171

162

South East Asia South Asia Europe Midddle East Africa CIS

108

120

Other Asia South and Central America

93

14

Fig. 2.1 Cost of BRI projects in regions (in US$ billion) (Source Adopted from Serica, 2021)

7.8% around 5.7% in Southeast Asia, and 5.2% East Asian (OECD, 2018). The BRI was devised to address these critical needs and thus become attractive to vast number of countries around the globe. The BRI has, therefore, offered an alternative form of financing infrastructure projects. The economies participating in BRI have been benefitted in several ways. It has expanded the circulation of goods and services at a time when global trade was experiencing negligible growth (Kondapalli, 2021). Majority of them have received larger amount of foreign investment, their infrastructure sector has got a boost while they have experienced a higher volume of trade especially with China in the very recent past. Along with the benefits, BRI also involves a potential threat for the participants. They had to bear substantial cost for their participation to the Chinese initiative. BRI projects in many countries have been criticised for their ambiguous bidding process, offering the contract to Chinese companies, skyrocketed cost, and charging higher rates of interest for the loans extended to the participants compared to multilateral loans. In general, there are two strides of the BRI, one that creates infrastructure and brings economic growth and another that puts huge burden of loans to the participants which sometimes become difficult or even unbearable

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for smaller economies. In this background, the current chapter aims to explore these two distinct features of BRI, viz., and the benefit it brings with the expanded volume of trade, and the risk of getting debt trapped by China. It analyses if the initiative has accrued more benefits to China or its participants. We will explore the reasons why several nations criticise the BRI. The discussion draws especial reference to South Asian region.

China’s Trade and Investment with BRI Participants As mentioned in its communiqué, trade is a vital part of the BRI. BRI is also a crucial element of Chinese trade and investment initiative that seeks to promote regional economic integration and a greater economic reliance on China and establishes Chinese economic influence. It aims to stimulate economic growth and improve ties with nations. However, unlike traditional regional trade agreements, BRI has no predefined or mutually agreed terms on tariff reduction or offering market access. The cooperation mechanism is rather flexible yet entails many aspects that may reduce costs to boost trade (Görg & Mao, 2022). Under BRI, several impediments to trade are reduced, cooperation on customs operations are increased, and trade barriers between China and BRI countries are removed. Thus BRI helps to reduce trade cost to a large extent. A large body of literature investigates the possible impact of BRI on the trade volume of the participating economies. Zhai (2018) argues that there will be a trade creation effect for the economies along and beyond the Belt-Road route, while Herrero and Xu (2017) and Ramasamy and Yeung (2019) suggest that European Union (EU) nations will accrue considerable benefit from the BRI and expand their trade volume due to reduction in transportation costs. Yang et al. (2020) opines that most Belt-Road economies foreign trade and trade terms are promoted due to the infrastructure investment under the BRI. The bilateral trade between China and the BRI participants has continuously increased since they joined the mega plan. Yu et al. (2020a) argue that the bilateral revealed trade preference index between China and the Belt-Road countries has grown approximately 8% faster than that with the non-Belt-Road countries. Yu et al. (2020b) outline China’s export potential to the Belt and Road area substantially increased since the launch of BRI. Zheng et al. (2019) and Karim et al. (2018) find strong evidences to support the growing linkage of trade between China and the economies participating

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in BRI. The World Bank data suggests that from the period 2013 to 2018 the gross trade value between China and other BRI economies surpassed US$9.2 trillion. The Chinese trade with BRI countries accounts for around 27.4% of its total merchandise trade and is growing at a rate faster than its total foreign trade. In 2018, the value of trade in goods between China and other BRI countries touched US$1.3 trillion, growing at a rate of 16.4% per year. Similarly, the services trade between China and other BRI nations is also expanding steadily. The total services trade between China and other BRI nations touched US$97.76 billion in 2017 increasing at 18.4% rate per year. In 2017 BRI economies shared 14.1% of China’s total trade in services, 1.6% points higher than in 2016.5 Examining the impact of the Belt and Road Initiative on trade for 71 participating countries, the World Bank reveals that the initiative increases trade flow by up to 4.1% among participating countries (Baniya et al., 2019). At the sub-regional level, the increase in bilateral trade between China and the Association of Southeast Asian Nations (ASEAN) touched the highest year-by-year growth at 14.1%, outpacing those with the other two vital trading partners: the United States (US) and the European Union (EU).6 The World Bank further reveals that BRI economies have increased their Global Value Chain (GVC) participation and are moving up in the network (Baniya et al., 2019). Table 2.1 presents export (both goods and services) by South Asian BRI participants to China. It is clear from the data that all the nations have experienced increased volume of exports to China in the reference period. In terms of percentage, Nepal realised the maximum growth rate in its export to China during the same time period. Nepal is followed by Afghanistan and Bangladesh. It is obvious that the nations have experienced increased export volume to China, but BRI cannot be entirely attributed for this growth. An analysis of the exported items that have registered the growth will give us a better idea.

5 Chinese Embassy in Sweden, Ministry of Foreign Affairs, Peoples Republic of China, The Belt and Road Initiative Progress, Contributions and Prospects. https://www.mfa. gov.cn/ce/cese/eng/zgxw/t1675676.htm. 6 China’s Foreign Trade with Belt & Road Countries Robust in 2019. Business Reporting Desk. Available online: https://www.beltandroad.news/2020/01/15/chinasforeign-trade-with-belt-road-countriesrobust-in-2019/. Accessed on 15 January 2020.

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Table 2.1 Export to China by South Asian BRI nations (Billion US$)

Afghanistan Bangladesh Maldives Nepal Pakistan Sri Lanka

2016

2019

Change %

1.14 36.86 3.15 2.01 25.48 17.45

1.48 46.36 3.8 2.66 28.15 19.43

29.82 25.77 20.63 32.34 10.47 11.35

Source TCdata 360, the World Bank

Foreign Direct Investment Over the last decades, foreign direct investment (FDI) in BRI economies has risen significantly. Several studies such as Du and Zhang (2018), Yu et al. (2019), and Shao (2020) have reported that investment flows from China to BRI economies have increased by 20 to 50% since the inception the mega plan. Du and Zhang (2018) find Chinese acquisitions of target companies in the Belt and Road countries have considerably increased after the announcement of the BRI strategy. They also find green field investment in BRI countries was growing at a slower pace than acquisitions. Evidences were found that Chinese firms transferred a portion of outward foreign direct investment (OFDI) from green field investment to acquisitions to seize the investment opportunities more promptly. Following the launch of BRI, China devised a series of policies to support the overseas expansion of Chinese companies. China shifted its foreign investment target from natural resources to high-tech and infrastructure sector. The EIU (2020), reported Cainiao, the logistics arm of technology firm Alibaba, technology giants Tencent, ByteDance, and the video streaming platform iQIyI has invested heavily in logistics and global service centres across BRI countries. Data extracted from statista.com reflects that during 2020, China’s OFDI flows to countries participating in the BRI reached US$22.54 billion with the top destinations being Singapore, Indonesia, and Vietnam. China shares 20% of the total FDI inflows in BRI economies in 2020 (Nedopil, 2022). A rise has also been noticed in the FDI flows among the BRI economies. This rise in FDI inflow is contributed by a large set of countries particularly from East and Asia-Pacific regions. Among the industries, energy sector received the highest volume of investment of 39% followed by transport (25), real estate (22), and metals

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(10). East Asian region received 27% of total BRI investment followed by West Asia (22), Sub-Saharan Africa (21), and Arab and the Middle East (14) (Nedopil, 2021). These investments are financed through loans provided by Chinese financial institutions and/or contractors with the project often receiving guarantees through the host country’s government institutions. The prominent companies that executed the BRI construction projects are PowerChina, China Communications Construction, and Sinopec. Notably all the companies are State-Owned Chinese enterprises. Chinese FDI in South Asia China followed a conservative approach towards outward FDI since 2001 as it was apprehensive of capital flight and loss of control of state assets. Later in 2003 with the launch of the ‘Go Global’ programme China allowed firms to invest in other countries (Buckley et al., 2008). Since then, China registered a tremendous growth in its FDI outflows over the last two decades. Gross FDI from China to the world was less than US$20 billion in 1999, increased to US$137 billion in 2019 making it the world’s largest foreign investor (UNCTAD, 2000, 2021a). Chinese firms invested heavily across the world including South Asia. Among BRI participants of the South Asian region, Pakistan attracted highest volume of FDI from China. Pakistan is followed by Sri Lanka and Bangladesh. Interestingly, Sri Lanka and Pakistan have also secured maximum amount of loans from China under BRI. Their close political affinity with China has played a crucial role in attracting the investment as well as the loan. Majority of the Chinese investment in South Asia is flown into the infrastructure sector. Chinese firms are also venturing into natural resource-based market in Afghanistan and market seeking FDI opportunities in the region. They are also expanding their manufacturing bases to avail the division of workforce and strengthen their regional supply chain network. Despite being the largest economy in South Asia; India has not received much direct investment from China. Though a large number of Chinese firms, especially in the manufacturing sector, have recently invested in India, their volume is quite small. This is possibly because of the cold political and diplomatic relations between these two neighbours. India’s recent policy amendments mandating additional scrutiny of the investment proposals from its bordering (land) economies added the hassle (DPIIT, 2020, PN-3). However, India attracted a huge amount

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of portfolio investment from Chinese firms in its emerging technologybased industries. Almost all the Indian unicorns have received Chinese capital in varied amount (Choudhury, 2022). The data in Table 2.2 shows the trend of Chinese investment among the BRI nations in South Asian region. It is clear that Chinese FDI has marked manifold increase in our reference period. Importantly, China remains one of the largest foreign investors for both Sri Lanka and Pakistan. In all the South Asian countries China has predominantly invested in the infrastructure sector. It is noteworthy that China has entered into bilateral investment treaties (BIT) with three of the five BRI participants in the South Asia. India terminated its BIT with China in 2018 which was enforced in 2007 (Table 2.3). Table 2.2 Chinese direct investment in BRI economies (South Asia) (Million US$)

2015 2016 2017 2018 2019 2020 2021

Bangladesh

Nepal

Pakistan

Sri Lanka

Afghanistan

49.84 52.37 68.58 506.13 1159.42 59.72 102.76

52.43 51.73 68.06 389 389 211.54 196.23

1097.0 817.2 1418.0 701.6 973.5 1083.0

150.78 52.81 628 1088 293 NA NA

0.5 0.35 0.73 NA NA NA NA

Source State Bank of Pakistan, Annual Reports, BIDA, Industrial Statistics, Department of Industry. Ministry of Industry, Commerce and Supplies, Govt of Nepal, Annual Reports 2011–2019, BOI Sri Lanka, CEIC data

Table 2.3 China’s bilateral investment treaties

Sri Lanka Bangladesh Pakistan

Signed

Enforced

13-03-1986 12-09-1996 12-02-1989

25-03-1987 25-03-1997 30-09-1990

Source Investment Policy Hub, UNCTAD

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BRI Projects in South Asia7 BRI has an extensively focused programme in South Asia. Due to the strategic location of the region, South Asia holds a great importance to BRI. In this region, the continental ‘belt’ connects maritime ‘roads’ via land and through the Indian Ocean. Except India and Bhutan all other South Asian nations have participated in the BRI. Pakistan and Sri Lanka are not only the largest BRI partners in the South Asia but in the world. CPEC, one of the six BRI corridors, passes through Pakistan which connects China with the Eurasia. BRI faces a great dichotomy in this region as it has one of the largest projects CPEC in Pakistan while India vehemently criticises the initiative (Anwar, 2020). Sri Lanka a large receiver of BRI loans had to handover the Hambantota port to China as it failed to repay the loan. This led to the highest level of criticism of BRI worldwide. Despite all the criticism China ardently lead the BRI projects in the region. It is, by and large, an ideal destination for China’s Belt and Road Initiative as it has a large population, emerging economies, and most importantly, weak intra-regional connectivity with huge gap in the infrastructure. Due to poor connectivity, the region lacks far behind compared to ASEAN or Europe for trade and integration. The World Bank finds it the least integrated regions in the world (Choudhury & Nayak, 2019). Through BRI China stressed the necessity of deepening trade and connectivity in the region. Naturally, the promise of investments in the form of BRI projects along with ancient and modern trading routes appear especially alluring to countries seeking foreign investments. China’s assistance to South Asian BRI participants has significantly helped it to take advantage of tax-free investments, garnering assured resource for its domestic industries and access to a large emerging market with growing population. South Asia provided a great scope for its economic growth and trade expansion. With a very minimum amount of investment (majority of the investment is borne by the participants), China developed the connectivity of the region which in turn helped it to flood the market with cheaper Chinese products (Kondapalli, 2021).

7 This section gives an overview of the BRI in South Asian region. Detail discussion is carried out in the individual chapters.

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Pakistan Among various BRI projects, CPEC is the largest and the most crucial projects in Pakistan. It was launched on 20 April 2015 with an estimated budget of US$47 billion which was later revised to US$67 billion. The project stands in the middle of the proposed Silk Route and Maritime Silk Road. It connects both routes through Gwadar port in Pakistan’s Baluchistan Province. The 3,218 KM long corridor will connect western China to the port city of Gwadar through multiple highways, railway lines, and pipelines. The CPEC aims to boost several industrial zones across Pakistan. This corridor is a crucial gateway to transport goods from China’s western provinces to the Arabian Sea and ensure China’s energy supply from the Middle East. Afghanistan China and Afghanistan had signed a memorandum of understanding (MoU) in 2016 with an aim to strengthen cooperation under the BRI. Through the agreement China pledged investments worth US$100 million in Afghanistan. Subsequent to joining BRI Afghanistan launched a few projects such as the Digital Silk Road, the Sino-Afghan Special Railway Transportation Project, the Five Nations Railway Project, and a Kabul–Urumqi air corridor (Safi & Alizada, 2018). Notably, China linked the first train from China to Hairatan in northern Afghanistan via Kazakhstan and Uzbekistan under the BRI arrangement (Najafizada, 2016). Bangladesh Joined in 2016, Bangladesh is an important participant of BRI. China pledged to invest around US$38 billion in the country—the third highest investment in South Asia, after Pakistan. China also promised to provide lines of credit worth US$24 billion to Bangladesh (Bhattacharjee, 2021). Under BRI China has extended its loan especially to Bangladesh to develop its road and rail connectivity and power generation. Nepal Nepal joined the Chinese initiative in 2017 with the primary objective to develop its capacity of hydroelectricity generation and improve connectivity. Since then, a large number of BRI projects have been lunched in this Himalayan economy. Nepal and China have identified nine of the projects under BRI which includes, road construction from

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Dipayal to the Chinese border, upgrading of Rasuwagadhi-Kathmandu road, Tokha-Bidur road, Kimathanka-Hile road construction, GalchhiRasuwagadhi-Kerung 400 kv transmission line, 762 MW Tamor hydroelectricity project, 426 MW Phuket Karnali hydroelectric project, and Kerung-Kathmandu rail, and Madan Bhandari Technical Institute (Giri, 2021). Sri Lanka Located in the middle of the Indian Ocean, Sri Lanka has a great relevance to the twenty-first-century Maritime Silk Road initiative. Sri Lanka joined the initiative in 2014. Through BRI scheme, Chinese capital started pouring to Sri Lanka who was already attracting a large volume of Chinese FDI for a while. Within a short period a large number of infrastructure projects were launched in Sri Lanka with Chinese fund. These include both newly designed projects and extension of previously completed ones. Among them some of the projects were remarkably large-scale such as Hambantota Port Development project, the Puttalam Coal Power project, Outer Circular Highway Project—Phase 3, Extension of Southern Expressway, and Section 1 of the Central Expressway Project (Weerakoon & Wijayasiri, 2019). Maldives In 2014, the Maldives officially joined China’s twenty-first-century Maritime Silk Road and three years later the two countries signed a MoU on bilateral cooperation under the framework of the BRI. The Chinabuilt Sinamalé Bridge, also known as the China-Maldives Friendship Bridge, is the first cross-sea bridge in the Maldives built under the BRI plan. Upgrading the Velana International Airport (VIA) into a modern international airport is another BRI project in the Maldives.

BRI and China’s Trade Agreements A recent report, prepared by BRI Leading Group (2017), mentions that alongside the building of infrastructure, the BRI aims to build a network of multilateral and bilateral free trade agreements (FTAs) to support a rule-based open trade environment. There will be a great implication for BRI with China’s engagement in recent trade agreements, especially in light of the Regional Comprehensive Economic Partnership (RCEP) and

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the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreements. RCEP is a mega trade agreement covering 15 East Asian and Pacific nations of different economic sizes and stages of development, representing around 30% of world GDP. The agreement encompasses several areas of cooperation, with tariff concessions as a central principle, which will eliminate 90% of tariffs within the bloc (UNCTAD, 2021b). The CPTPP was originally conceived as Trans-Pacific Partnership or TPP by 12 countries, namely Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the US. TPP was set to become the world’s largest free trade deal, covering 40% of the global economy. It is estimated that the CPTPP reduces tariffs by 98% among its members (McBride et al., 2021). On 16 September 2021, China, who shares strong trade ties with all the members of the CPTPP, formally submitted its application to join the CPTPP. It also has preferential or free trade agreements with all the countries except Mexico and Canada. The majority of the members are also connected to China through RCEP. As per the United Nations COMTRADE data, 6 out of the 11 CPTPP countries, China accounts for more than 20% of bilateral merchandise trade. Economies like Australia, Chile, and Peru have above 25% of bilateral merchandise trade with China (Schott Jeffrey, 2021). If China succeeds in securing membership in CPTTP along with RCEP it would open a huge array of opportunities for China to export its products in these markets at a preferential rate. RCEP is often labelled as ‘China-led’ trade block and with the US leaving CPTTP China would emerge as the biggest player in the group. Through BRI China could utilise many of its excess capacity in several industries such as iron and steel, and cement, since infrastructure projects supported by the initiative would boost external demand for Chinese exports. China would also probably export its growing unemployed labour force to these project sites as it has already been doing in many countries. Further, BRI could also help China to employ the excess capacity to export equipment that is currently lying idle (Meltzer, 2017). As China is well-positioned in the higher stage of regional industrial supply chain compared to most of the RCEP, CPTTP, and BRI members, it is poised to accrue the maximum benefit. China would take advantage of its unique position in the regional supply network to boost its trade. Among South Asian BRI partners, China has preferential trade agreements with Maldives and Pakistan while negotiation is underway with Sri

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Lanka. China is considering starting negotiations with Bangladesh and Nepal and is also negotiating with many other economies for potential FTA. An extended network of bilateral FTAs could be later consolidated and upgraded into a multilateral arrangement (Casas et al., 2018). Taking the advantage of its large economy China is exploiting opportunities in the South Asian region which is reflected in its trade figure with a huge trade surplus. Expressing concern about China’ growing trade surplus with Pakistan, Pakistan Business Council (PBC), points out that “the FTA with China is poorly negotiated which has resulted in ruining the domestic industry and dangerously widening the trade deficit of about US$6 billion only through Pak-China trade” (Business Recorder, 2017). Due to similar concerns, Sri Lanka is moving cautiously in the negotiation process with China. Questions have also arisen against the strategic implications of China-Maldives FTA. There is a high chance of flooding these markets with Chinese products once the connectivity is improved through the BRI projects.

Why BRI Is Being Criticised? Over the last 9 years of BRI, the number of participants to this Chinese initiative has increased continuously. The analysis in the earlier section of the chapter also outlines the benefits received by the participating economics. Yet it raises concern about the sustainability of the projects funded under this plan. Chinese investments have strenuously been criticised for exposing the participating countries to huge financial risk. Countries have questioned the viability of several projects, the terms of extending loans, and the rate of interest charged, among others. Other than infrastructure sector, China’s foray into the region’s telecommunication and IT sector have also been questioned in several quarters of the policymakers. Several experts have warned about the security implications of China’s large-scale involvement in the digital infrastructure sector. Given their size and scale, the BRI projects inherently carry several risks commonly found in the mega-infrastructure development projects. The risk gets multiplied in many countries, especially developing countries attributed to weak domestic institutions, poor economic fundamentals and large-scale corruption, and the undisclosed ambiguous financing terms of BRI projects. In 2018, Malaysia cancelled a BRI project worth US$22 billion due to alleged inflated cost (Chatzky & McBride, 2020). Another crucial

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allegation is that through BRI, China is pushing the participants to huge unsustainable debt (sometimes leading to bankruptcy) making them vulnerable and thus establishing its diplomatic and economic influence. Indian political scientist Brahma Chellaney termed it as ‘debt trap diplomacy’ (Chellaney, 2017). The US alleges BRI to Trojan horse for China-led regional development and military expansion (Chatzky & McBride, 2020). The Debt Trap Diplomacy Among many criticisms of Chinese development model under the BRI scheme, the most prominent is to push the loan availing economy to the notorious ‘debt trap’. It is referred to a tactic of extending to an economy, loans of very high amount which is often not sustainable and also under strict repayment method. Later, when the debtor country fails to repay the loan, creditor takes control of the property constructed by its loan. There is also concern raised by experts that maintaining debt will create an unfavourable degree of dependency on China as a creditor. Conducting a detailed analysis Hurley et al. (2018) identified 8 countries viz., Djibouti, Maldives, Laos, Montenegro, Mongolia, Tajikistan, Kyrgyz Republic, and Pakistan as vulnerable to Chinese debt trap. As reflected in this list, China applies the debt trap method primarily against small and economically weak nations. The Chinese tactic became notorious in 2018, when China took control of the Hambantota port in Sri Lanka constructed under BRI initiative. In 2018, The New York Times exposed how due to opaque contractual terms and its inability to repay the loans, Sri Lanka had to handover the control of the Hambantota port for 99 years lease to China (Habib, 2018). China influenced Sri Lanka to construct the port despite several feasibility studies questioning the sustainability of the project. In the same manner, Djibouti in East African region is set to lose its control of a container terminal built as part of BRI projects in Africa, after it was saddled with debt equivalent to 88% of its GDP of US$1.72 billion (WBD, 2019). Due to the widespread criticism of its policy, China’s President Xi Jinping was compelled to acknowledge the concerns that BRI is a debt trap for participating countries. He promised to create ‘debt-sustainability framework’ for the initiative, in compliance with the international infrastructure contracting standards and measures to curb corruption and ensure environmental sustainability (WBD, 2019).

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Inflated Cost Alongside the debt trap diplomacy through BRI, China is also accused of inflating costs of the projects. A few countries such as Uganda and Malaysia have carried out investigations to find out reasons behind the very high costs of projects. Investigating the construction costs of Kampala-Entebbe Highway in Uganda built under BRI plan, the auditor general found the cost was highly inflated (Nancy et al., 2019). This accusation of inflating costs and financing economically unviable projects led to cancellation or halt of several BRI projects in various parts of the world. Mass protests have been organised in many countries, such as Pakistan, Malaysia, and Kazakhstan by the civil society and common citizen against BRI, driven by the concern of rising cost of the projects and their sustainability. After assuming office in 2018, Malaysian Prime Minister Mahathir Mohammad cancelled a BRI project connecting Malaysia with Singapore through high-speed railway, questioning the cost and viability of the project and large-scale corruption allegations. In Africa, Sierra Leone called off a China-funded airport project of US$318 million out of debtburden concerns in 2018 (Nancy et al., 2019). In 2018, Myanmar also scaled back a BRI project due to high cost involved in it (Kapoor & Thant, 2018). It is noteworthy to mention that these incidences occurred after China took the control of the Sri Lankan port in 2018. Ambiguous Bidding Process and Widespread Corruption The BRI has also drawn global attention for its blurred bidding and procurement policy. China maintains a very strict policy against disclosing the contract terms with BRI participants. There is very limited information available in public about the procedure applied in identifying the firms to execute projects. Any detailed analysis becomes impossible due to lack of comprehensive and cross-country data regarding the biding process under different BRI projects. Based on the partial information available, it has been found that majority of the BRI projects awarded to Chinese firms are primarily the SOEs for both construction and supply. The Center for Strategic and International Studies estimates more than 60% of BRI projects allocated to Chinese companies. The Baker McKenzie (2017) reports that Chinese SOEs have invested or participated in at least 1,700 BRI projects since 2017. Ghossein et al. (2018) in a World Bank working paper suggest that China’s Communications

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Construction Company and China Railway Construction Corporation are among the major firms who have won the bid for BRI projects so far. Similar to the biding process, the source of financing organisation for the BRI projects is also concentrated and limited to four Chinese banks viz. China Development Bank, China Exim Bank, Agricultural Development Bank of China, Industrial and Commercial Bank of China. It has been estimated that about half of the financing for BRI projects (comprising outstanding loans or equity investment) has been provided by these big four Chinese banks (Baniya et al., 2019; OECD, 2018). The BRI is also severely criticised for widespread corruption. The latest Corruption Perception Index (CPI) scores suggest that the perceived corruption in Belt and Road corridor economies is higher than the global average and is highest among lower-middle and low-income corridor economies. Perceptions of bribery are higher in construction and public works than in any other sector, including the arms industry and oil and gas sectors, according to the Transparency International 2011 Bribe Payers Index. Environmental Degradation The BRI plan also poses a great risk of environmental degradation. Losos et al. (2019) categorised the environmental risk posed by BRI as both direct and indirect. The environmental risk varies with the size of the project, type of the projects (rail, road, or energy), and domestic condition of the country. Many BRI projects pass through steep terrain, while rail and particularly high-speed rail are constrained to fairly straight paths, and less easily routed around topographical and hydrological barriers. BRI projects lead to huge loss of forest cover. Construction around the terrain poses risk of soil erosion, landslides, flooding in the region, sedimentation in rivers, and interruptions of water courses. Polluting air and water, habitat destruction and fragmentation, displacement of flora fauna, animal migration, and human-wildlife collusion are among other prominent environmental threats posed by BRI projects. It is estimated that BRI projects would possibly increase global carbon dioxide emissions by 0.3%, while 7% or more in case of low-income economies (World Bank, 2019). Further, BRI projects would increase the global warming by 2 °C. The Tsinghuabased Center for Finance and Development estimates that the current carbon footprint of the Belt and Road Initiative should be reduced by 68% to stay within this limit. Otherwise, it could lead alone to a warming of nearly 3 °C (Héraud, 2019).

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Slow Down of BRI In a recent report released by the Chinese think tank Green BRI, it is suggested that investment in BRI has reduced drastically in 2019. In 2019, investment in BRI was reported to be the lowest since its inception in 2013 (Nedopil, 2022). The report also suggests that China has been struggling to finance BRI projects in the various parts of the world. This reduction is primarily attributed to several countries opting out from their proposed investment as mentioned earlier in the chapter. Countries like Malaysia and Uganda have scrapped a few BRI projects. Many countries have initiated legal investigations against BRI projects. Due to negative sentiments and perceptions among countries after the Hambantota incidence, the prospects of several BRI projects have been further damaged. The outbreak of the COVID-19 has also affected BRI extensively. Almost all the countries have been badly affected by the pandemic which in turn affected the economies and their capacity to invest in any projects. Following this, several Chinese banks directed their funds to domestic projects instead of investing abroad. Chinese investments abroad have declined remarkably since a peak in 2015 (Jie & Walace, 2021). In June 2021, Wang Xiaolong, director-general of the foreign ministry’s International Economic Affairs Department, revealed that 20% of BRI projects had been ‘seriously affected’ by the virus, with up to 40% being ‘somewhat affected’ (Shehadi, 2020). American Enterprise Institute data suggests a decline of 50% in the first half of 2020 in BRI investment, down from US$46 billion in the same period in 2019.

Reaction of Non-participants to BRI Along with offering connectivity through infrastructure financing, creating economic and diplomatic influence has been one of the prominent ambitions of Chinese President Xi. China’s announcement of the BRI reflects its ambition to become the dominant power not just in Asia but in the world as well. China accepts the emergence of a multi-polar world and wants to hold an equal status with other traditional major powers (Xi, 2017a). Over the last few years, at least to a certain extent, it has been successful in surpassing the US and other developed European nations as a major development partner in selected African countries. Since the beginning, BRI has worried the US lawmakers. In a time of

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heightened US-China rivalry, on 30 July 2018, at Indo-Pacific Business Forum, the US Secretary of State Mike Pompeo announced the launch of the new investment plan backed by the US. He informed that under the ‘Indo-Pacific Economic Vision’, along with US$113 million in direct government investment, the global spending cap for the development finance corporation would be doubled to US$60 billion. While the US invests US$113 million in new technology, energy, and infrastructure initiatives in emerging Asia, it will also spend US$25 million to expand the US technology exports to the region. At the same time, the US has also signed a US$350 million investment deal with Mongolia to develop new sources of water and hundreds of millions of dollars investment deal with Sri Lanka (Jiangtao & Churchill, 2018). Another counter-initiative to BRI is the launching of Build Back Better World (B3W) initiative during the 47th G7 summit in 2021 by the US and G7 nations. The summit was attended by Australia, India, South Korea, and South Africa as guest participants. B3W promises to be a value-driven, market-led, high-standard, and transparent infrastructure partnership to help narrow the US$40+ trillion infrastructure gap in the developing world by 2035. It aims to coordinate in mobilising private sector capital in four areas of focus—climate, health and health security, digital technology, and gender equity and equality. The B3W is intended to be global in scope and to cover low-and middle-income countries. B3W is widely perceived as a response to China from the US and its allies to counter BRI. More importantly, this initiative is seen as a strategy to build coalition among low- and middle-income countries while offering to finance an alternative grand infrastructure plan to that of China led by the US and other G7 countries (Panda, 2021). Once implemented, B3W aspires to become one of the largest infrastructure-focused initiatives by the democratic world, extending from ‘Latin America and the Caribbean to Africa to the Indo-Pacific’. Despite these ambitious plans, it is difficult to predict how things will unfold in the future. Comparing B3W with BRI would be too early given the nascent stage of the initiative. B3W plan was unveiled less than a years ago compared to the nine years of BRI which has already connected 140 countries in its ambit (The White House, 2021). In 2015, Japan designed an infrastructure development plan to offer a quality alternative to the BRI. Japan wanted to leverage its decade-old experience of financing infrastructure projects in third-world countries, i.e. the developing world. Japan referred the initiative as Partnership

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for Quality Infrastructure (PQI). The Japanese initiative had a five-year budget of US$110 billion earmarked for PQI projects and was initially limited to Asia. Later in 2016, the scope of PQI was extended to the world and its budget was raised to US$200 billion. Until recently, Japan has invested around US$259 billion in unfinished projects in Indonesia, Malaysia, the Philippines, Thailand, and Vietnam (Grieger, 2021). In another initiative, Japan and India planned to jointly develop the AsiaAfrica Growth Corridor (AAGC), to connect ports from Myanmar to East Africa. India has always been a strategic competitor to China, especially in the South Asian region. BRI outlines the growing Sino-Indian competition in the subcontinent and the Indian Ocean region. From the beginning India maintained its position by vehemently opposing the Chinese initiative. India marked its protest by not attending the BRI Forum that China hosted in May 2017. In official statements, India questioned the initiative’s transparency and processes, and New Delhi opposed the CPEC due to concerns about territorial sovereignty (Baruah, 2018). India is also worried about the decline of its influence in the region due the strong emergence of China as the regional power. Large-scale investment by India in the region, especially in Sri Lanka and Afghanistan, is always viewed as India’s strategic move to curtail Chinese influence.

Conclusion In this chapter, an attempt was made to address two important aspects of BRI. First, what are the benefits BRI brings for its participants, and second, what the possible risks are in getting associated with the BRI projects. We also outlined the prominent shortcomings or the major criticisms faced by BRI in different parts of the world. Having analysed the benefits, the study finds that almost all the participants have been benefitted by associating with BRI. World-class infrastructural facilities have been created in many countries through BRI finance. Connectivity in many countries has been improved. The participants have been benefitted through their increased trade and investment with China. Chinese trade with BRI partners has crossed US$9.2 trillion while direct investment surpassed US$130 billion in 2021. However, all these have come with a huge cost to many participants. Countries like Sri Lanka had to lose control of its Hambantota port. Djibouti in East African region is also in the verge of losing its control of a container terminal built as part of BRI

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projects. BRI projects have strenuously been criticised for their opaque bidding process, widespread corruption, and inflated costs. BRI exposes the participants to huge financial risks and drags them to notorious debt trap. China predominantly applies the debt trap method against small and economically weak nations. It is clear from our analysis that China has accrued more benefit from the scheme than the participants. Along with economic profit China also used BRI to gain political mileage. Over the last few years, China has successfully used BRI as a tool to ascertain diplomatic influence. To a certain extent, China has also been successful in delivering the message of its emergence as an economic superpower not only in the region but in the global stage as well. It has threatened the status quo of the global power, and this is reflected in several initiatives such as the B3W scheme launched in response to BRI. Reactions of the leaders on BRI give strength to this argument. However, despite all these challenges and criticisms, China continues to expand the coverage and scope of BRI and more countries are participating in the initiative. At present, BRI is undoubtedly the largest infrastructure project in the world, and probably the most debated and controversial infrastructure initiative the world has ever witnessed. It is a project that you may participate in or oppose, but cannot ignore.

Annexure 2.1 Select BRI Projects 1. Addis Ababa-Djibouti economic corridor, including the development of industrial parks along the economic corridor 2. Agua Negra Pass international tunnel 3. Baku-Tbilisi-Kars new railway line and Alyat free economic zone in Baku 4. Brunei-Guangxi economic corridor 5. China-Central Asia-West Asia economic corridor 6. China-Europe land-sea express line 7. China-Indochina Peninsula economic corridor, including LaosChina economic corridor 8. China-Kyrgyzstan-Uzbekistan international highway 9. China-Laos-Thailand railway cooperation 10. China-Malaysia Qinzhou industrial park 11. China-Mongolia-Russia economic corridor

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12. China-Myanmar economic corridor 13. Eastern economic corridor in Thailand 14. Economic corridor in Greater Mekong sub-region 15. European Union (EU) Trans-European transport networks 16. Europe-Caucasus-Asia international transport corridor and TransCaspian international transport route 17. Industrial park Great Stone 18. International North-South transport corridor (INSTC) 19. Lake Victoria-Mediterranean sea navigation line-linkage project 20. Lamu Port-South Sudan-Ethiopia transport corridor 21. Malaysia-China Kuantan industrial park 22. New Eurasian land bridge 23. New International land-sea trade corridor of the China-Singapore (Chongqing) Demonstration Initiative on strategic connectivity 24. Northern corridor trade route in Africa linking the maritime port of Mombasa to countries of the Great Lakes region of Africa and Trans-Africa highway 25. North-South Passage Cairo-Cape Town pass way 26. Port of Piraeus 27. Port Sudan-Ethiopia railway connectivity 28. Regional comprehensive economic corridors in Indonesia 29. Suez Canal Economic Zone (SC Zone) 30. Transcontinental shipment of cargo using the capacities of the Northern sea route 31. Transoceanic fibre optic cable 32. Two corridors and one belt framework 33. Uzbekistan-Tajikistan-China international highway. Source Refinitiv (2019). BRI Projects in South Asia 1. China-Pakistan economic corridor 2. Port Qasim Power Plant 3. Colombo Port city 4. Hambantota port 5. Sinamalé Bridge 6. Velana International Airport development project

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7. Padma Multipurpose Bridge 8. Payra power plant 9. Nepal-China Trans-Himalayan Multi-dimensional connectivity Network, including Nepal-China cross-border railway. Source People’s Daily Online. Available at: http://en.people.cn/n3/ 2022/0402/c90000-10079566.html.

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Nancy, M. G., et al. (2019). The Belt and Road Initiative Opportunities and Risks for Africa’s Connectivity. China Quarterly of International Strategic Studies, 5(1), 117–141. Nedopil, C. (2021). Investments in the Belt and Road Initiative. Green Finance & Development Center, FISF Fudan University. https://greenfdc. org/investments-in-the-belt-and-road-initiative-bri/. Accessed on 13 August 2022. Nedopil, C. (2022). China Belt and Road Initiative (BRI) Investment Report 2021. Green Finance & Development Center, FISF Fudan University. https://greenfdc.org/brief-china-belt-and-road-initiative-bri-investmentreport-2021/. Accessed on 11 August 2022. OECD. (2018). China’s Belt and Road Initiative in the Global Trade, Investment and Finance Landscape. OECD Business and Finance Outlook 2018, OECD. https://www.oecd.org/finance/Chinas-Belt-and-Road-Initia tive-in-the-global-trade-investment-and-finance-landscape.pdf. Accessed on 3 August 2022. Panda, J. (2021, August 9). Build Back Better World Initiative: A Partnership Against or Beyond China? (MP-IDSA Issue Brief 2021). https://www. idsa.in/issuebrief/build-back-better-world-initiative-jpanda-090821. Accessed on 3 August 2022. Ramasamy, B., & Yeung, M. C. H. (2019). China’s One Belt One Road Initiative: The Impact of Trade Facilitation Versus Physical Infrastructure on Exports. World Economy, 42, 1673–1694. Refinitiv. (2019). BRI Connect: An Initiative in Numbers. Refinitiv. https:// www.refinitiv.com/content/dam/marketing/en_us/documents/reports/ref initiv-zawya-belt-and-road-initiative-report-2019.pdf. Accessed on 6 August 2022. Safi, M., & Alizada, B. (2018). Integration Afghanistan into the BRI Initiative: Review, Analysis and Prospects. Friedrich Ebert Stiftungm. https://library.fes. de/pdf-files/bueros/kabul/15587.pdf. Accessed on 7 September 2022. Schott Jeffrey, J. (2021, September 23). China’s CPTPP Bid Puts Biden on the Spot. Peterson Institute of International Economics. https://www.piie.com/ blogs/trade-and-investment-policy-watch/chinas-cptpp-bid-puts-biden-spot. Accessed on 28 June 2022. Shao, X. (2020). Chinese OFDI Responses to the B&R Initiative: Evidence from a Quasi-Natural Experiment. China Economic Review, 61, 101435. Shehadi, S. (2020, December 3). How Covid Has Changed China’s Belt and Road Initiative. Investment Monitor. https://www.investmentmonitor.ai/ sectors/construction/how-covid-has-changed-chinas-belt-and-road-initiative. Accessed on 10 May 2022.

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The Economic Intelligence Unit. (2020). Belt and Road Quarterly: Q4 2020. http://country.eiu.com/article.aspx?articleid=250850808. Accessed on 25 April 2022. The White House. (2021, June 12). FACT SHEET: President Biden and G7 Leaders Launch Build Back Better World (B3W) Partnership. Press release. https://www.whitehouse.gov/briefing-room/statements-releases/2021/ 06/12/fact-sheet-president-biden-and-g7-leaders-launch-build-back-betterworld-b3w-partnership/. Accessed on 25 June 2022. UNCTAD. (2000). World Investment Report 2000. UNCTAD. UNCTAD. (2021a). World Investment Report 2001. UNCTAD. UNCTAD. (2021b). A New Centre of Gravity: The Regional Comprehensive Economic Partnership and Its Trade Effects. UNCTAD. https://unctad. org/system/files/official-document/ditcinf2021d5_en_0.pdf. Accessed on 19 April 2022. US Chamber of Commerce. (2017). Made in China 2025: Global Ambitions Built on Local Protections. https://www.uschamber.com/assets/archived/ima ges/final_made_in_china_2025_report_full.pdf. Accessed on 19 April 2022. WBD. (2019, April 30). China’s Belt and Road Initiative: Why the Price Is Too High. Podcasts. Wharton Business Daily (WBD). Wharton Business School. https://knowledge.wharton.upenn.edu/article/chinas-belt-androad-initiative-why-the-price-is-too-high/.. Accessed on 14 April 2022. Weerakoon, D., & Wijayasiri, J. (2019). Belt and Road Initiative, Debt and Diplomacy: Challenges and Opportunities for China—Sri Lanka Economic Relations (Occasional Paper Series; No. 200). Institute of Policy Studies of Sri Lanka. World Bank. (2019). Belt and Road Economics: Opportunities and Risks of Transport Corridors. Advance Edition (Report Number 137911). World https://www.worldbank.org/en/topic/regional-integration/pub Bank. lication/belt-and-road-economics-opportunities-and-risks-of-transport-cor ridors. Accessed on 3 June 2022. Xi, J. (2017a, October 18). Secure a Decisive Victory in Building a Moderately Prosperous Society in all Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era. Delivered at the 19th National Congress of the Communist Party of China. Xi, J. (2017b). Work Together to Build a Community of Shared Future for Mankind. United Nations Office. http://www.xinhuanet.com/english/ 2017-01/19/c_135994707.htm. Accessed on 4 July 2022. Yang, G., et al. (2020). Assessment of the Effects of Infrastructure Investment Under the Belt and Road Initiative. China Economic Review, 60, 101418. Yu, C., et al. (2020a). Has China’s Belt and Road Initiative Intensified Bilateral Trade Links Between China and the Involved Countries? Sustainability, 12, 6747.

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CHAPTER 3

China’s Conundrum in Afghanistan

Unlike other South Asian countries, China’s economic engagements with Afghanistan through trade and investment or BRI projects have not attracted much attention. China holds clear, coherent, but relatively low-profile position on Afghanistan (Huasheng, 2012). However, maintaining a low profile does not mean maintaining a low profile in bilateral relationships. Instead, China has maintained a close and friendly relationship with the Afghanistan government since its formation in 2001. Over the period, the two countries have reached a series of agreements covering a wide range of areas with special emphasis on economic and security issues. Both countries agreed to strengthen economic relations, with special focus on the development of natural resources, power generation, building roads, improving agriculture, providing better transportation, and developing other infrastructure projects.1 Despite developing a close economic relation with Afghanistan, China maintained a safe distance from Afghanistan’s internal issues and followed limited diplomatic engagement. The bilateral relationship between China and Afghanistan largely revolves around economic and security issues. Chinese efforts always focused on solidifying the foundation of the bilateral relationship, promoting economic cooperation, and providing financial and 1 These goals were set in the China-Afghanistan Joint Communiqués, signed on 20 June 2006 and 25 March 2010 as cited by Huasheng (2012).

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other assistance to Afghanistan (Huasheng, 2012). Like other countries in the region, China emerged as one of the largest trading partners and investors in Afghanistan within a very limited time span. It ranks among the top five major trading partners of the country. China has heavily invested in several infrastructure development projects in Afghanistan. It is in this context that this chapter discusses the Chinese investment in Afghanistan and the emergence of China as a key player in the infrastructure development in the war-torn country.

Evolution of Diplomatic Ties The China-Afghanistan ties can be traced centuries back through the Silk Route, when the association was primarily commercial. It was well before the establishment of the modern states. In the contemporary period, the formal diplomatic relationship between them was established in 1955, while in 1963 the two parties resolved the issue of common border demarcation (Kalinovsky, 2012). However, the relation was very limited to commercial and economic activities. The trade between these two countries was taking place through third-world countries for some time as China kept the borders closed fearing infiltration of ‘separatist’ forces (US-China Institute, 2021). China kept distance from Kabul’s political and diplomatic issues which were under the Soviet influence until 1989 (Huasheng, 2011, 2014). China did not recognise the pro-Soviet regime in Kabul; neither had it given any importance to the Taliban government when they assumed office in 1989 (Ghosh, 2019; Pandey, 2019). The only notable incidence that took place between these two nations until 1990 was the signing of the ‘Boundary Treaty’ in Beijing to settle the territorial dispute over the Afghan-controlled Wakhan Corridor on the border between Badakhshan Province in Afghanistan and the Xinjiang region in China (Saud & Ahmad, 2018). China was anxious about the prevailing chaos and instability in Afghanistan adjacent to its border and perceived it as a threat to the stability in its Xinjiang region. This forced China to maintain distance from the Taliban regime and cut links with Afghanistan. They did not recognise the Taliban regime and did not make any attempt to develop a relationship with the latter (Huasheng, 2016). The situation started to improve in early 2000 when the bilateral relations between China and Afghanistan began to shape in 2001 as the provisional government led by President Hamid Karzai assumed power

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in Kabul (Pandey, 2019). The two countries began to come closer and China started to take increasing interest in Afghan issues. China strongly supported the Karzai government, provided aid, and also made significant investments, especially in infrastructure and development sector. Following the re-establishment of diplomatic ties, a series of bilateral visits took place. Afghan President Hamid Karzai paid his first visit to China in 2002. His visit was the first foreign diplomatic tour by an Afghan head of state since 1964. He visited China again in 2008 to attend the opening ceremony of Olympic Games and then another official trip in March 2010. During his visits, the two countries signed documents on economic and technological cooperation and favourable tariffs for Afghan exports (Global Times, 2010). Another bilateral official meeting between these two countries was held in 2012 when Karzai visited China again and met Chinese President Hu Jintao. During the meeting they decided to launch the China-Afghanistan Strategic and Cooperative Partnership wherein they agreed to cooperate in the political, economic, cultural, and security fields, as well as on regional and international affairs. Among the Chinese officials, Foreign Minister Jiaxuan made his first visit to Afghanistan in 2002 which was followed by another high-level visit by Yang Jiechi in 2007 (Yilmaz, 2012). However, China’s highest leader or head of the state has never visited Afghanistan. Along with bilateral meetings, leaders from both the countries have met through various multilateral forums particularly in Shanghai Cooperation Organization (SCO). In 2012, China invited Afghanistan to SCO as an observer (Huasheng, 2016). In the same year both countries declared establishing a Strategic and Cooperative Partnership (Umarov, 2017). Over the period, the relationship between China and Afghanistan has progressively strengthened while China’s role has expanded rapidly in the war-torn country. Afghan government also expected a larger role of China in its nation building and maintaining stability. It expected higher investment, aid, and other development assistance from Beijing. This is evident from President Karzai’s visit to Beijing in September 2013 wherein he expressed his hopes that China will continue to help in bringing peace, security, and stability in Afghanistan, in addition to playing a constructive role in improving the relations with its neighbouring states. He further expressed his desire to strengthen trade and cultural ties with China and expectation of Chinese help in boosting Afghanistan’s economy, thereby improving the lives of its citizen (Huasheng, 2014).

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The government in Kabul changed in 2014 and the new government were formed under the presidency of Ashraf Ghani. The newly elected President Ashraf Ghani followed his predecessor and chose Beijing as his debut official foreign visit. With the new Afghan government in place, China intensified its political activity. In July 2014, Beijing appointed the very first special envoy for Afghanistan, Sun Yuxi, a former PRC ambassador to Kabul. Sun was succeeded in November 2015 by another experienced Chinese diplomat, Deng Xijun (Umarov, 2017). President Ghani wanted greater Chinese involvement in Afghanistan, both for peace negotiations and promotion of regional connectivity and economic growth (Sharma, 2019). Following this, China proposed setting up of ‘peace and reconciliation forum’ which subsequently resulted in the formation of the ‘Quadrilateral Coordination Group’ (QCG) comprising of Afghanistan, Pakistan, China, and the US, focusing on Afghanistan’s security (Ghosh, 2019). Following the visit of Ashraf Ghani to China, a historical event took place when PRC Vice President Li Yuanchao visited Kabul in November 2015 to celebrate the 60th anniversary of diplomatic relations between the two countries. Beijing always maintained limited engagements in diplomatic and economic affairs and avoided participating in any international military presence in Afghanistan. It did not allow coalition forces to operate out of Chinese bases or airspace (Ludwig, 2013). However, China changed its earlier position on military cooperation with Afghanistan in 2014. During his visit to Afghanistan, the PRC Vice President Yuan Chao announced a grant of about US$79 million to build 10,000 apartments for the families of fallen soldiers and policemen (Panda, 2015). In 2016, China announced US$72 million in aid to the armed forces of Afghanistan. It was announced during the chief of General Staff of the PLA, Fang Fenghui’s visit to Kabul in March 2016 (Umarov, 2017). Fang further announced that China was willing to increase counter-terrorism intelligence, joint drills, personnel training, and other areas of practical cooperation. All these demonstrate the shift in China’s approach for Afghanistan, as maintained earlier since 2002. The former always avoided any military cooperation with Kabul and rejected to train any Afghan security forces except for a small number of counter-narcotics experts. On 3 July 2016, China delivered the first batch of military aid to Kabul, consisting of vehicles, spare parts, and ammunitions (Umarov, 2017). The cooperation between Afghanistan government and China on several

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issues continued until August 2021 when the republic government led by President Ashraf Ghani was overthrown by the Taliban. During all these years of engagement with Afghanistan, China has also developed significant economic interests in the country. In fact, within a very short time China become one of the top five trading partners of Afghanistan. To enhance its trade ties, China allowed tariff-free import of Afghan goods (Gul, 2022). In the forthcoming section of this chapter, we discuss the economic and trade relationship between China and Afghanistan. Sino-Afghan Economic Engagement Sino-Afghan economic and trade relations date back to the era of Silk Route. With the wide-ranging usage of the silk route, a healthy trade association developed between Asia and Europe. China was the centre of various trades and Afghanistan occupied a critical point of transportation and trade in both the directions, Asia and Europe (Tahiri, 2017). Afghanistan lies at the crossroads of Central Asia and South Asia, and its geographically strategic location gives it a competitive advantage over others, in terms of being a regional hub for trade and transit (Pandey, 2019). With the establishment of modern states and engaging diplomatically with each other, the economic ties between these countries were further strengthened. To expand the economic cooperation, the Treaty of Economic and Technical Cooperation was signed in 1964 (Khan, 2015). However, as mentioned earlier, Chinese association with Afghanistan largely revolves around its economic interests and security concerns. Kley (2014) argues that, China views economic engagement as its main contribution to securing stability in Afghanistan and the region. He further argues that there are three pillars determining the China-Afghan economic ties: first, its security situation, second the attitude of the Chinese enterprises, and third, attitude of the Afghan government. China faces immense difficulty in protecting its investments in Afghanistan. Copper mine in Mes Aynak with the largest Chinese investment in Afghanistan was attacked multiple times, killing several Chinese engineers engaged in mining activities. Hence, by engaging with Afghan government through several initiatives and by providing aids China help in maintaining peace in Afghanistan so that its investment is protected. The hidden motive of China to secure peace in Afghanistan can also be drawn

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from the fact that it changed its position on military cooperation only after it already had a significant volume of investment in the war-ridden country. About the attitude of the Chinese enterprises, Kley (2014) also argues that as a few Chinese companies have already undertaken aid projects in Afghanistan funded by third-party countries, despite the security risk, one would expect Chinese firms to shoulder the risk of aid projects in the country. In addition, Chinese firms also have some level of control in the development of Chinese-funded aid projects, and thus lower-risk projects could be pursued. Chinese government is, therefore, very likely to encourage these projects by extending political and diplomatic support and hence, push Afghanistan to improve its investment environment. As far as the attitude of the Afghan government is concerned, China believes that the Afghan government will have some level of influence over the type of economic aid delivered. China capitalises the approach by enhancing the ties with the government. Chinese interest in maintaining stability in Afghanistan originates from its economic interests. China expects favourable environment for its companies which are operating in Afghanistan and sending natural resources and revenue back to China (Tahiri, 2017). Afghanistan is endowed with a range of abundant and valuable natural resources such as oil, natural gas, iron ore, gold, copper, cobalt, lithium, and other raw materials worth nearly US$1 trillion (Risen, 2010). Some also put the value of Afghanistan’s minerals at US$3 trillion (US-China Institute, 2021). According to a joint survey conducted by Afghan and American Geological Surveys, during the period between 2007 and 2009, a huge deposit of copper, mercury, rare-earth elements, sulphur, chromites, asbestos, potash, graphite, and sand and gravel has been found in Afghanistan spread over 20 mineralised areas. The survey underlines copper and iron as the most significant metals available in the country. The total copper resources in Afghanistan range up to 60 million metric tons of copper of which the sediment-hosted copper deposits at Aynak are estimated to contain nearly 30 million metric tons. Resources of sedimentary iron deposits are abundant, and the Haji Gak and surrounding deposits are estimated to contain about 2,260 million metric tons of iron ore (Khan, 2015). These resources naturally attract attention of a nation that aims to expand its economic activities beyond its national boundary. China is not an exception. In fact, Chinese state-owned firms were early bidders to access those resources (US-China Institute, 2021). In 2006,

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China and Afghanistan signed the Treaty of Good-Neighborliness and Friendly Cooperation. Both sides have also established a Joint Economic and Trade Committee. This committee was responsible to oversee the cooperation in infrastructural areas, such as those related to the development of natural resources, power generation, and road construction. The meetings of the committee were held in 2010, 2015, and 2017 (China Briefing, 2021). In the Good-Neighborliness and Friendly Cooperation treaty, both the countries decided to sign an agreement on Trade and Economic Cooperation (Branco, 2019). This agreement paves the way for Chinese firms to explore opportunities in resource-rich Afghanistan. A new chapter on Chinese investment in Afghanistan was opened within a year of entering the agreement. China made its largest investment in Afghanistan in 2007 when it won a contract of US$3.5 billion to operate the Ayanak copper-gold mine. Trade between these two countries also started to grow in the subsequent period. A detailed analysis of the bilateral trade between China and Afghanistan and Chinese investment in Afghanistan is presented in the next section of the chapter. Sino-Afghan Trade Ties Although China and Afghanistan have been trading since the ancient period, it was largely limited to small quantity. Only a handful of goods were exchanged between these two nations in the earlier days. Moreover, the trade was taking place primarily through a third-party country as China kept its border with Afghanistan closed for a long period. However, trade between Afghanistan and China started to increase in the post-cold war period. Bilateral trade between them increased from US$20 million in 2002 to US$178.95 million in 2010 (see Table 3.1). The trade further jumped in the last decade between 2010 and 2020 and reached US$523 million in 2021. During the period between 2002 and 2018, the highest trade volume was recorded when the figure touched US$691 million in 2018. In 2021, China held a share of more than 20% in Afghanistan’s total trade and ranks among its 5 major trading partners. In 2019, China was the fifth-largest export destination for Afghan goods, after the United Arab Emirates (UAE), Pakistan, India, and the US. It was also the fourth largest source of imported goods for Afghan markets, following UAE, Pakistan, and India (China Briefing, 2021). It is noteworthy that a huge discrepancy can be noticed in the trade volume reported by international agencies such as International Trade centre (ITC) and earlier studies

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like (Huasheng, 2012; Umarov, 2017, Zhang, 2022a, citing different sources). The product composition of trade between these two nations primarily comprised of Chinese electrical products, drugs and pharmaceutical items, machinery, light industrial goods and textile and agricultural goods, and minerals from Afghanistan. Major Afghan products exported to China are nuts, non-retail pure cotton yarn, carpet, dry fruits, animal hair, and soapstone, while China mainly exports rubber tires, green tea, synthetic filament yarn, woven fabric, broadcasting equipment, semiconductor devices, and electronic transformers to Afghanistan (China Briefing, 2021; Huasheng, 2012). With an aim to expand Sino-Afghan trade, a Joint Economic Committee was set up that recommended duty-free access to 278 Afghan goods to Chinese market since 2006. Later in 2010, both the countries signed Comprehensive Cooperative Partnership agreement to further boost their bilateral trade. Cooperation on economy and trade was one of the 6 domains of action articulated in the agreement (Branco, Table 3.1 China-Afghanistan bilateral trade (Million US$)

Year

Export

Import

Total trade (X + M)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

19.91 26.45 56.97 51.21 100.49 169.53 151.63 213.37 175.26 230.01 464.03 328.26 393.56 361.82 430.65 541.21 667.59 599.80 500.68 474.45

0.08 0.61 0.95 1.51 0.19 2.38 2.69 1.38 3.68 4.40 5.19 9.60 17.37 11.77 4.53 3.43 24.08 29.28 54.51 49.53

19.99 27.06 57.92 52.72 100.67 171.91 154.32 214.74 178.95 234.41 469.22 337.85 410.93 373.59 435.19 544.63 691.67 629.08 555.19 523.98

Source WITS

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2019). This agreement promised a larger economic and technological cooperation, giving a favourable tariff to many products of Afghanistan (Tahiri, 2017). In 2017, both countries signed a customs-free trade agreement and expanded the private sector relations and cooperation between their respective chambers of commerce (Safi & Alizada, 2018). The Afghanistan-China Air Corridor opened in 2018 is also expected to increase Afghanistan’s exports to China. Again in 2022, China offered tariff-free import of 98% of goods from Afghanistan. Chinese Foreign Minister Wang Yi informed during the SCO’s foreign ministers’ meeting in Uzbekistan that ‘China will grant zero tariff treatment to 98% of the tariff lines of the Afghan products exported to China and is willing to import more quality products from Afghanistan’ (Gul, 2022). Chinese Investments in Afghanistan Although Chinese investment in Afghanistan is much limited as compared to other South Asian economies, they have been in some of the most critical areas. Similar to trade volume, Chinese investment has also started to increase in the last decade, especially after 2007, and by 2020 it became the largest foreign investor in Afghanistan (Haider, 2020). China is attracted by the huge untapped mineral resources in Afghanistan as majority of the Chinese investments are made in the natural resource extraction. These untapped resources available in Afghanistan are particularly attractive to China as they can cater to its growing demand for energy and minerals. The very first notable investment by Chinese firm in Afghanistan took place in 2007 when Metallurgical Corporation of China (MCC) and Jiangxi Copper Corporation (JCCL) won a bid to operate the Ayanak copper-gold mine in the country’s eastern Logar Province. Geologists claim it to be the world’s second-largest undeveloped copper deposit, estimated to be worth US$1–3 trillion (Khan, 2015). The Mes Aynak Copper Project was leased to China on Build, Operate, and Transfer (BOT) agreement for 30 years. It was agreed that China would set up the infrastructure and import machinery needed to extract copper. Within the framework of this project, China also committed to build a coal reservoir, a thermal power plant with capacity of 400 megawatts to make the site independent of the national grid for its energy needs, a railway from Afghanistan to Xinjiang, a hospital, and a mosque (Downs, 2012; Saud & Ahmad, 2018). Over the next couple of years, Chinese companies

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expanded their operations in Afghanistan. According to the PRC Ministry of Commerce, as of 2008, Chinese firms were working on at least 33 projects in Afghanistan, including those on roads and telecommunications. Chinese state-owned company China Railway Shisiju Group Corp won a contract of US$50 million to build 50 km two-lane road in the Wardak Province (Scobell, 2015). Another notable investment by Chinese firms is by China National Petroleum Corporation (CNPC). In 2011, CNPC and local Afghan firm Watan Oil & Gas jointly secured the rights to extract oil from three oil blocks in the provinces of Sari-i-Pul and Faryab in northwestern Afghanistan. The right was awarded for 25 years (Tatar, 2014). China became the first foreign country to sign an oil exploration deal with Afghanistan (Khan, 2015). Under the deal, it was agreed that the Afghan government will receive 70% from sale profits while CNPC will also pay 15% in royalties as well as corporate taxes and rent for land used for its operations. In addition, the CNPC promised to build a refinery within three years, the first in Afghanistan. The deal is estimated to earn Afghanistan as much as US$7 billion over 25 years until the right to extract expires (Huasheng, 2012). CNPC and its Afghan partners are exploring crude oil from Amu Darya River Basin which has got deposits of more than 87 million barrels of crude oil reserves (Downs, 2012). The northern Afghanistan region is believed to have a deposit of more than 1.6 billion barrels of crude oil, 16 trillion cubic feet of natural gas, and 500 million barrels of natural liquids gas (Downs, 2012). China has initially invested US$400 million for the oil exploration in these oilfields in Afghanistan (Harooni, 2011). In a recent development, it was reported that a group of Chinese entrepreneurs met Afghan President Ashraf Ghani in Kabul to discuss investment plans of US$400 million in the area of electricity generation (Choi, 2014). China is also reported to be studying the possibility of building a railway line from northern Pakistan through Kabul to southern Uzbekistan, at a cost of up to US$7 billion (Reuters, 2011). By investing in railways, China is also weaving land-locked Afghanistan into an integrated economic system and reducing its dependence on transit routes through Pakistan. China is considering the possibility of investing in the unexplored Afghan marble industry (Branco, 2019) and is also exploring opportunities to extract Afghanistan’s rare-earth metals which are estimated between US$1–3 trillion in value (Jain, 2021). Along with physical infrastructure development, Chinese firms are also engaged in digital

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infrastructure development in Afghanistan. Chinese telecom giants ZTE and Huawei have been operating in Afghanistan since the early 2000s. Both these firms are also involved in laying a 4,800 km-long fibre line from Kashgar city in China to Faizabad in Afghanistan. They are also developing a satellite known as Afghansat 2 (Chia et al., 2021). As mentioned earlier in this chapter, China has intensified its engagement with Afghanistan after 2002, besides taking increasing interest in investing in Afghanistan. In the period post 2001, three important developments took place in Afghanistan that encouraged China to strengthen its economic ties with them. First, in 2001 the US troops entered Central Asian region which made China concerned about growing western influence in the region. Hence, as soon as the republic government assumed power in Afghanistan, Beijing seized the opportunity to expand its own activity in the region. This resulted in large-scale investment and the expansion of Chinese companies into Central Asia (Umarov, 2017). Second, they set up a joint Economic Committee in 2006. Again in 2010, both countries signed Comprehensive Cooperative Partnership agreement. Both these developments opened avenues to explore the untapped markets in Afghanistan by the Chinese firms. Third, in 2013 China unveiled its ambitious project BRI. Though Afghanistan did not feature in the early days of BRI plan, later it emerged as a vital partner to it (Haider, 2020). Finally, the government in Afghanistan led by President Ghani also facilitated Chinese investment post-2014 (Najafizada & Shi, 2014). Chinese Development Aid to Afghanistan Besides making commercial investment, China has also made substantial efforts to rebuild a war-torn Afghanistan by financially supporting infrastructure developments and by providing humanitarian aid. However, China has always been a minor donor to Afghanistan as compared to its western counterparts and provided only modest amounts of foreign aid to it. Though China provided a small amount of humanitarian aid and interest-free loan to Afghanistan in early 1970s, it has largely refrained from extending aid during the cold war period (Dutt, 1980). China gradually started to increase offering aid to Afghanistan after 2002 as it started to intensify its engagement with the nation. In 2001, the Chinese government allocated US$4 million of humanitarian aid for restoration of the Afghan state. Later, at the Tokyo donor

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conference in 2002, it promised to provide an additional US$1 million of humanitarian aid. During the same year, China further announced an aid package of US$150 million to Afghanistan. Notable projects that were funded by China at the initial period include Jomhouri Hospital and Parwan Irrigation Project (Sachdeva, 2010). Again in 2009 China offered US$75 million aid to Afghanistan while writing off their US$19.5 million debt in 2010 to help the government fight against its economic crisis. In 2011, China granted another US$23.7 million of assistance to Afghanistan (Umarov, 2017). Xi Jinping after becoming the President of China in 2013 increased the volume of aid to Afghanistan. During the Fourth Heart of Asia–Istanbul Ministerial Process gathering, China announced to increase the annual amount of aid to Afghanistan from US$32 million in 2013 to US$300 million through 2017 (Shisheng et al., 2016). For the period from 2001 to 2013 China extended roughly US$240 million as development assistance to Afghanistan. In 2014 China pledged a massive US$80 million aid to Afghanistan making it the largest Chinese aid to Afghan government so far (Saud & Ahmad, 2018). In 2014, when Afghan President Ashraf Ghani visited Beijing, China and Afghan government signed a security accord wherein they pledged to fight against terrorism and support one-China policy by Afghanistan. During this visit President Ghani secured an aid of another US$327 million from China (Wu, 2018). Both nations signed an agreement on Technical Cooperation worth US$76 million in 2016 when Afghan Chief Executive Abdullah visited China (Saud & Ahmed, 2018). Over the next few years, China sponsored multiple infrastructure projects in Afghanistan. Among them notable are the expansion of Kabul University and the solar power plants (Chia et al., 2021). China also provided education scholarships to Afghan students to study in China and trained Afghan officials in diverse (military and combat) areas (Zhang, 2022a). In 2019, China provided US$10 million in aid to Afghanistan for helping those affected by natural disasters in the country (Branco, 2019). China provided muchneeded medical aid to Afghanistan to combat against the COVID-19 pandemic in 2020 which Kabul received in different batches. The medical aid includes protective suits, test kits, fully automated nucleic acid extractors, PCR (polymerase chain reaction) machines, and masks and gloves (Xinhua, 2020). In early September 2021, Beijing announced emergency aid of goods worth more than US$31 million, as well as donating 3 million doses of COVID-19 vaccines to Afghanistan (Zhang, 2022b).

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Beijing continued its aid to Afghanistan even after removal of the republic government from Kabul. In fact, China was the first to pledge emergency humanitarian assistance to the Taliban-led government in Afghanistan (Chia & Vater, 2021) in 2022, and subsequently China donated US$37.4 million of aid to Afghanistan (Zhang, 2022b).

Afghanistan as a BRI Partner Afghanistan lies between two of the 6 corridors that BRI proposes to build. These two corridors are China-Pakistan Economic Corridor (CPEC) and the China Central and West Asia Economic Corridor (CCWAEC). Afghanistan is also part of the Five Nation Railway Project that connects China to Iran through Kyrgyzstan, Tajikistan, and Afghanistan (Safi & Alizada, 2018). Strategically located, Afghanistan provides the shortest route between Central Asia and South Asia, and between China and the Middle East; it can also serve as a gateway to the Arabian Sea (Haider, 2020). Scholars argue that Afghanistan can be converted into an important connectivity hub and has a huge potential to emerge as a crucial point of BRI (Stanzel, 2018). In simple words, Afghanistan is indispensable to the entire plan. In addition to this, Afghan government’s own steps to emerge as the ‘heart of Asia’ by becoming integral part of regional connectivity and economic cooperation have further spurred its interest to participate in the BRI scheme (Safi & Alizada, 2018). Beijing also intensified its economic participation in Afghanistan since 2014, the time when it launched BRI. However, despite all these favourable conditions, Afghanistan was initially excluded from the BRI project. No infrastructure development or connectivity project was planned in Afghanistan under the BRI initiative. China realised the importance of Afghanistan later in 2016 when it signed the memorandum of understanding (MoU) with Afghanistan wherein both countries expressed their commitments to jointly cooperate for BRI in Afghanistan. Following the signing of the MoU, Afghanistan came further close to China’s economic bandwidth by joining the China-led Asian Infrastructure Investment Bank (Chia et al., 2021). The growing importance of Afghanistan for China can also be understood from the Chinese ambassador to Afghanistan Mr. Yao Jing’s statement when he commented that without Afghan connectivity, there is no way to connect China with the rest of the world (Najafizada, 2016). Subsequent to joining BRI, Afghanistan has launched a few projects such as the Digital Silk Road,

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the Sino-Afghan Special Railway Transportation Project, the Five Nations Railway Project, and a Kabul–Urumqi air corridor (Safi & Alizada, 2018). Notably, China linked the first train from China to Hairatan in northern Afghanistan via Kazakhstan and Uzbekistan under the BRI arrangement (Najafizada, 2016). The cooperation between the two nations started to strengthen subsequently. A minister level delegation from Afghanistan attended China’s Belt and Road Forum held in Beijing during 14–15 May 2017 (Diplomat, 2017). Following the BRI forum, discussions took place to incorporate Afghanistan into the CPEC. In 2017, China sponsored the creation of a trilateral dialogue forum with Pakistan and Afghanistan. The forum met on 26 December 2017 for the first time wherein the three nations discussed possibilities of expanding CPEC to Afghanistan. The second trilateral dialogue among these three nations was held in Kabul in December 2018. During this dialogue they agreed to promote ChinaAfghanistan-Pakistan trilateral cooperation under the framework of jointly building the Belt and Road Initiative. Again, in another trilateral dialogue hosted by Pakistan in September 2019, three sides underlined that the Peshawar-Kabul Motorway may provide the foundation for Afghanistan’s formal joining of the CPEC, as Peshawar—Pakistan’s largest northwestern city—is already linked with the route. The three sides also decided to pursue this project under the ‘China-Afghanistan-Pakistan Cooperation’ (Haider, 2020). The fourth trilateral dialogue of these nations was held in virtual mode in June 2021. Extending cooperation for the BRI projects was the common agenda in all the four rounds of trilateral dialogues that had taken place between these three countries until 2022. Expansion of CPEC to Afghanistan would immensely help Afghan businesses and investors by offering them access to the consumer markets in South Asia and thus help them to diversify their market. Improved infrastructure and connectivity would reduce their transportation costs and thereby increase their competitiveness (Roy, 2017). Afghanistan has warmly welcomed the BRI as it hopes to seek benefit from the proposed development of its infrastructure and connectivity in the country that have been earlier devastated by repeated wars and conflicts. Highlighting the importance of BRI projects, deputy foreign minister of Afghanistan Hekmat Khalil Karzai said that the ‘economic development process along the Silk Road will reshape the international development order that has been centered in our region and carries great significance for human development in the twenty-first century’ (Roy,

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2017). To accrue the benefits of BRI, Afghanistan has aligned many of its domestic plans with BRI and has identified three areas namely, movement of goods, energy, and data in which Afghanistan had a unique advantage under BRI (Ghosh, 2022). BRI is believed to be an attractive scheme for the country that plans to seize the opportunity to transform its aiddependent economy to an independent one and bring stability into it. Afghanistan considers the initiative as an opportunity to regain its status of ‘Asian transit and trade hub’ connecting South Asia to Central Asia and East Asia to West Asia, thus bringing economic benefits not only to Afghanistan but to the entire region (Roy, 2017). The Digital Silk Road proposed under BRI would help Afghanistan to become a major trade and transit hub for subsea and transcontinental communications (Safi & Alizada, 2018).

Challenges to BRI in Afghanistan Despite having a conducive location and several efforts made by the government, BRI has not been making much measurable progress in Afghanistan. Chinese attitude remains obscure when it comes to drawing up plans for Afghanistan’s integration into the BRI. China has been reluctant to explain Afghanistan’s link to BRI or discuss concrete investment plans in Afghanistan under the project (Branco, 2019). Even though Afghanistan has high expectations from the BRI projects, China does not seem to yet consider Afghanistan as an integral, contributing country or as an important block of BRI. As the BRI projects in different countries started to progress it became clearer that China prioritised certain countries, like Pakistan, and ignored some others, such as Afghanistan (Safi & Alizada, 2018). Chinese investments through BRI are focused around Afghanistan rather than inside it. This is evident from the fact that, China committed only US$100 million to Afghanistan against their commitment of US$62 billion to Pakistan and US$31 billion to the Central Asian countries (Roy, 2017). Other than its own approach, security situation in Afghanistan has always been the prime concern for China which has been deteriorating for years, particularly after the withdrawal of North Atlantic Treaty Organization (NATO) forces. It is due to the lack of confidence in the Afghan security that China has been hesitant in expanding its investment in this war-torn country. China fears Afghanistan can be used as a base by terrorists to launch attacks against China, especially in

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its western province of Xinjiang. Beijing also fears that instability in Afghanistan could spill over into Pakistan and Central Asia, destabilising the countries in China’s periphery and putting BRI at risk. In July 2021, a suicide bomber allegedly trained in Afghanistan attacked a bus in Pakistan killing nine Chinese nationals. Despite enjoying strong influence in Pakistan when China could not ensure the security of its workers there, it would be more difficult to do so in Afghanistan (Sacks, 2021). The insecurity prevailing in Afghanistan jeopardises its connectivity and integration projects. One such example is TAPI (Turkmenistan–Afghanistan–Pakistan–India) natural gas pipeline project, which was delayed for decades for mainly security reasons. Security concerns also discourage countries from choosing Afghanistan for trade and transit. The private players in China also expressed their reservation to invest in Afghanistan. Former Chinese ambassador to Afghanistan Yao Jing stated that Chinese private players are highly hesitant to invest in Afghanistan primarily due to security concerns (Safi & Alizada, 2018). Another important impediment to BRI integration in Afghanistan comes from its neighbour Pakistan. Although Pakistan has been a signatory of all the trilateral dialogues where the possibility of expanding CPEC to Afghanistan was discussed, it has expressed its reluctance to the idea on several occasions. Pakistan prefers China to focus its attention and resources on it rather than dividing it with Afghanistan (Calabrese, 2021). In addition to this, the recent shift in China’s approach towards BRI projects has further reduced their lending amounts. Now Chinese banks are prioritising projects where they have a greater chance of being repaid (Hillman & Sacks, 2021). As China looks for safer bets in other BRI countries, Afghanistan does not appeal to them as a potential investment destination anymore. It looks highly doubtful that Chinese banks would take on the challenge of investing in Afghanistan under BRI. The growing instability after the Taliban-assumed power in Afghanistan in 2021 further makes the future of BRI projects in Afghanistan a blur.

Concluding Thoughts In this chapter, we discussed the evolution of the diplomatic and economic relations between China and Afghanistan. This chapter addressed the issue of foreign aid and development financing, and the

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bilateral trade between of these two nations. In addition, our discussion also stressed the growing association between these two countries through their engagements in BRI. Our analysis finds that SinoAfghan association started to grow after 2002. It is also observed that post-2002 it started taking increasing interest in both economic and diplomatic issues in Afghanistan. China made two huge investments in Afghanistan’s mining and oil exploration sector. It also made several investments in infrastructure development in the country. Post-2014, China further intensified its association with Afghanistan. In July 2014, Beijing appointed the very first special envoy for Afghanistan, Sun Yuxi, a former PRC ambassador to Kabul. It increased its foreign aid to Afghanistan. The bilateral trade between these two countries increased significantly in the post-2014 era. China further strengthened its association with Afghanistan through BRI when the latter joined the initiative in 2016. A few critical projects were launched under the ambit of BRI in Afghanistan which include railways connectivity and digital connectivity plans. However, despite making so many efforts the Chinese investments remained substantially limited in Afghanistan as compared to its neighbouring countries in South Asia and Central Asia. Although a few big size investments were made during late 2000, it could not maintain the progress in the later stage. Some of the primary reasons for these are (1) Afghanistan remains very insecure zone for any investment. Despite having so much interest in Chinese investment, Afghanistan government could not provide proper security to their investment. Many of the investment sites have been attacked by the terrorists as well. (2) China never took serious interest in stabilising the security situation across Afghanistan. China was primarily concerned about the safety of its investment and its worker working in different sites. (3) China’s prime interest in Afghanistan was to extract the untapped natural resources available there and send it back to its own territory. The security situation in Afghanistan which was deteriorating since 2015 reached its lowest point when Taliban took control of the country in August 2021. Chinese investments are now at a higher risk. With diminishing security paradigm in Afghanistan and growing strength of Taliban, the future of Chinese investment remains very elusive. Beijing’s own approach towards investment in risky zones after the COVID-19 pandemic further limits the chances of a bright Sino-Afghan investment relationship.

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Institute for Defence and Security Studies. https://raffaellopantucci.com/ 2016/02/17/communication-co-operation-and-challenges-a-roadmap-forsino-indian-engagement-in-afghanistan/. Accessed on 3 September 2022. Stanzel, A. (2018). Fear and Loathing on the New Silk Road: Chinese Security in Afghanistan and Beyond. European Council on Foreign Relations. https://ecfr.eu/publication/new_silk_road_chinese_security_in_a fghanistan_beyond/. Accessed on 29 August 2022. Tahiri, N. R. (2017). Afghanistan and China Trade Relationship (MPRA Paper No. 82098). https://mpra.ub.uni-muenchen.de/82098/1/MPRA_paper_8 2098.pdf. Accessed on 1 August 2022. Tatar, J. S. (2014). China’s Evolving Stance on Afghanistan: Towards More Robust Diplomacy with ‘Chinese Characteristics’. Strategic File, 2(58), 1– 6. Polish Institute of International Affairs. https://www.files.ethz.ch/isn/ 184324/PISM%20Strategic%20File%20no%2022%20(58).pdf. Accessed on 27 July 2022. The Diplomat. (2017, May 12). Belt and Road Attendees List. The Diplomat. https://thediplomat.com/2017/05/belt-and-road-attendees-list/. Accessed on 21 August 2022. Umarov, A. (2017). Assessing China’s New Policy in Afghanistan. Central Asian Affairs, 4, 384–406. US-China Institute. (2021, August 19). China and Afghanistan: What Might the Taliban’s Takeover of Afghanistan Mean for China? News Letter. USChina Institute at the University of Southern California. https://china.usc. edu/china-and-afghanistan. Accessed on19 August 2022. Wu, D. (2018). Power Relations in Development Communication and Public Diplomacy: US and Chinese Practices in Afghanistan. In J. Pamment & K. G. Wilkins (Eds.), Communicating National Image Through Development and Diplomacy (pp. 217–239). Palgrave Macmillan. Xinhua. (2020, October 8). Afghanistan Receives 6th batch of Chinese aid for Combating COVID-19. Xinhua. http://www.xinhuanet.com/english/202010/08/c_139426000.htm. Accessed on 19 August 2022. Yilmaz, S. (2012). Afghanistan: China’s New Frontier? International Relations. https://www.e-ir.info/2012/12/19/afghanistan-chinas-new-frontier/. Accessed on 22 August 2022. Zhang, F. (2022a). China’s New Engagement with Afghanistan After the Withdrawal. LSE Public Policy Review, 2(3), 1–13. Zhang, K. (2022b, July 6). China Delivers US$37 Million in Aid to Afghanistan, Fulfilling Promise to Taliban. South China Morning Post. https://www.scmp. com/news/china/diplomacy/article/3184316/china-delivers-us37-millionaid-afghanistan-fulfilling-promise. Accessed on 29 August 2022.

CHAPTER 4

China in Bangladesh: Developing Infrastructure or Deepening Influence

Bilateral relationship between Bangladesh and China started with Chinese government recognising Bangladesh in 1975. Since then the relationship between them has flourished and transformed from a normalcy to all weather friends (Uddin & Bhuiyan, 2011). Bangladesh and China developed their relationship considerably through different bilateral cooperation agreements, economic pacts, trade policies, and joint economic and business associations while gradually expanding the areas of cooperations (Quiyum, 2020). Now both the nations share a very close diplomatic tie in the region. The bilateral diplomatic engagement is supplemented by a large volume of trade and investment flow. Like any other South Asian economy, Chinese investment in Bangladesh has increased exponentially over the last few years. The gross Chinese foreign direct investment (FDI) increased from US$69.73 million in 2015 to US$444.85 million in 2021 (Bank of Bangladesh, 2015, 2021). Noteworthy, China is the largest investor in Bangladesh only after the US. Chinese capital has flown primarily to textiles, power generation, and construction sector. Chinese investment in Bangladesh’s power generation and construction sector are also made under the Belt and Road Initiative (BRI). China pledged to invest around US$38 billion in the country—the third highest in South Asia, after Pakistan (Bhattacharjee, 2021). In case of trade also, China and Bangladesh share a strong relation though it is highly in favour of China. The bilateral trade increased © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 R. N. Choudhury, Mapping Chinese Investment in South Asia, https://doi.org/10.1007/978-981-99-1385-5_4

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from US$14.7 billion in 2015 to US$22.25 billion in 2021. China contributes the highest share in Bangladesh’s total import from the world which predominantly consists of textile products, machinery, and refined petroleum products. With this background, this chapter aims to explore the Bangladesh-China relationship from three distinct perspectives, viz. diplomatic and strategic relationship, trade flows, and investment volume. However, central discussion of this chapter will primarily revolve around the Chinese investment in Bangladesh. This chapter will also cover the Chinese investment made in Bangladesh under BRI.

Developing Diplomatic Ties Since Liberation The relationship between these two nations was not pleasant initially, especially right after the liberation of Bangladesh (Tyagi, 1980). During the liberation war in 1971, China supported Pakistan and blamed India for the disturbances in the East Pakistan. The Chinese maintained that the liberation of Bangladesh would indeed weaken Pakistan and hurt Chinese interests in South Asia (Nayar, 1972). It was due to their closeness with Pakistan that China took a long time to recognise Bangladesh. Bangladesh Prime Minister Sheikh Mujibur Rahman strived for the recognition of his government and made several efforts to influence the international community to secure recognition. But response from China was very cold. In fact, it created obstacles for the newly created country in the multilateral forums. China opposed Bangladesh’s bid for membership of the United Nations twice (Cooper, 1973). In the absence of formal diplomatic ties, there was no official trade between them. However, a few Bangladeshi trade delegates attended trade events in China without having official recognition. Bilateral state of affairs between Bangladesh and China was limited to high-level official visits only (Foysal, 2014). China did not regard liberation of Bangladesh from Pakistani rule as sufficient evidence of independence and it was not until the repatriation of Pakistani Prisoners of War (Chakrabarti, 1994). China lightened its stand against Bangladesh after India, Pakistan, and Bangladesh signed the tripartite treaty on 9 April 1974 and agreed to repatriate Prisoners of War (POW). The changing Chinese attitude was also evidenced in Beijing’s announcement of a donation of relief goods worth US$4 million to Bangladesh following the 1974 floods (Chowdhury, 2009). Subsequently, with warmth in the relationship, China refrained from using veto power in the United Nations Security Council (UNSC) which paved the way for

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Bangladesh to become a member of the UN in September 1974. Later, on 31 August 1975, China recognised Bangladesh as a sovereign state and opened its first diplomatic mission in Dhaka in 1976 (Ranjan, 2019). This marked the beginning of a formal diplomatic relationship between China and Bangladesh. Bangladesh’s relations with China appear to be one of the priorities of the former’s foreign policy (Rashid, 2001). In the following years the relationship flourished and steadily improved. The foundation of China-Bangladesh relationship was laid down by General Ziaur Rahman who became the President of Bangladesh in April 1977 and had immensely contributed to building a strong friendship between the two countries. Army-turned-politician General Ziaur Rahman provided Bangladesh with new National experience. Ziaur wanted Bangladesh to play an active role in the world by making positive contribution to global political affairs (Ziring, 1992). He strived to develop relations with all the powerful nations. His policies were much tilted towards China (Ranjan, 2019). It is General Rahman who made the first high-level official visit from independent Bangladesh to China. General Zia visited China, as Chief Martial Law Administrator of Bangladesh in January 1977. He received a warm reception, with Chairman Hua Kuo-Feng at the airport to greet him. During Ziaur Rahman’s visit to China, both countries signed an economic and technical cooperation agreement and a trade and credit agreement. More significantly, the Chinese offered military supplies to Bangladesh (Choudhury, 1979). His visit was followed by a visit of the then-Chinese Vice President Li Xiannian in 1978. It was for the first time that any Chinese leader officially visited Bangladesh. As President of Bangladesh, Zia visited China again in 1980. In 1981, General Zia was assassinated by a group of revolting army officers in Chittagong. Following his assassination, the then-Chief of Army staff Lt. Col. Hussain Mohammad Ershad assumed presidency. H. M. Ershad largely followed his predecessor Generals Zia’s policies especially in maintaining foreign relations. During his tenure, between 1982 and 1990, President Ershad visited China several times. He visited China for the first time in November 1982, which was followed by his visits in July 1985, July 1987, November 1988, and June 1990. It was in his tenure in 1984 that Chinese Premier Zhao Ziyang listed Bangladesh among five friendly states of China in the Asian region (Foysal, 2014). During the presidency of Zia, China also paid a few official visits to Bangladesh. In March 1986 Chinese Vice President Li Xiannian visited

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Bangladesh promising China’s continuous support to Bangladesh, deepening the bilateral relationship while expanding the mutual collaboration. Later in November 1989, Chinese Premier Li Peng paid an official goodwill visit to Bangladesh. Almost all these meetings were fruitful from both Bangladesh and Chinese perspective. Bangladesh always believed that mutual trust and comparable interests are the basis of their ties with China. Likewise, China also highlighted the common understanding and reciprocal support for strengthening the relationship. Notably, Chinese leadership always appreciated Bangladeshi approach of respecting ‘One-China’ policy and keeping no official engagement with Taiwan. In his tenure Ershad signed several bilateral agreements with China covering a range of areas such as science and technology, trade and economy, and mutual exemption of visas (Sarkar, 2014). 1991 marked the end of military regime in Bangladesh and return to democracy. Bangladesh Nationalist Party (BNP) won the election and Begum Khaleida Zia, wife of former President Ziaur Rahman, became Prime Minister of the newly formed government. The new government in Dhaka announced to inherit domestic as well as foreign policies of the late President Ziaur Rahman. Two months after her assumption of office, Begum Zia paid a friendly visit to China in June 1991. Begum Zia expressed her special gratitude to the Chinese leadership for their extensive support to Bangladesh during the hurricane in 1991 and restoring several services in the aftermath. China also reaffirmed its support to Prime Minister Zia in the future. Following her visit the Chinese foreign minister paid a visit to Bangladesh 1994 to advance mutual ties (Sarkar, 2014). Prime Minister Zia visited China again in 1995 on official capacity. She signed a handful of important agreements with China including Memorandum of Understanding (MoU) for Chinese assistance in developing the energy sector and water resource management (Foysal, 2014). Following her predecessors, her regime also maintained a policy of developing friendly relations with China. In 1996, BNP lost election, making way for Awami League to assume power. Under the new government, Sheikh Hasina was given the charge of the Prime Minister’s office. Prime Minister, Hasina chose China for her first foreign visit. In September 1996, Prime Minister Sheikh Hasina visited China and thanked them for extending support to Bangladesh. Both countries signed numerous agreements to encourage and protect

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investments, double tax avoidance treaty, and signed agreement of the Prevention of Tax Evasion among others. Following her visit, Li Peng, the then-Chairman of the Standing Committee of the National People’s Congress of China, visited Bangladesh to show a goodwill gesture. On 4 October 2000, Bangladesh and China celebrated the 25th anniversary of their bilateral relationship. To commemorate this event Bangladesh released a postal stamp to show Bangladesh’s consistent support. BNP with support from four other parties formed government in Bangladesh in 2002. Again, the responsibility of running the government was given to Begum Khaleda Zia. The Nationalist Party under her leadership continued the existing foreign policy and maintained their traditional friendship towards China. In January 2002, Chinese Premier Zhu Rongji visited Bangladesh and held talks with Prime Minister Khalida Zia. The two countries signed agreements on Economic and Technical Cooperation, Certificate of Handover of the Bangladesh-China Friendship Conference Center, Executive Program of the Cultural Agreement for 2001–2003, and four other agreements (Xinhua, 2005). Later, in December 2002, Prime Minister Khaleda Zia visited China again. The two countries signed Exchange of Letters regarding the loan used for the project of Bangladesh-China Friendship International Conference Center to be converted to grant, agreement on Economic and Technical Cooperation, and two other agreements (Hassan, 2018). Bangladesh and China agreed to conduct a feasibility study of setting up of two hydroelectricity plants in Bangladesh. Several other agreements for supporting water resource management were also signed during her tenure (Foysal, 2014). Another remarkable step taken by Khaleda government is the announcement of Look East Policy. With an aim to diversify trade and strengthen trade ties with South-East Asian nations, and accrue larger economic gain, Bangladesh announced Look East Policy in 2002 (Ghosal, 2014). Again in 2004, Begum Khaleda visited China to attend Global Poverty Alleviation Conference. In April 2005, the Chinese Prime Minister Wen Jiabao also made an official visit to Bangladesh. Celebrating 30 years of diplomatic engagement both countries, he declared 2005 as the ‘Bangladesh-China Friendship Year’. His visit was followed by Begum Zia’s visit in August 2005. It was her final visit to China during this term. Bilateral relationship between China and Bangladesh under Begum Zia touched new heights of development. After the completion of the term by

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Khaleda government, a caretaker government by Dr. Fakhruddin Ahmed was formed in 2007. Maintaining the tradition, Dr. Fakhruddin Ahmed paid an official four days visit to China from 15 to 18 September 2008 (Foysal, 2014). After the parliamentary election held in 2009, the new government led by Sheikh Hasina assumed power in Dhaka. Since then she has been serving Bangladesh as the minister. After assuming office in 2009 she made her first visit to China in March 2010. The agenda of the meeting primarily focused on economic issues. The leaders signed three critical agreements: first, the Economic and Technical Cooperation Agreement, second, Framework Agreement on Shahjalal Fertiliser Factory, and finally, Agreement on the 7th Bangladesh-China Friendship Bridge (Chowdhury, 2010). Prime Minister Sheikh Hasina visited China again from 6 to 11 June 2014. During the visit, various bilateral issues were discussed with the Chinese leadership. The meeting primarily focused on economic agenda. Notably, they discussed Chinese financial support for large infrastructure projects in Bangladesh. Dhaka sought soft loans or grants for major infrastructure projects (Bhattacharjee, 2014). Following her visit, Chinese vice Premier Liu Yandong visited Bangladesh in May 2015 to commemorate the 40th anniversary of the establishment of diplomatic ties between China and Bangladesh (Jacob, 2017). A milestone was achieved in the Sino-Bangladeshi relation when Chinese President Xi Jinping made a short visit of 22-hour to Bangladesh on 14 October 2016. It was for the first time in 30 years that Chinese head of the state visited Bangladesh. During the visit, the two countries signed 40 agreements and MoUs. The joint statement released during Xi’s visit uses the word ‘Strategic Partnership of Cooperation’ in the title reflecting the deepening of ties between China and Bangladesh (Ranjan, 2016). Again in 2019, from 1 to 5 July, Hasina visited China. The areas that gained priority in the discussion were trade and investment, maritime cooperation, defence, and security, people-to-people connectivity, climate change, science, etc. Additionally, the two countries expressed commitment to deepen cooperation under BRI and work towards implementing the ‘Bangladesh, China, India, and Myanmar’ (BCIM) economic corridor (Bhattacharjee, 2019). It is evident that, Hasina’s regime in Bangladesh has witnessed a sheer development in the bilateral ties with China. An exponential growth in

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trade and investment inflows with China has also been experienced. Ever since the bilateral diplomatic relation was established between the two nations, their association has come a long way. Over the time, China has proved to be a time tested and reliable partner of Bangladesh. Their cooperation has been expanded from diplomatic to military and defence and infrastructure development. Bilateral cooperation has covered almost all the areas of Bangladesh. However, among all areas, defence cooperation with China remains very critical.

Extending Defence and Military Cooperation Defence cooperation occupies a significant aspect of Bangladesh-China relations (Hossain & Islam, 2021). This can be traced back to the mid-1970s. Realising Bangladesh’s growing closeness with China, USSR refused to supply arms to the newly formed state in 1975. China started to take the advantage of the situation by ensuring export of military equipments to Bangladesh. Within a few years China emerged as the largest supplier of arms and ammunition to Bangladesh. Between 1975 and 1978, China supplied 78% of Bangladesh’s arms import (Ranjan, 2019). A new era in the Sino-Bangladeshi defence relationship started in 1987 when a high-powered Chinese military delegation led by General Yang Dezhi, Chief of General Staff of the PLA, visited Bangladesh in January 1987. The delegation made commitment to strengthen and enhance the military capability of Bangladesh (Chakrabarti, 1994). Following this, Bangladeshi army started receiving training from Chinese army, equipped with Chinese arms (Ghosh, 1995). Training was conducted in the 33 infantry Division at Comilla, 24 infantry Division at Chittagong and Sylhet (Ranjan, 2019). China supplies ammunition ranges from anti-tank guns, MIG-21 class fighter planes, battle tanks, knife pistols, folding daggers, and AK-47 rifles among others to Bangladesh (Chakrabarti, 1994). Another remarkable chapter in the Sino-Bangladeshi defence relation opened in 2002 when both nations signed the Defense Cooperation Agreement during Prime Minister Khaleda Zia’s visit to China. It outlays plan for joint production of defence equipments and diverse forms of military training for Bangladeshi soldiers. It was for the first time Bangladesh signed an agreement with any country of such nature (Sarkar, 2014). In 2006 China supplied a large consignment of arms and ammunitions to Bangladesh and for some time now, Bangladesh has been regularly

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receiving varied amount of military equipments from China. Going a step forward, Bangladesh achieved another milestone in 2016–2017 by acquiring two Ming-class submarines from China as a part of its military modernisation project ‘Forces Goal 2030’ (Khondoker & Zaman, 2022). Although the submarines are of an old model, it has enabled the Bangladesh Naval force with important submarine operating skills (Samaranayake, 2016). Currently, Bangladesh is the second-largest destination for China’s arms export sourcing around 72% of its arms import from China during 2010–2019 (Anwar, 2022). It is evident from their respective approaches that Bangladesh and China share a strong and long-term defence relationship. Bangladesh is heavily dependent on China not only for Chinese equipments but also to train its military. Although Dhaka maintains its defence tie with China based on their mutual and economic interests, it raises concerns among neighbouring countries, especially Myanmar and India. Bangladesh, despite its strategic skills and being the biggest beneficiary of Indian armed force, could not maintain the same level of relation in the successive years. India has always been a major factor in Bangladesh policy.

Indian Influence on Sino-Bangladeshi Ties Bangladesh has always attached high importance to India in its foreign relations, including the Sino-Bangladeshi relations. Despite sharing a common colonial history, geographical affinity, and cultural closeness, Bangladesh-India ties remained complicated and shaky. Although India has been primarily instrumental in Bangladesh’s liberation and was the first nation to recognise its sovereignty, her diplomatic influence on Bangladesh faded over time. Bangladesh always had to find ways to balance between two powers, India and China. Within a few years, Bangladesh started to grow closer ties with China. Both sides signed a plethora of agreements ranging from economic and trade cooperation, infrastructural development, and defence cooperation, among others. Bangladesh’s growing closeness with China created concerns for India. The geo-economic competition between the two Asian powers has thrown Bangladesh into a quandary. In particular, India’s anxiety comes from two distinct fronts, first, security threat and second, losing influence (Jacques, 2000).

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The security threat is connected to India’s vulnerability in the Siliguri corridor, often referred to as the ‘chicken neck’. The corridor is stretched to 200 km in length and 40 km in width and connects the northeastern region with the rest of the country with all modes of travel. The corridor borders with Bangladesh on the one side and China on the other. A large number of armed personnel of both countries are deployed in the Indo-China border. Both nations also have territorial dispute in the border areas. In fact, a major Sino-Indian skirmish erupted in the border in 2017. Hence, Bangladesh-China bilateral ties constantly keep India anxious about any possible threat to the corridor. India is apprehensive of using Bangladesh territory by China to create tension in India. In addition, growing Sino-Bangladeshi military cooperation also makes India suspicious about any possible military threat, jointly from Bangladesh and China over the Northeast states in India (Sarkar, 2014). Several experts observe that India is probably losing its influence on Bangladesh. Over the last few years, China invested heavily in Bangladesh and emerged as the largest foreign investor and trading partner there. China invested around US$26 billion, between 2016 and 2020 against around US$3 billion by India. Moreover, the total commitments by China are about US$38 billion. The total volume of trade between the two countries in 2019 stood at around US$18 billion while the trade between India and Bangladesh amounted to about US$10 billion (Singh, 2020). In 2019, China offered zero tariff treatment to 97% of Bangladesh’s exports. It is evident that Bangladesh has accrued larger benefit from its relationship with China than with India. So far it appears that Bangladesh has tactfully maintained a balanced relationship with both China and India, tapping the benefits of China’s economic strength while remaining very sensitive to the core concerns of New Delhi (Chakma, 2019).

Developing Economic Cooperation or Deepening Dependence The foundation of the Bangladesh-China economic cooperation was laid with the first official visit of the then-President Ziaur Rahman from 02 to 06 January 1977 (Peking Review, 1977). Along with the foreign relation, Sino-Bangladeshi economic relation also started to grow. Since the establishment of formal diplomatic relationship, a continual effort to upgrade the level of cooperation on economic fronts by both sides

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was noticed. Several steps were taken by the two countries to strengthen their economic cooperation and friendship. During 1983 to 2009, among the 37 MoUs signed between Bangladesh and China, 19 have economic dimensions (Hossain, 2022). Immediately after the liberalisation, when the war-torn Bangladesh economy was facing a major economic crisis Chinese government came forward to their aid and helped the nation to rebuild itself. China and Bangladesh are engaged in a wide range of cooperation including industries, agriculture and water resources, and infrastructure development, among others. In order to deepen the cooperation, Bangladesh and China set up a Joint Economic Commission (JEC) in 1983 (Quiyum, 2020). Meetings of the JEC are held in the different capital cities turn by turn. Based on the recommendation of the JEC, a long-term trade agreement was signed and Most Favoured Nation (MFN) status was granted by each other in 1984 (Ghosal, 2014). This laid an important milestone in the Sino-Bangladeshi economic ties. Following this, bilateral trade between them has been continuously increasing. In fact, Sino-Bangla trade jumped from merely US$13.75 million in 1975–1976 to US$147.21 million in 1989–1990, experiencing more than ten-fold increase in 15 years (Chakrabarti, 1994). The prominent items exported by Bangladesh to China at that time were jute, jute goods, newsprint, hides, and leather. Among other things, Bangladesh also used to import mechanical equipments, coal, light industrial products, steel, billets, and cement. Since the beginning trade remained largely in favour of China. However, a series of measures have been taken to reduce the gap in bilateral trade although it could not generate any positive result. Over the time, Bangladesh’s dependence on China increased manifold. With an aim to bridge the trade imbalance, China and Bangladesh signed the Thirteenth Barter agreement in 1991. Under the accord, Bangladesh was allowed to finance a part of its imports from China by barter trade rather than making payments through foreign currency. Again, under the new three-year accord with China, effective from 1 January 1993, Bangladesh was granted counter-trade opportunities between private business houses of the two countries. China also agreed to ramp up investment in Bangladesh in trade-generating joint ventures. In 1996, the two countries signed an agreement on Encouraging and Protecting Investment, another for the Avoidance of Double Taxation, and another agreement on the Prevention of Tax Evasion (China.cn.org, 2005). In 2002, both the countries signed agreements on Economic

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and Technical Cooperation. In 2005 China became the largest source of import for Bangladesh replacing India. Bangladesh’s imports from China touched US$495.5 million during 2005–2006, surpassing its import from India of US$416.6 million in the same year. In January 2006, China granted duty-free access for 84 Bangladeshi products under the Asia-Pacific Trade Agreement (APTA). The list was further extended by including around 5000 more items in 2010.1 The major products that feature in the list are medicinal materials, leather, timber, textile, readymade garments, and poultry products. By 2019 Bangladesh secured duty-free market access for 97% of its produce in China. However, all these efforts failed to reduce the burgeoning trade deficit of Bangladesh with China which crossed US$21 billion in 2021.

Current Scenario of Bilateral Trade The bilateral trade between Bangladesh and China has been increasing continuously. The total trade value which was only a US$ billion in 2002 increased to more than US$22 billion in 2021. The data placed in Table 4.1 and Figs. 4.1 and 4.2 reveals that during the period between 2002 and 2021 Bangladesh trade with China has never experienced a downfall with the only exception in 2020. Registering a fall in the trade value in 2020 is obvious due to the global outbreak of COVID-19 which forced majority of the countries across the world to lockdown their economies. Additionally, China was the epicentre of the pandemic. Apart from this COVID-19, no other factor could influence the Bangladesh-China trade. Noteworthy, their trade registered an increase even during the global meltdown in 2008. Although Bangladesh reduced its import marginally in 2009, it continued with its higher exports to China. These reflect the closeness of the Sino-Bangladeshi trade links.

1 Zhang Lei, Chief of Political Section of the Embassy of the People’s Republic of China in Bangladesh, stated the figure in his speech titled “Presentation on Chinese Perspective for Political and Economic Development of Bangladesh.” In a roundtable discussion organised by BIISS on 14 March 2011 as cited by Uddin and Bhuiyan (2011).

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Table 4.1 Bangladesh’s trade with China (in million US$)

Year

Export

Import

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

32.4 33.4 57.0 78.6 98.8 114.2 131.9 140.7 268.9 449.0 479.7 602.4 761.1 803.7 861.9 870.8 985.4 1036.4 799.6 950.3

1066.3 1334.7 1906.3 2402.7 3090.4 3349.8 4556.1 4441.1 6789.1 7810.7 7970.1 9705.1 11,782.3 13,904.8 14,473.0 15,202.7 17,759.5 17,335.1 15,060.0 21,307.7

Source ITC Trade Map

1200.0 1000.0 800.0 600.0 400.0 200.0 0.0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Fig. 4.1 Bangladesh’s export to China (in million US$) (Source Trade map)

Foreign Direct Investment in Bangladesh The Policy Milieu The foreign investment in Bangladesh is governed by Foreign Private Investment Act 1980. This act envisages non-discriminatory approach

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25000.0 20000.0 15000.0 10000.0 5000.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0.0

Fig. 4.2 Bangladesh’s import from China (in million US$) (Source ITC Trade map)

between foreign investment and local investment and provides legal protection to foreign investors against nationalisation and expropriation. It guarantees repatriation of profit, capital, dividend, and equitable treatment with local investors. Intellectual property rights, such as patents, designs, trademarks, and copyrights, are protected by this act (Choudhury & Nayak, 2019). Immediately after the liberation, Bangladesh experienced massive capital crunch. Due to its poor industrial development and limited capacity for domestic investment it relied on foreign capital. It soon realised the importance of foreign capital for its industrial development and positive externalities that foreign capital brings with it. Bangladesh understood its growing capital needs and that the ambition of achieving higher economic growth can largely be fulfilled by foreign investment. Taking a forward step in this regard, Bangladesh started to liberalise its FDI policy and succeeded in the same in the late 1980s and in the early 1990s as a part of structural adjustment policies under the World Bank and the IMF (Kruger, 1975). Since then, Bangladesh has made gradual improvement in its investment and regulatory environment, including the liberalisation of the industrial policy, abolition of performance riders, and allowed fully owned foreign joint ventures. In order to encourage the flow of FDI, Export Promotion Zones (EPZs) were established. Foreign portfolio investments in both primary and secondary markets were permitted. Foreign Capital inflows were encouraged in almost all industrial activities with only exception in the reserved sectors like production of arms and ammunition, forest plantation, production of nuclear energy, and printing of currency. Later the adoption of convertibility of currency in 1994 facilitated the investors by

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relaxing them from obtaining prior approval from Bangladesh Bank for current account transactions (Choudhury & Nayak, 2019). However, despite these developments there remains a huge scope for improvement. The limited coverage of the policy leaves plenty of room to regulate the FDI at the sector level. For example, an investor needs to seek numerous approvals from several authorities while investing in Bangladesh (BIDA, 2020). The analysis of the Intellectual Property Rights (IPR) suggests adoption of a modern investment policy along with other regulatory reforms to address issues affecting the wider business environment. Bangladeshi government employs limited resources to protect IPR which paves the way for large-scale availability of counterfeit goods. Government policies related to Information Communication Technology (ICT) sector are also not developed. Slow adoption of alternative dispute resolution mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes (US Dept of States, 2021).

FDI Inflows in Bangladesh At the time of independence in 1971, Bangladesh inherited only a small stock of FDI, most of it by Translational Corporations (TNCs) and geared towards exploiting a domestic market protected by the then prevailing import-substitution policy. However, the efforts made afterwards helped Bangladesh attract foreign investment and that has also been successful to a large extent. The endeavour made by Bangladeshi authorities is reflected in the data presented below in Fig. 4.3. Data of FDI inflow reveals a fluctuating trend until 2010. From 1996 to 2010 Bangladesh experienced moderate volume of FDI; however, it started to rise significantly afterwards. In the years 2010–2011, the values of FDI inflow which were US$779 million increased to US$3.8 billion in 2018–2019. Notably, it was the highest level of FDI ever received by Bangladesh. The sectors that primarily attracted these investments are textiles and wearing, leather and leather products, and trading. In the very recent past, a large volume of investment has also come to the power generation and construction sector in Bangladesh. The latest data shows that Bangladesh received US$2.8 billion FDI in 2020–2021. It experienced a growth rate of more than 271% from 2010– 2011. These investments came prominently from China, the US, UK, Singapore, and South Korea. Many investors from these countries have

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4500 4000 3500 3000 2500 2000 1500 1000 500 0

Fig. 4.3 Gross FDI inflows in Bangladesh (in million US$) (Source Bank of Bangladesh)

invested in the garment and footwear manufacturing sector in Bangladesh to avail the benefit of generalised system of preferences while exporting to the EU and the US. Importantly, China accounts highest share in the total foreign investment made in 2018 and in 2019. China’s share in total FDI inflow in Bangladesh remarkably increased from 20% in 2017 to 31% in 2018. It was less than a percent in 2010. Capturing Chinese FDI in Bangladesh Data released by the Bank of Bangladesh reveals a dramatic increase in the FDI inflow in Bangladesh from China. Data in Fig. 4.4 shows that the value of the Chinese FDI was merely US$0.52 million in total FDI inflow of US$563 million in 2000. Until 2007 the value remained stagnant under a million. 2010 onwards Chinese capital inflow in Bangladesh started to grow at an exponential rate and within a span of just 10 years it touched the billion marks. In 2018, China became the largest foreign investor in Bangladesh with US$1029.9 million. It surpassed the traditional industrial countries such as the US, the UK, and Japan. In 2021, the Chinese investment amount was US$407.88 million. The stock of Chinese FDI as on June 2021 was reported to be US$1078.71 million. China invested such a big amount despite the global slowdown from the pandemic. Chinese capital initially targeted the garment manufacturing, trading, and other manufacturing sectors; however, in the recent past especially after 2016 a significant volume of Chinese capital is being invested in the construction and power generation sector. There are two

Fig. 4.4 Chinese FDI in Bangladesh (in million US$) (Source Bank of Bangladesh)

0

200

400

600

800

1000

1200

61.490.12

91.34

407.88

625.92

1029.9

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

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factors that explain these rises in the Chinese capital inflow in Bangladesh. First, in 2015 China unveiled its ambitious Made in China plan. Through this initiative China aimed to transform its economy from labour-intensive to a capital-intensive economy. Owing to this, a large number of firms that operate in the lower parts of the supply chain shifted to other countries that include Bangladesh. Second, in 2016 Bangladesh joined China’s mega-infrastructure plan BRI. Under the BRI scheme, China started to build a large number of infrastructure projects in Bangladesh, including that of power generation. This automatically generated demand for capital in the construction sector which was met by Chinese firms through their investments. It is thus interesting to note that after joining BRI, Bangladesh experienced a huge influx of Chinese capital into its economy. Apart from BRI projects, China also invested huge amounts in several infrastructure development projects in Bangladesh. Another import Chinese investment in Bangladesh is the acquisition of 25% share in the Dhaka Stock exchange in 2018 by a consortium of China’s Shanghai and Shenzhen Stock Exchanges. Chinese consortium out passed bid by other bidders like, India’s National Stock Exchange and the US Nasdaq (Reuters, 2018).

Chinese Infrastructure Investment in Bangladesh From the beginning China has been a major investor in the infrastructure development sector of Bangladesh. China is actively engaged in building ports, roads, bridges, power plants, and other physical infrastructure in Bangladesh. One of the critical development assistances provided by China in its early days of engagement with Bangladesh was for the construction of Sino-Bangladeshi Friendship Bridge. Since their engagements in 1975, China has provided development assistance and interest-free project loans for seven ‘friendship bridges’, while one more is under construction (Xinhua, 2021). It is being constructed over Kocha River in southern Bangladesh, and the Bangladesh Roads and Highway department has been carrying out the construction work. The first SinoBangladeshi friendship bridge was inaugurated in 1987 which was built at the cost of US$24 million out of which China provided US$13 million in the form of grants and loans (Ghosh, 1995). The construction of the first Bangladesh-China Friendship Bridge, with a span of more than 917 metre in length, began in October 1986, and was completed in February 1989 (Xinhua, 2017). Another landmark Chinese-funded project in Bangladesh

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is the Bangabandhu International Convention Centre which is the largest convention centre of Bangladesh. It was initially built with a US$24 million interest-free loan and was subsequently converted into a grant (Datta, 2021). During her visit to China in 2010 Bangladesh Prime Minister Sheikh Hasina signed two agreements for setting up of a fertiliser factory and telecommunications network systems in the country, with an approximate cost of which US$770 million. For this, China would disburse the loan at an interest rate of 2%, payable in 20 years (Uddin & Bhuiyan, 2011). Bangladesh relied heavily on China for the development of its power sector. Many power plants in Bangladesh were constructed with Chinese loan by Chinese companies. One such is the Barapukuria Power Plant situated in Rangpur. Bangladesh received a US$224 million loan from the Chinese private bank Industrial and Commercial Bank of China (ICBC) in January 2014 to expand the capacity of the 250 MW Barapukuria coal-fired thermal power plant by 275 MW (Shakhoat, 2022). Another power plant in Ghorashal with production capacity of 363 MW and two plants in Sirajganj with production capacity of 220 MW were also built with Chinese loans (Hasan, 2018). Furthermore, China has committed to Bangladesh US$1.9 billion on coal plant expansion and another US$5.1 billion in developing a 14 GW coal-fired capacity. More recently, GCM resources Plc and PowerChina signed a US$4 billion deal to build a 2000 MW coal-fired power plant in Dinajpur (Saimum, 2020). China is financing Chittagong coal-fired electricity station with a capacity of 1224 MW (Rana & Ji, 2020) and also funding a power project Payra coalfired power plant with 1320-megawatt capacity in the southern region of Bangladesh. The project will be completed with an estimated cost of US$2.48 billion of which 80% will be financed by China through loans (Bhattacharjee, 2021). Other than these high value projects, China also funded several other important infrastructure development projects such as construction of road and rail link connecting Chittagong with Kunming, water purification projects in Pagla, and the Dhaka-Chittagong railway chord line project, among others (Ghosal, 2014). There is a long list of projects in Bangladesh undertaken by Chinese funds. Table 4.2 provides the list of the projects for which both the countries have signed a MoU during the Chinese president’s visit to Dhaka in 2016. Among all the above-mentioned projects enlisted in the MoU, commercial agreements for only seven projects worth US$5.4 billion had

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Table 4.2 Proposed China-funded projects in Bangladesh Sl. no

Name of the project

In million US$

1 2 3

Padma Bridge Rail Link Project Dhaka–Sylhet four-lane highway project Development of the national ICT infra-network project for the Bangladesh Government Construction of tunnel under Karnaphuli River Installation of Single Point Mooring (SPM) with double pipeline Rajshahi WASA Surface Water Treatment Plant System loss reduction by replacing 5 million electromechanical energy metres with electronic energy metres Expansion and strengthening of the Power System Network under DPDC area Power Grid Network Strengthening Project under PGCB Construction of Dhaka–Ashulia elevated expressway Establishing six full-fledged TV stations of Bangladesh Television Modernisation of telecommunication network for digital connectivity Construction of a dual-gauge track parallel to the existing Joydebpur–Mymensingh–Jamalpur section Construction of double line between Joydebpur and Ishurdi sections Establishing digital connectivity Marine Drive Expressway and coastal protection works from Sitakunda–Chittagong–Cox’s Bazar Expansion and modernisation of Mongla port facilities Extension of underground mining operations of Barapukuria Coal Mine Gazaria 350 MW coal-fired power plant Conversion of MG railway track to DG railway track in the Akhaura–Sylhet section Prepayment metering project for Bangladesh Power Development Board’s (BPDP) distribution zone New inland container port near Dhirasram railway station Replacement of overloaded distribution transformer to provide reliable electricity to the RE region Water supply, sanitation, drainage, and solid waste management for small municipalities

2667.93 2110 156.56

4 5 6 7

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

705.8 500.466 350 165.98

1650.51 1321.83 1393.98 127.88 231 581.26 752.79 1000 2856.56 249.17 256.41 433 1756.05 521.56 200 230.59 150

(continued)

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Table 4.2 (continued) Sl. no

Name of the project

In million US$

25

Modernisation and expansion of public sector jute mills of Bangladesh Chinese economic and industrial zone in Chittagong Modernisation of rural and urban lives through ICT

280

26 27

280 500

Note projects whose funds have been disbursed are given in bold and italics Source Saimum (2020)

been signed and only US$1.54 billion disbursed until June 2020. Two more projects namely Dasherkandi Sewage treatment plant and establishment of Tier IV National Data Centre signed earlier are also underway. Thus, they have signed a total of only 9 projects worth US$7.1 billion of which US$1.8 billion have been disbursed (Datta, 2021). This amount is far below the amount proposed by President Xi. The signed amount so far is around 22% while the disbursed amount is around 12% of the total committed sum. The construction of Padma Bridge has had a great significance to the Bangladesh economy. Initially, it was supposed to be funded by the World Bank with its US$1.2 billion line of credit but it later withdrew the proposal citing corruption. In 2012 the World Bank dismissed the contract with the Canadian construction company SNC Lavalin who was entrusted to build the bridge (World Bank, 2012). Later, the Government of Bangladesh signed another contract in May 2014 with the Chinese firm China Major Bridge Engineering Company (CMBEC) to undertake the construction activities. Interestingly it was the only bidder for the project (EIU, 2014). The construction of bridge was completed in June 2022 and was subsequently opened to public. This bridge connects Bangladesh’s principal ports and links it to the Dhaka-Chittagong Highway. It is important to note here that until the inauguration of the bridge it has always been referred as BRI project (Datta, 2021; Saimum 2020). However, after the inauguration of the bridge when the media was levelling it as a BRI project, Bangladesh rejected the news by releasing a statement saying, ‘the Ministry of Foreign Affairs categorically asserts that the Padma Multipurpose Bridge has been entirely funded by the Government of Bangladesh and no foreign funds from any bilateral or multilateral

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funding agency have financially contributed to its construction’ (MOFA, 2022). On 31 May 2013, Bangladesh signed an agreement of RMB 860 million government concessional loan (GCL) with China’s Exim bank at an interest rate of 2% with 20-year maturity and 5-year grace period. The loan was sought to undertake the Phase II of the Info-Sarker Project which is also known as the Development of National ICT Infra-Network for Bangladesh Government Phase II Project. The project aims to link all Bangladeshi government offices—at both district and sub-district levels— under a single network. Data released by the Economic Relations Division (ERD) of the Government of Bangladesh suggests an amount of RMB 767.325 million had been disbursed through the China Exim Bank GCL by 2017. China Machinery and Equipment Engineering Co. Ltd. and Huawei serve as the general contractor and major subcontractor for this project respectively. It was completed on or around March 4, 2016 (Aiddata, n.d.). Another important Chinese-funded project in Bangladesh is Karnaphuli Multi-Channel Tunnel Project which is now underway. China Communication Construction Company Ltd along with Ove Arup & Partners Hong Kong Ltd (CCCC-Arup JV, the Consultant) was jointly awarded the project on 19 April 2011 (BBA, 2013). The tunnel, estimated to cost US$1.7 billion to complete, is seen as a key component among several BRI-related projects in the country. It will connect the port city of Chittagong to the far side of the Karnaphuli River, the site of a new Chinese economic zone. It is expected to ease the heavy congestion on the existing two bridges across the river while also connecting the Korean Export Processing Zone with the Shah Amanat International Airport (Hassan, 2019). Payra Deep Seaport is another landmark Chinese-funded project in Bangladesh. Located in Patuakhali region of Bangladesh, Payra Seaport is being constructed with a cost of US$15 billion. The project is undertaken by China Harbor Engineering Company and China State Engineering and Construction Company (Fairman, 2019). Notably, these two Chinese state-owned enterprises also oversee construction of Gwadar port in Pakistan and Hambantota ports in Sri Lanka. It is evident from the discussion above that Bangladesh’s economic engagement with China has intensified since 2016 when it joined the BRI. It can be noticed both in the government-to-government loans and also in the case of private investment in the form of FDI. It is pivotal to

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mention here that several infrastructure projects were already underway in Bangladesh with Chinese loan that predates BRI. There is no denial that China is deeply engaged in the infrastructure development in Bangladesh and many Chinese firms are entrusted to complete the construction. It is also true that all the projects that are financed by China are not ‘BRI projects ’. Many projects such as the Padma Bridge and the Info-Sarker Project are often levelled as BRI projects by popular media and even by the academic community without verifying the fact that the projects started before the launch of BRI. Many studies considered these as BRI projects only due to the fact that they are undertaken by Chinese firms as found in the case of Padma Bridge. Moreover, as per our knowledge there is no official statement from either side about any list of BRI projects. These make it very difficult to distinguish projects as BRI and non-BRI. In the next section of this chapter, we make an attempt to explore the position of Bangladesh in BRI and identify some of the projects undertaken under this initiative.

Navigating BRI in Bangladesh Bangladesh joined the BRI in October 2016, when Chinese President Xi Jinping visited Dhaka (Das, 2017). President Xi offered US$24.45 billion infrastructure loan to Bangladesh, for 27 projects, the largest sum ever pledged to Bangladesh by a single country (Chakma, 2019; Samaranayake 2019). The significance of Bangladesh in the BRI initiative emerges from two important factors: first, Bangladesh’s critical location in the Bay of Bengal and the Indian Ocean. This turns Bangladesh into a major player in China’s grand ambitions of asserting influence in the region. Second, among the six proposed corridors to be constructed under the BRI, the BCIM (Bangladesh, China, India, and Myanmar) passes through Bangladesh. BCIM-EC conceptualised in 1999 predates the BRI by 14 years. It was primarily proposed to connect the economically backward regions of southwest China and northeast India via Myanmar and Bangladesh. It was supposed to start from Kunming, China, and end up in Kolkata, India. The corridor, however, could not take off because of India’s rejection of BRI. China did not mention about India in the second BRI Forum declaration in April 2019. However, as BRI evolves, Beijing prioritises BCIM-EC as an important loop to the greater sub-regional connectivity plan (Anwar, 2020).

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Bangladesh’s attractiveness as an important BRI destination also comes from its closeness with China in both economic and diplomatic fronts. Since it joined BRI, Bangladesh has actively participated in all the BRI forums held so far. Bangladesh stands out as an attractive BRI destination due to its large reserve of natural resources, conducive environment for investment, and for export oriented Chinese firms. Bangladesh has a huge availability of skilled labour force at a relatively lower cost which can be employed by the Chinese firms who are planning to establish manufacturing facilities there (Hussain, 2013). Improved connectivity through BRI would reduce costs of transport and benefit Bangladesh through enhanced trade and investment. BRI will help it become better integrated into the global economy (Khatun & Saadat, 2020). Bangladesh also has high demand for infrastructure investment to sustain its growing economy. As per an estimation made by the World Bank, it needs around US$320 billion to maintain the growth rate of 6–8% per annum (Ehsan, 2020). Desperately looking for the infrastructure investment the country aims to meet this demand through Chinese capital. Under the BRI, China will be funding several projects in Bangladesh for the development of infrastructure in the sectors such as transportation (road and rail), power generation, and digital connectivity. It is clear that Bangladesh is attracting a lot of attention due to its involvement in the BRI. One can argue about a project being BRI or nonBRI but cannot deny the huge amount of loan that China has extended to Bangladesh. The high values of the loans have raised alarm in some quarters of policy experts. Many BRI or Chinese-funded projects have been criticised in Bangladesh. Experts believe that Bangladesh may find it difficult to repay the loans provided under BRI for the grossly overpriced infrastructure projects. China’s official finances are less concessional as compared to multilateral agencies (Ehsan, 2020). Experts also cite the Sri Lankan experience in Hambantota port while warning Bangladesh from falling in debt trap (Sakib & Habib, 2021). Hambantota port, built in Colombo with Chinese loan, had to be transferred to China for 99 years lease as Sri Lanka failed to repay the loan on time. India’s opposition to BRI and disinterest in further discussion on BCIM corridor has largely jeopardised the prospect of Bangladesh taking advantage of the corridor. In addition, India opposed several other BRI projects in Bangladesh as it believed that it would harm its long-term geostrategic interests (Chakma, 2019). Due to heavy pressure from India, Bangladesh had to decline Chinese offers to build the Chittagong and

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Sonadia ports in 2016 (Rana & Ji, 2020). Against this, Bangladesh accepted an alternative proposal from Japan to develop deep seaport at Matarbari, close to Sonadia. India was concerned that it would provide China significant advantage in the maritime rivalry of the Indian Ocean (Chakma, 2019). Corruption remains another challenge for BRI in Bangladesh. It is ranked 147 out of 180 in Corruption Perception Index 2021 published by Transparency International (2021). China Harbour Engineering Company (CHEC) was accused of paying bribe to Bangladeshi official with around 5 million taka (US$60,000) while negotiating the DhakaSylhet expressway expansion project in 2018. This led to the blacklisting of CHEC by Bangladesh government. They eventually cancelled the project (Rana & Ji, 2020). Again in 2021, Bangladesh cancelled 5 more Chinese-funded projects citing different reasons (Chakma, 2021). Another controversy related to BRI in Bangladesh erupted recently when Bangladesh inaugurated Padma Bridge. A large section of the media was referring to this Bridge as a BRI project and an example of strong Sino-Bangladeshi relation. Following this Bangladesh refused the claim made by media through a press release and informed that the bridge was constructed by its own fund without any foreign assistance. However, the bridge was constructed by two Chinese companies (MOFA, 2022). Other than this prominent criticism, BRI projects in Bangladesh also created concerns for environmental degradation. Infrastructure development projects under BRI would disturb the ecological balance where 56% of the total investment is promised in energy sector (Ehsan, 2020). Bangladesh has often witnessed mass protests in several Chinese-funded project sites for paying low wages, assaulting local labourers, and other malpractices (ANI, 2022).

Conclusion The chapter explained how the Sino-Bangladeshi relation got stronger since the establishment of formal diplomatic ties. Over the last four decades, their relationship has tremendously strengthened both in diplomatic and in economic fronts. Bangladesh also developed close military ties with China who supplies them majority of its arms requirement. China has emerged as the largest trade partner of Bangladesh. It also receives significant volume of investment from China especially in infrastructure development sector. China is actively engaged in building

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ports, roads, bridges, power plants, and other physical infrastructure in Bangladesh. So far seven bridges have been constructed in Bangladesh and one more is under construction with Chinese assistance. These are termed as Sino-Bangladeshi ‘Friendship Bridge’. Bangladesh is among the early participants of Chinese initiative BRI. Our discussion in this chapter finds that Bangladesh’s economic engagement with China has intensified since it joined BRI. In 2016 China pledged to extend US$24.45 billion infrastructure loan to Bangladesh, for 27 projects, the largest sum ever pledged to Bangladesh by a single country. Though there were a few controversies that erupted over the BRI projects in recent time, Bangladesh managed them very tactfully so far without affecting its relation with China or any other country.

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CHAPTER 5

Growing Sino-Indian Economic Ties: Under the Shadow of Border Tension

Significant rises in the volume of Chinese investment in India have been noticed in the recent past. The Department of Promotion of Industry and Internal Trade (DPIIT), Government of India, responsible for maintaining and publishing data on foreign direct investment (FDI) reports, the total FDI inflow which was only around a US$ million until 2010, increased to US$173 million in 2019. Besides FDI, a remarkable increase in the foreign equity capital flow or foreign portfolio investment (FPI) from Chinese firms to India is noticed over the last few years. Venture intelligence, a privately owned database and widely used in academic research, suggest that China invested US$3,423 million in 2019 in India as portfolio investment. Chinese investors targeted almost all the sectors in Indian economy. Chinese investment which was dominated by StateOwned Enterprises (SOE) earlier has expanded to several private players. Chinese companies have emerged as majority shareholders in several Indian start-ups, particularly in the technology sector. The rise in the Chinese capital inflow in India has been accompanied by an increase in the trade between these two neighbours by a significant volume. Data extracted from the UN COMTRADE reveals that the trade between India and China increased from US$58 billion in 2010 to US$85 billion in 2019. This reflects flourishing economic association between them. But a reverse development is noticed in the political and diplomatic fronts. There has been a constant clash in the borders, noticeably in the Doklam © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 R. N. Choudhury, Mapping Chinese Investment in South Asia, https://doi.org/10.1007/978-981-99-1385-5_5

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and Galwan valley with a few other minor clashes in different areas. Experts comment that in Galwan valley, conflict reached the highest level after the 1962 Sino-Indian war (Ayres, 2020). Many even predicted a second Sino-Indian war. All these have reshaped the relationship between these two emerging global powers. Both nations are experiencing a booming economic alliance and a shrinking political and diplomatic relation at the same time. In other words, the Sino-Indian relationship can be viewed from two perspectives, first from political and strategic lens and second from economic lens. From the existing evidence, one can be convinced that both China and India have been successful in keeping these two fronts of relationship separate from each other. However, there has been some occasional turbulence in the economic ties caused due to shaky diplomatic bonding. In fact, recently, India tried to put restrictions or apply rider to Chinese investment in Indian firms, but it was not very effective. In this context, this chapter outlines three important attributes of Chinese investment in India. First, it provides an overview of India-China relation, second, it analyses Chinese investment in India. The chapter analyses India’s growing apprehension for Chinese investment and India’s response to the same. In addition to this, we will also try to underline India’s stand on China’s mega plan, the Belt and Road Initiative (BRI).

Sino-Indian Relation: Flourishing over Time China and India are among the largest countries in the world in terms of size and by population, and they share around 3000 km of common border spanning over several provinces. The Sino-Indian relationship dates back to centuries. There have been interminable civilisation exchanges between these two countries. The religious faith of Buddhism travelled from India to China along with numerous ideas, texts, and values. Travellers, like Fa-Xian, Xuan Zhang, and Kumarajiva, from both countries played a pivotal role in the development and exchange bilateral ideas and principles. The historical relationship between these two neighbours is also marked by trade and people-to-people exchanges. In the modern times, the ties between these nations began when India diplomatically recognised the statehood of China in 1949. Later, India bided for securing China’s seat in the United Nation. To boost the ties, India-China Friendship Association (ICFA) was set up in Calcutta in 1951. Subsequently, several chapters of ICFA was opened in different

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cities of India and China where they organised several cultural events such as photo exhibition and culture and art exhibition, among others (Ghosh, n.d.). India and China signed the famous ‘The Panchsheel Agreement’ on 29 April 1954 outlining the five principles of peaceful coexistence which marked the pinnacle of relations between the two countries. The relationship flourished between these nations until the uprising of Tibet and India granting asylum to Dalai Lama, the supreme Buddhist monk in 1959. Following this, a series of crossfires and skirmishes happened in the border until a major military war finally started in 1962. This incidence changed the entire equation of the existing SinoIndian relationship while marking the beginning of a new era featuring disrespect, division, mistrust, conflict, and rivalry. The 1962 border clash severely affected the diplomatic relation and cultural engagement between the two countries, and the discontent continued till 1979 when Indian external affairs minister Atal Bihari Vajpayee visited China (Banerjee, 2021). His visit was followed by the visit of Chinese Foreign Minister Huang Hua to New Delhi. Following these two visits a few more bilateral dialogues took place but the major development in restoring the relationship happened with the Indian Prime Minister’s visit to Beijing in 1988. After this visit an intense process of normalisation began to unfold between the two countries despite several unsolved differences (Ranganathan, 1988). Both started engaging with each other culturally and on economic issues as well. They also engaged in several multilateral forums such as WTO, UN, G20, BRICS, and SCO, among others. The association also includes global issues of common concern, notably climate change, trade and investment relationship, food security, and broader exchanges between people and agencies on both countries. Over the period both nations established themselves as major powers in the region and also started to emerge as a global power. They also became major military powers while strengthening their economic muscles. Power dynamics in the Indo-Pacific and South Asian region largely revolves around these two neighbouring nations and they play an influential role in all the important global issues. They are now among the top economic performers and trading nations in the world. Over the last decade China became India’s largest trading partner. The relationship progressed without any major dispute while the discussions on resolving national border disputes continued. Several visits by respective state heads also took place over the last two decades playing

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Table 5.1 Bilateral visits by State/Government heads Name

Designation

Country

Visiting year

Narasimha Rao Atal Bihari Vajpayee Wen Jiabao Hu Jintao Dr Manmohan Singh Xi Jinping Narendra Modi Pranab Mukherjee Narendra Modi Xi Jinping Narendra Modi Xi Jinping

Prime Minister Prime Minister Premier President Prime Minister President Prime Minister President Prime Minister President Prime Minister President

India India China China India China India India India China India China

1993 2003 2005 2006 2008 2014 2015 2016 2016 (twice) 2016 2018 2019

Source Compiled from MEA, GoI website

a crucial role in deepening the bilateral ties. Evidently leaders of these two nations met more frequently since 2014 (Table 5.1). In his visit to India in 2014, Xi Jinping remarked that the two countries should make full use of existing mechanisms and the flag meetings of border personnel to jointly safeguard peace and tranquillity in the border areas. He further said a few clouds in the sky can never overshadow the radiance of the Sun of Sino-Indian friendship (MFA, 2014). Similar tone is also noticed in Indian PM Narendra Modi’s speech when he commented that our border-related agreements and confidence-building measures have worked well, and clarification of Line of Actual Control (LAC) would greatly contribute to our efforts to maintain peace and tranquillity (MEA, 2014). Evidently, both countries tried to resolve their issues and co-exist peacefully. The attempt was also successful to a large extent to subdue their rivalry. But it did not last very long. The relationship started to get bitter with an incidence in the Doklam valley, situated at the tri-junction between India, Bhutan, and China in Sikkim, India. A military standoff began between India and China on 16 June 2017, when Chinese troops came to the area with equipments to extend a road southward in Doklam, towards the Bhutanese Army camp near the Jampheri Ridge. Both India and Bhutan claim it to be an integral part of Bhutanese territory, while China claims that the ridge is the border. Two days later,

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a few hundred Indian troops entered Doklam (Joseph, 2018). The military skirmish continued for 73 days before both the nations announced disengagement of their respective troops from the border. Thankfully, no incidence of firing was reported nor any causality took place. Both nations kept the diplomatic channel open and discussion continued between them. However, the incident increased mistrust between the two countries and damaged the bilateral ties (Ganguly & Scobell, 2018). The resolution process followed an arrangement of informal meetings between the Indian Prime Minister Narendra Modi and Chinese President Xi Jinping. The first meeting was held when Prime Minister Modi visited Wuhan, China in April 2018. In the ten-hour meeting known as the Wuhan Summit, both countries agreed to improve communications and further strengthen the existing confidence-building measures (Basrur, 2019). The second discussion took place in Tamil Nadu, India, in October 2019 during President Jinping’s visit. In the meeting, the leaders focused on boosting bilateral trade and investment relations. To find possible ways to expand India’s market access in China and reduce India’s burgeoning trade deficit were also discussed in the meeting (Verma et al., 2021). However, the entire attempt to bring normalcy in the border and to have a friendly relationship with China was washed away by a major military face off in the Indo-China border in Galwan valley area in Ladakh on 15 June 2020. The fight began with Chinese objection to Indian construction of road in the Galwan valley (MEA, 2020a). The popular media reported that soldiers from both sides were held hostage and released after diplomatic intervention. However, no official statement from either side confirmed such incidence (Al-Jazeera, 2020). The fight took lives of 20 Indian soldiers and an undisclosed number of Chinese soldiers. It was the deadliest clash between these two neighbours in 45 years. China maintains that India provoked the clash (Zhao, 2020) and it should initiate the process of restoring the peace and stability in the LAC by accepting the status quo. Against this, India wants to restore the status quo ante May 2020 position along the LAC (Verma et al., 2021). India argues that China’s claims are not in accordance with China’s own position in the past. Multiple rounds of discussion through military and diplomatic channels failed to break the stalemate. Hundreds of soldiers are still positioned in the disputed area. Though very recently both sides started disengaging their troops from the border, complete

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disengagement is yet to be achieved. After this incidence, no major bilateral discussion at ministerial level took place between India and China, with the only exception of Chinese Foreign Minister Wang Yi’s visit to New Delhi in March 2022. Around 15 rounds of meeting of the military level have taken place till July 2022 to resolve the issue. Despite these efforts relationship between these two countries remain strained. The clash in Galwan valley brought two significant changes in India’s policy towards China. First, India started to engage proactively with several multilateral forums, such as QUAD, SCRI, AUKUS, IPEF which China perceives as an anti-China block. Second, India adopted stringent economic measures against foreign investment. Policies were introduced to scrutinise the Chinese investment and measures were taken to reduce dependence on Chinese goods and services. However, result of these measures is yet to be noticed in the ground. It will possibly take a long time for India to economically disengage from China given its deep trade and economic linkages.

India-China Economic Relationship Historically, both India and China have been prominent trading nations but there was limited bilateral trade between them. Moreover, their bilateral trade was largely confined to land borders. Calcutta, in the eastern Indian Province, was the primary point of contact between the traders of these two countries. Indian traders primarily exchanged their opium, sandalwood, and pepper for Chinese porcelain and silk (Das Gupta, 2001). The trend of limited bilateral trade continued in the independent India as well. India primarily relied on the European region and Soviet Union for trade. In the subsequent years, after the independence, India’s aim to become self-reliant through adoption of import-substitution policy and the Sino-Indian war of 1962 largely affected their bilateral trade. India suspended trade with China after the war. The relationship remained sour and neither side paid any attention to resume trade. After a long period of suspension, trade was resumed in 1978 (Baru, 2016). This marks the beginning of a new era to India-China trade partnership. China opened its economy in 1980 while India liberalised its economic policy in 1991. In 1984, they granted the most favoured nation status to each other. During the visit of Indian Prime Minister Rajiv Gandhi to China, both nations agreed to set aside their territorial disputes and deepen ties that include expanding the trade volume. They also agreed

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to set up India–China Joint Economic Group (JEG) on Economic Relations and Trade, and Science, and Technology. By the end of next two decade China become a manufacturing hub and India established itself as a leader in the service sector. By 2000, a lot of Indian software firms started exporting to China. A few also opened their branches in China. Two-way trades began to increase by leaps and bounds. Goods produced in China began to occupy Indian markets. In fact, markets dedicated to selling only Chinese goods, especially electronic and lifestyle items, developed informally in various parts of India. Encouraged by the growing trade volume a Joint Task Force (JTF) was set up to study the feasibility of a Regional Trade Arrangement between India and China in 2003 (Lu, 2016). Bilateral trade jumped from US$339 million in 1992 to around US$74 billion in 2011, while China emerged as India’s largest trading partner replacing the US. With a share of around 2.3%, India became the 7th largest export destination for China in 2012. To boost the trade further, both economies signed a handful of agreements including setting up of India–China Strategic and Economic Dialogue (SED) (Baru, 2016). The data presented in Table 5.2 depicts that India’s trade with China has been fluctuating since 2010. The total trade increased from US$58.69 million to more than a billion in just 10 years. Total trade volume crossed the symbolic figure of US$100 billion in 2018. Share of China in India’s total export increased from 5.6% in 2011 to 7.2% in 2021. India primarily exports cotton, ores, chemicals, mineral fuels, etc. to China while it imports commodities like electrical machinery, mechanical appliances, and plastic products, among others. Indian export basket with China largely consists of products or raw materials while import consists of industrial goods. Around 70% of India’s export to China consists of raw materials and intermediary goods while above 50% of its imports are capital goods. Interestingly, bilateral trade was not affected much even during the COVID-19 pandemic in 2020 and 2021. Data reflects that during the reference period, India’s import from China has increased much faster than the increase in export. The higher value of import compared to the export value has led to burgeoning unfavourable trade deficit for India. Incidentally, India’s trade deficit with China has expanded by three times between the period 2010 and 2021. Moreover, India’s importance in China’s total trade is much less than its importance in India’s total trade. India never enjoyed surplus trade with China except in 1991 and 1992 (Ghosh et al., 2019).

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Table 5.2 India’s trade with China (US$ billions)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Export

Import

Total trade

Trade balance

17.44 16.72 14.73 16.42 13.43 9.58 8.92 12.50 16.37 17.28 21.19 21.25

41.25 55.48 54.14 51.64 58.23 61.60 60.48 71.92 90.40 68.40 65.21 94.17

58.69 72.20 68.87 68.05 71.66 71.18 69.40 84.42 106.76 85.68 86.40 115.42

−23.81 −38.77 −39.41 −35.22 −44.80 −52.03 −51.57 −59.43 −74.03 −51.12 −44.03 −72.92

Source UN COMTRADE (WITS)

The unfavourable structure of the trade and the continuous expansion of the gap between export and import have created concerns among the Indian policymakers. Both governments blame each other for imposing unnecessary non-tariff barriers that act as impediments to trade. India accuses China of restricting market access for its traders and extends undue support to domestic traders that distort the market. India further blames China of dumping goods in Indian market. These issues have been discussed in various bilateral meeting that took place between India and China, but have not received any concrete solution. India argues that the onus lies with Chinese government to address the issues first and take corrective measures as the trade figures are in China’s favour (Baru, 2016). A large set of factors have facilitated the growth of Indian trade. The leaders of both China and India realised the importance of trade in deepening bilateral ties. For a very long time, they emphasised on the expansion of trade and made serious efforts to achieve this. Economic cooperation and deepening engagement have often featured in joint statements and declarations issued after the bilateral meetings. Many of the ministerial visits were accompanied by the business delegations from respective countries. During various bilateral meetings, India and China adopted several measures and institutionalised efforts to promote trade.

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The formation of India–China Joint Economic Group on Economic Relations and Trade, Science, and Technology in 1988, setting up of Joint Task Force (JTF) for studying the feasibility of entering into FTA study in 2003, and starting the India–China Strategic and Economic Dialogue from 2010 has been immensely helpful in promoting trade (Lu, 2016; Shisheng, 2016). Policy measures undertaken in India with economic liberalisation have greatly contributed to the expansion of China’s export to India. Subsequent to the trade liberalisation India reduced its import duties on industrial products from 33% in 2000 to less than 9% in 2008. India removed all the quantitative restrictions on imports, such as import licensing, in 2001. This opened a huge door for Chinese products to enter India and capture it within a very short time. Though India took restrictive measures to discourage import of several items and reduce dependency on foreign goods by increasing its import duties in 2018, the impact of those moves hardly generated a positive result (Dhar, 2019). Despite enacting several policies and offering incentives, India could not make any remarkable progress in increasing the manufacturing sector production. The share of the manufacturing sector to the GDP remained stagnant around 14–15% during the last two decades and has also not shown any improvement in the crucial indicator Gross Value Added (GVA) (Choudhury, 2020). The figure remained stagnant at 16.08 since 2014 (PIB, 2018). India’s failure to integrate with the global production network leaves the manufacturing sector to the peril of being dependent on foreign goods. Chinese manufacturing sector took this advantage to make inroads to Indian market. Another contributing factor to the exponential growth of Indo-China trade is the meagre amount of investment from China to India, especially in the manufacturing sector. The machinery items, electric products plastic goods, etc. are not produced in India by any Chinese company. Hence, it is obvious for them to export these items to India to cater the demand. Moreover, these items are produced in China with a very minimum cost taking advantage of economies of scale, low wage rate, and government support which makes them more affordable compared to other suppliers. In many instances, the domestic production of such goods is found to be more expensive than importing them from China. India’s import from China is growing continuously despite several initiatives to curtail it and narrow the trade deficit. There can be two prominent explanations for it. First, India is too much dependent on

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Chinese goods. India’s successive failure to strengthen the weak manufacturing sector has made it largely dependent on Chinese goods including critical items such as Active Pharmaceutical Ingredients (API) used as raw materials for producing medicines. It is also dependent on China for various raw materials used in white goods industry. Second, today China’s unique position for producing a wide range of items at a very low cost makes it so competitive that it is very difficult for others to produce the items domestically at the same cost or find another supplier easily. Hence despite having a tensed political relationship, India finds it difficult to reduce trade with China. The Sino-Indian trade continued to flourish even during the military skirmishes in the border. Moreover, both the nations handled the situation aptly and did not allow the shadow of the war to affect the trade. The economic ties between India and China are now more need based with strong fundamentals and less sensitive to external factors. Why Countries Are Apprehensive of Chinese Capital? Many scholars view Chinese investment from the prism of suspicion since a long time. They believe that China aims to exert diplomatic dominance through its investment. Scholars accuse China of capturing strategic asset in the debt-burden nation (Chellaney, 2017; Hillman, 2018). Experts also argue that China’s rise or economic expansion will translate into outright expansionism or a quest for strategic dominance (Xie, 2019). Acharya (2003) and Rajan (2003) expressed their fears of China’s uncertain evolution as a rising power and the political costs in the Southeast Asian countries. China’s rapid and large investment in African region has also attracted attention from scholars, and policy and lawmakers around the world. Like other regions, Africa has also experienced dramatic expansion of trade and investment relation with China. Chinese economic expansion in Africa has crowded out the US and European investment and in turn reduced their diplomatic dominance in the region. Chinese investment is also viewed with doubt because it is majorly state driven. China’s challenge to American supremacy in Africa is primarily economic in nature. Chinese investment and trade are rapidly increasing at the cost of American firm which is evident in the 40% growth in Chinese FDI and billions in government loans and grants over the last decade (Hruby, 2019). The scenario is not different in South Asia. China has invested immensely in almost all the South Asian countries. In this region the

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anxiety regarding Chinese capital is even higher than other parts of the world. The apprehension about Chinese funds grew higher since 2018 when China overtook the control of Hambantota port in Sri Lanka as the tiny island nation could not repay the loan which it availed from China during the construction of the port (Ferchen & Perera, 2019). Securing 25% stake in the Dhaka Stock Exchange (DSE) is another strategic investment from the financial market’s perspective. It leaves DSE and Bangladeshi financial market to a vulnerable position and helps China to deepen its economic influence (Stacey, 2018). The China-Pakistan Economic Corridor (CPEC) constructed under China’s ambitious BRI where Pakistan availed a loan worth US$62 billion from China has led Pakistan to the brink of bankruptcy and forced it to knock on the doors of the international financial institutions multiple times (Wani, 2020). Pakistan had to request for bail out to the International Monetary Fund (IMF). All these investments mentioned above are rapidly eclipsing India in the South Asian region, both on economic and political fronts. China has emerged as one of the biggest investors in South Asian region in very short time at India’s cost. Jain (2018) observes how India is losing its political dominance in the region especially in countries like Sri Lanka and Bangladesh. The author warns about the security risk associated with the Chinese investment. The author comments that India’s national sovereignty and territorial integrity are at stake owing to the CPEC project. China’s ‘domestic periphery’ presents a significant threat to its national security and to the neighbouring countries of South Asia and Central Asia, warned Kumar (2019). A recent study by Krishnan (2020) explored the role played by the private sector in China and the provincial governments that have emerged as important interest groups in shaping China’s diplomacy with India. The influx of Chinese capital also poses serious challenge for India’s regulation of foreign investment. The study suggests that Indian foreign policy should proactively engage with the emerging actors shaping the Chinese foreign policy and that India should pursue a coherent policy and bring a transparent regulatory policy. But given the current scenario, this will not be an easy task, as mentioned by Bhalla (2021). The author further suggests that India needs to work towards establishing clear economic and political objectives in its economic engagement with China. Like Krishnan (2020), Bhalla also recommends that India should pursue more strategic

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and long-term issue to reshape relationship with multilateral institutions and inter-governmental agencies. India has expressed concerns regarding the security threat from Chinese companies, especially from digital and telecommunication sector. Indian security agencies and other organisations had underlined the threat posed by Chinese telecom equipment in sensitive national networks, with 35% of cyber attacks on Indian websites traced to China (Purushottam, 2018). Department of Telecommunications (DoT) had excluded Chinese telecom equipment manufacturer Huawei from 5G trials in India. Chinese telecom firms are accused of IPR theft, collection and transfer of unauthorised data, and practising anticompetitive behaviour in several countries including India. Close relationship between Chinese telecom firms and the People’s Liberation Army (PLA), and Chinese Communist Party (CCP), the ruling party in China also raises questions about their intentions. The US Cyber security and Infrastructure Security Agency reported that China conducts extensive hacking operations globally, targeting the health and telecom sector, critical infrastructure providers, and enterprise software providers stealing intellectual property and confidential information (CISA, n.d.). Several scholars suggest that widespread use of Chinese equipments in strategic sectors poses threat of sabotaging a country’s cyber security infrastructure (Engstrom, 2018). The fact that India has been in the radar of Chinese hackers for a long time finds merit in this argument. In the very recent past, several attempts of cyber attack reported in India were sourced back to China (Patil & Mahajan, 2022). Data security is a major challenge arising from the widespread use of Chinese apps. Bhandari et al. (2020) report that Chinese mobile apps ask around 45% more information compared to major global players. They also ask irrelevant permission from the users for microphone, camera, etc. These companies collect a large pool of personal data from the users about their location, movement, contacts, etc. which can be used for commercial purposes and influence a large group of consumers while violating the privacy of the consumers. On the economic front, Indian industry and policymakers fear that Chinese companies invested in India will displace them from the business. Owing to their competitive edge over Indian firms and aggressive pricing, arising from availing state subsidy, protectionist policies, and cheap finance, these Chinese companies pose a challenge to the Indian businesses. This is evident from the current status of the Indian mobile manufacturing sector which was earlier dominated by companies like

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Samsung, LG, etc. and is now controlled by Chinese brands such as Xiaomi, Oppo, and Realme, among others (Choudhury, 2022). Indian policymakers also fear that if a Chinese company takes over an Indian firm and transfers a technology or an expertise to a Chinese controlled entity, it may apply the same against India’s national interests. The threat becomes grave if the technology is tightly concentrated and not available easily. Threat also arises in a situation when the target company supplies critical goods or services to the Indian government, its military, or even critical infrastructure units, and the switching costs are high. Moreover, heavy dependence on foreign goods and services, whether it is critical or not, can be economically threatening to any country. It is evident that a serious security concern remains with Chinese investment and it is seen through the prism of doubt and suspicion. However, it is also true that despite all the doubts, China is emerging as one of the biggest investors in several parts of the world. In many countries, it has already superseded the US and the EU as major investor and successfully established its economic and political dominance. Realising that the security threat comes along with the Chinese investment, various countries have started barring Chinese investments in some strategic sectors. Banning Chinese firms ZTE and Huawei in the US and parts of Europe is and active example of the same. India has also undertaken strong steps in this regard. It banned more than 200 Chinese mobile applications in three phases alleging them to be prejudicial to India’s sovereignty, integrity, and national security (The Economic Times, 2021). In addition to that, India amended its FDI policy and made mandatory government clearance for all the FDI coming from the neighbouring countries that share land border. The government clarified that the FDI policy was amended to prevent any opportunistic takeovers or acquisition of Indian companies due to the COVID-19 pandemic (DPIIT, 2020). The decision was also influenced by similar steps taken by a few EU nations. It was reported that India proposed to bring stricter regulatory checks on foreign portfolio investors from China and Hong Kong as it is concerned that FPIs may attempt to buy equities to gain control of local firms (Ahmed & Kalra, 2020). It is now pertinent to explore how in such a short period China became one of the major investors in India. It is necessary to examine what the trend of Chinese investments has been, what sectors China has invested in, what the modes of those investments

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are, and if there is any security threat involved with these sums. The next section attempts to answer these questions in Indian context.

Trend of Chinese FDI Flows in India It is clearly understood from the earlier discussion how China has emerged as a major economic power in the last two decades. China has attracted global attention mainly because of its economic upsurge. During the last two decades, it has investment in almost all the regions and major countries in the world. There is hardly any sector where China has not invested in. Through its ambitious BRI project, China tried to establish its diplomatic dominance along with economic supremacy across the globe. DPIIT data reveals that Chinese FDI in India accounted around US$173 million in 2019 which excludes portfolio investment. As per the data and analytics firm GlobalData, India witnessed a 12 times growth of Chinese investments in its start-up firms between 2016 and 2019. Chinese investment increased from US$381 million in 2016 to US$4.6 billion in 2019. The same firm claims that a majority of unicorns in India (17 out of 24) are backed by corporate and pure-play investment firms from China (PTI, 2020). All these investments are in the form of foreign portfolio investment. Chinese ambassador to India in 2019 informed that more than a thousand Chinese companies are operating in India (Taneja, 2020). Analysing the data published by DPIIT, it is noticed that Chinese FDI in India has also increased tremendously in the recent past. The data suggests that the total FDI inflows which was only a US$ million until 2010 had touched the value of US$173 million in 2019 which was received by diverse sectors of the economy. Figure 5.1 depicts the trend of Chinese investment in India from 2005 to 2020. From the data, we notice a fixed trend until 2010. From 2010, the investment volumes start rising and it reached its peak during 2015 which also fell sharply in 2016. After 2016, data reveals a fluctuating trend in the FDI inflows. The reason behind the sharp rise in inflows in 2018 was the single largest Chinese investment in India worth US$1.1 billion in acquisition of Gland Pharma by Fosun. This investment accounts for 17.7% of all Chinese FDI into India in that year (Bhandari et al., 2020). Analysing company-wise investment data published by DPIIT, it is observed that majority of the Chinese FDI has availed the automatic route of investment. Around 50% of these capitals have been invested in the manufacturing sector followed by construction and trading sectors.

72.15

140.79

288.85 165.28

391.21

173.88 96.65

49.51 41.41 1.82 0.7 1.04 0.25 7.3 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

138.31

868.99

Fig. 5.1 Chinese FDI inflows in India (in million US$) (Source FDI News Letters, DPIIT 2006–2021)

0

100

200

300

400

500

600

700

800

900

1000

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Between 2010 and 2020 India recorded total 1759 investments in different companies. Among them noticeable were by SAIC motor, BYD auto, Huawei, and China Steel Corporation, among others. In 2019 SAIC motor announced an investment of US$1 billion in India in a phased manner. It was considering of serving Indian market with its SUV model of electric vehicle. Chinese construction equipment manufacturer Sany invested US$70 million in a 30,000-square-meter plant in Maharashtra in 2010. It is the second-largest plant of the company outside China. In 2017 the company announced investment of an additional amount of Rs 1000 Cr in India and thereby upgrade its manufacturing facility (The Economic Times, 2018). Mobile manufacturing sector in India is probably the most prominent sectors with Chinese presence. Leading brands such as Xiaomi and Oppo have several factories in India. Along with manufacturing, these two players also operate many retail stores in India. In the consumer electronics segment Haier, which manufactures refrigerators in India since 2007, expanded its operation in 2017 by investing US$86.5 million in its existing plants in Maharashtra. Later in 2018 it invested an additional amount of US$442 million in Greater Noida, Uttar Pradesh to set up a new plant (Krishnan, 2020). Along with the FDI inflows, a tremendous amount of capital in the form of portfolio investment has also flown in India in the last couple of years. These were primarily made by venture capitalist and other investment firms. Chinese investors have participated in 31 rounds of funding in the recent past (Korreck, 2019). These are investments made by nearly two dozen Chinese tech companies and funds, led by giants like Alibaba, ByteDance, and Tencent. They funded 92 Indian start-ups, including unicorns such as Paytm, Byju’s, Oyo, and Ola. Other notable Chinese investors are Ant Financial, Steadview Capital, and DidiChuxing. These investments have been made in almost all sectors of the economy, from transport to food delivery, and from mobile gaming to online store. Bhandari et al. (2020) have identified over 75 companies with Chinese investments concentrated in e-commerce, fin-tech, media/social media, aggregation services, and logistics. A detail of these investments is recorded in Table 5.3. The table reveals the names of Chinese investors, their invested amount, and the names of Indian companies receiving the investments. From the data shown in Table 5.3 a few things can be observed. First, all these capitals have been infused in technology-based companies rather

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Table 5.3 Chinese investment in Indian start-up firms Year

Investor

Indian company

Funding amounta (in US$)

2014 2015

Tencent, DidiChuxing Alibaba Group Alibaba Group Alibaba Group DidiChuxing Tencent Alibaba Group Fosun Tencent China Lodging Group China Lodging Group Tencent Alibaba Group Alibaba Group Ant Financial Meituan Alibaba Group Meituan Tencent China Eurasia Economic Cooperation Fund Ant Financial Hillhouse Capital Group, Meituan, Tencent DidiChuxing Fosun Tencent Alibaba Group Legend Capital Tencent

Ola Paytm Snapdeal Paytm Ola Hike Paytm Mall Delhivery Byju’s OYO Rooms OYO Rooms Ola BigBasket BigBasket Zomato Swiggy Paytm Mall Swiggy Dream11 Ola

Undisclosed 213M 500M 472M 500M 175M 200M 30M 40M 260M 10.2M 1.1B 5M 300M 152M 100M 453M 210M 100M 50.2M

Zomato Swiggy

210M 1B

OYO Rooms Delhivery Byju’s BigBasket Vedantu Swiggy

100M 413M 35.4M 150M 10M 43M

2016 2017

2018

2019

20201

Note Data for the year 2020 has been compiled from Rai (2020). a M denotes Million, B denotes Billion Source Adopted from Korreck (2019)

1 Data for the year 2020 is not available in any compiled format. We tried to gather information from the media reports. As per Venture intelligence, in 2020, Chinese PE investors invested $952 million into Indian companies as against $3,423 million in 2019— a drop of nearly 72%. The change in Indian policy and outbreak of Covid-19 is clearly visible in the data. See Simhan (2021) for detail discussion.

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than traditional business formats. Second, Chinese invested in those firms who are performing better than their rivals or enjoying the market leader’s position. Further, the Chinese tend to invest in those business models which have been a success in their domestic economy. They prefer to invest in a sector where competition is limited. Alibaba’s investment in Paytm and DidiChuxing’s investment in Ola are examples in this regard. The data in Fig. 5.2 shows a fluctuating trend in the PE inflow in India from China for the period between 2014 and 2020. It shows a marvellous growth from just US$51 million in 2014 to US$1253 million in 2019. It is important here to note that there have been wide discrepancies in the data reported by different sources. As we mentioned earlier, Venture intelligence, a highly reputed and widely used data and analysis firm, reported that an amount of US$952 million PE was invested by Chinese firm in 2020, which is much higher than the amount reported by Indian Venture Capital and Private Equity Association. The data is also different for the same period reported by FDI Intelligence and Bloomberg. The primary reason is that they collect the information from media reports and other sources and compile the information. As there is no primary nodal agency that collects or publishes the private equity and venture capital investment in India, data reported by different agencies tend to vary widely. Further, the firms who compile the data from several sources also adopt different parameters and methodologies. Hence, it is pertinent 1800 1600

1600 1464

1400

1253

1200 1000

989

800 600 400 288

200 0

261

51 2014

2015

2016

2017

2018

2019

2020

Fig. 5.2 Chinese PE investment in India (in million US$) (Source Indian Venture Capital & Private Equity Association [2021])

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to mention that the PE data used in this study gives us a tentative figure rather than the exact one.

Why India Did Not Participate in BRI? BRI is a grand diplomatic strategy by China to establish itself as global leader and to assert its soft power in the international community (Zheng & Zhang, 2018). Globally, the BRI is viewed through three distinct lenses—pragmatic, utilitarian, and revisionist (Sharma, 2019). India considers BRI as a tool to strategically encircle its neighbours (Bhardwaj, 2017). From the beginning, India not only refused to participate in the BRI, but also vehemently opposed this Chinese initiative. Since then, India maintained a consistent position on the BRI. Announcing from different platforms India reiterated its position on BRI at certain intervals. New Delhi never participated in the BRI summits held so far (Sachdeva, 2018). Indian opposition comes primarily from a set of critical reasons. Fist, India believes BRI to be a Chinese initiative crafted for its own national interest without discussing with any potential participants (Jaishankar, 2015). It avoided a meaningful consultation with partners. Second, India argues that that BRI does not follow the universally recognised international norms for connectivity development, fails to maintain the rule of law, and lacks openness, transparency, and equality. Third, along with that it also suggests that any project should avoid creating financial burden, maintain ecological balance, and thereby protect environment (MEA, 2017).

Territorial Integrity Beside these above-mentioned reasons, another important factor that stopped India from participating in the BRI is China-Pakistan Economic Corridor (CPEC), one of the six corridors proposed to be built as a part of BRI. CPEC connects the northwestern Chinese Province of Xinjiang with the Pakistani port of Gwadar through a network of roads measuring around 3000 kms. It passes through parts of the Union Territories of Jammu & Kashmir and Ladakh which are under occupation of Pakistan. India maintains that CPEC directly impinges on the issue of sovereignty and territorial integrity of India (MEA, 2020b). In other forums also, India raised the issue of CPEC violating its territorial integrity. Speaking in an international conference, Prime Minister Modi affirmed that India

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welcomes ‘new connectivity projects that respect countries’ sovereignty and territorial integrity’ (Modi, 2018). Construction of this corridor passing through the contested territory raised the fear in India of China recognising Pakistan’s claims over parts of Kashmir. The fear remained despite China’s repeated assurance of not interfering in this matter.

Security Concern Along with the territorial issue, CPEC also threatens India’s maritime security. India fears that the nexus between China–Pakistan will challenge the peace and stability of the Indian Ocean region. India is also concerned that as the Gwadar port is owned by a Chinese state-owned enterprise, China can turn it into military facility which could threaten Indian naval forces operating out of bases from the subcontinent (Malik, 2012). India suspects Gwadar’s port would enable Chinese navy to have permanent presence in the Indian Ocean which will alter the power dynamics in the region (Baruah, 2018). Following this, India is keeping a constant watch about the military movement in the surroundings of Gwadar port (Panneerselvam, 2017). Against this argument, several scholars suggest that India opposes Gwadar port as it poses a challenge to India’s maritime supremacy in the region (Baruah, 2018; Brewster, 2014). Some scholars also opine that BRI may jeopardise India’s own connectivity efforts (Das, 2017; Ghoshal, 2021; Sharma, 2019).

The AIIB Factor In many instances, Asian Infrastructure Investment Bank (AIIB) and BRI have been seen from the same lens but one needs to understand that the existence of AIIB predates that of BRI. Being a founding member of the AIIB, India is the second-largest shareholder in the bank after China. India is also the largest recipient of concessional finance from the bank. Despite criticising BRI, India’s continued participation in AIIB displays its intention of working on the regional connectivity development that does not threaten its sovereignty. India officially maintains that it joined the AIIB at before the launch of BRI, and it makes all the difference (Sachdeva, 2018). To sum up, it can be said that India’s approach towards BRI has been clear and practical (Sharma, 2019; Wu, 2020). India’s position has been guided by its economic interest and security concern. India rejected BRI on the ground of sovereignty and security while it continued

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its association with a financial set up despite the fact that it heavily funds BRI projects.

Conclusion and Policy Implication This chapter attempted to provide an overview of the Sino-Indian relationship from two distinct perspectives. First, we discussed how the relationship between these two civilisations evolved over the time. Our analysis highlights that despite being neighbours the two countries always had a strained relationship. Several efforts were made to strengthen the relationship, but they did not last very long. Against this distant diplomatic relationship, trade and investment ties have flourished between India and China. Both nations experienced a tremendous increase in their trade volume for the last two decade. In fact, China surpassed the US to become India’s largest trade partner. However, the trade volumes have been skewed and unfavourable for India. Unlike trade, the bilateral investment has been limited between these countries. Though in the recent past a lot of Chinese companies have invested in India, their investments have been concentrated to select industries only, such as pharmaceuticals, automobile, and mobile manufacturing. In addition to this, maximum amount of Chinese capital flown in India are in technology-based start-ups and unicorns in the form of portfolio investment which found to be growing at a remarkable volume despite India’s apprehension for Chinese investment. It is noteworthy that unlike other countries Chinese investment in India has been predominantly led by private sector rather than SOEs. However, it is very difficult to distinguish between the private and state businesses, especially the technology-based firms working closely with the ruling party to achieve common goal. Chinese investors have provided the growth-hungry Indian start-ups with much-needed capital for expansion. A unique trend has been noticed in the recent time when trade and investment between these two nations increased manifold while their diplomatic relation sharply stiffed. The Sino-Indian trade flourished even during the military skirmishes in the border. Both the nations handled the situation aptly and did not allow the shadow of the war to affect their trade. The economic tie between the two countries is more need-based with strong fundamentals and less sensitive to external factors.

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Modi, N. (2018, June 10). English Translation of Prime Minister’s Intervention in Extended Plenary of 18th SCO Summit. Ministry of External Affairs. https://bit.ly/2PcVDQO. Accessed on 17 August 2022. Panneerselvam, P. (2017). Maritime Component of China-Pakistan Economic Corridor (CPEC): India-China Competition in the Arabian Sea. Maritime Affairs, 13(2), 37–49. Patil, S., & Mahajan, K. (2022). Expanding Chinese Cyber-Espionage Threat Against India. Observer Research Foundation. https://www.orfonline.org/ expert-speak/expanding-chinese-cyber-espionage-threat-against-india/#_ftn1. Accessed on 11 August 2022. PIB. (2018, December 14). Contribution of Various Sectors to GDP. Press Information Bureau. https://pib.gov.in/newsite/PrintRelease.aspx?relid=186413. Accessed on 17 February 2020. PTI. (2020, June 26). Chinese Investments in Indian Start-Ups Grow 12 Times to $4.6 Billion in 2019: GlobalData. https://www.financialexpress.com/eco nomy/chinese-investments-in-indian-start-ups-grow-12-times-to-4-6-billionin-2019-globaldata/2005389/. Accessed on 20 June 2021. Purushottam, S. (2018, October 27). Chinese Threat to Cyber-Security: Why India Needs a Comprehensive & Concrete Action Plan for National Security and Economic Health. Financial Express. https://www.financialexpress.com/ opinion/chinese-threat-to-cybersecurity-why-india-needs-a-comprehensiveconcrete-action-plan-for-national-security-and-economic-health/1363012/. Accessed on 30 May 2022. Rai, J. (2020, April 20). Here’s a Snapshot of Key Chinese Investors in Indian Start-Ups. VC Circle. https://www.vccircle.com/here-s-a-snapshot-of-keychinese-investors-in-indian-startups/. Accessed on 18 May 2021. Rajan, R. (2003). Emergence of China as an Economic Power: What Does It Imply for South-East Asia? Economic and Political Weekly, 38(26), 2639– 2643. Ranganathan, C. V. (1988). India-China Relations: Problems and Prospects. World Affairs: The Journal of International Issues, 2(2), 104–120. Sachdeva, G. (2018). Indian Perceptions of the Chinese Belt and Road Initiative. International Studies, 55(4), 285–296. Sharma, M. (2019). India’s Approach to China’s Belt and Road Initiative— Opportunities and Concerns. The Chinese Journal of Global Governance, 5, 136–152. Shisheng, H., et al. (2016). Competitive Co-operation in Trade—A Chinese Perspective. In K. Bajpai, H. Jing, & K. Mahbubani (Eds.), China India Relations—Co-operation and Conflict (pp. 67–90). Routledge. Simhan, T. E. R. (2021, January 4). VC/PE Funding from US Doubles in 2020 as Flows from China Dip 72% on Regulatory Uncertainty. The Hindu

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CHAPTER 6

Chinese Investment in Nepal: Capturing the Himalayan Hills

China’s economic engagement with Nepal in the recent time has attracted attention of the policymakers and scholars from across the world. Several studies have been conducted about the growing relationship between these two nations (Murton et al., 2016; Nayak, 2014; Rae, 2021; Sharma, 2018). It has been observed that China has intensified its political and diplomatic engagement with this Himalayan state in the recent past especially after 2015. Like in many other countries, Chinese engagement with Nepal also revolves around its economic interest. China’s bilateral trade with Nepal has registered an exponential growth over the last few years. The total trade volume which was only Rs 46 billion in 2010 has increased to Rs 265 billion in 2020. Several trade facilitation measures have been adopted by these two countries to further strengthen their trade ties. China signed a transit treaty with Nepal in 2016 offering access to its ports. Similar to trade, China has also emerged as the largest source of foreign direct investment (FDI) in Nepal. Along with private capital in the form of FDI, government investment through China’s State-Owned Enterprises (SOEs) in the infrastructure development projects has also multiplied in the last couple of years. The infrastructure sector in Nepal has particularly attracted Chinese capital after it joined China’s connectivity project Belt and Road Initiative (BRI) in 2017. Huge untapped natural resources in Nepal have also generated China’s interest. Besides

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strengthening commercial ties, China has also been Nepal’s key development partner and helped this Least Developed Country (LDC) in different development projects. With this background, the current chapter attempts to explain Nepal–China relations in the changing contour of diplomatic and economic association. It will also delve into some of the factors that led China to be the largest investor in Nepal in a very short time. The growing bilateral trade between Nepal and China will also be analysed here. Due attention has also been paid in examining Nepal’s participation in BRI.

Establishment of Diplomatic Relation Nepal and China share a very old history of political, economic, religious, social, and cultural relations since Nepal’s Licchavi (approximately 400– 750 A.D.) and China’s Tang dynasty (618–907 A.D.) (Acharya, 2019). The early relation was established especially through visits of Buddhist monks. Nepalese monk Buddhabhadra, born in 358 A.D. in the Shakya family, came to China in the fifth century on the request of great Chinese Tra Yun to share the teachings of Buddha (Embassy of Nepal, Beijing, 2022). However, in the later years the association between these two countries slowed down. Between 1911 and 1949 there was no notable incident recorded in their bilateral relation and it seems there was a pause in China-Nepal relations. In fact, Nepal-China relations remained uncertain and unstable till 1949 (Nyaichyai, 2021). In the modern time, the establishment of diplomatic relation took place in 1955 after the formation of the People’s Republic of China in 1949 and the ushering in of democracy in Nepal in 1951. In 1955, at the Bandung Conference in Indonesia, Chinese Premier Zhou met with the Nepalese delegation and proposed establishing diplomatic relations with Nepal. The Nepalese delegation welcomed the proposal and agreed to take necessary steps in this regard (Bhattarai, 2010). Subsequently, a diplomatic relation was established on the basis of Panchsheel, the Five Principles of Peaceful Co-ex, and an agreement was signed on 1 August 1955 in Kathmandu by Principal Royal Adviser Sardar Gunja Man Singh and Chinese Ambassador Yuan Zhongxian on behalf of both the governments (Embassy of Nepal, Beijing, 2022). In the same year, they also signed the Nepal-China friendship treaty (Sigdel, 2021). It was an opportune moment for Nepal who had to establish proper and cordial relationship with rest of the world and more so with China, her next-door neighbour as the political landscape

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in the region was changing (EPW, 1955). Following the establishment of diplomatic relation, China opened its residential Embassy in Kathmandu in July 1960 and Nepal opened its residential Embassy in Beijing in September 1961. Bilateral relations began to develop slowly afterwards between both countries. To strengthen the diplomatic ties, leaders from both countries made bilateral visits. The first bilateral visit was by the former Prime Minister of Nepal, Mr Tanka Prasad Acharya in 1956. During his visit, China agreed to provide economic aid to Nepal (Bhasin, 1994). The next high-level visit by Nepalese leader to China was by Prime Minister Bisweshor Prasad Koirala in 1961. It was an important visit as both countries discussed the issue of border demarcation in the Nepal-Tibet boundary. They signed the border treaty on 5 October 1961 (Shrestha, 2005). The dispute was resolved later in the same year and the border between these two nations was demarcated. In the same visit Prime Minister Koirala also secured Chinese loans to build a new road linking Kathmandu and Lhasa, capital of the Tibet Autonomous Region (Sharma, 2018). Bilateral visits continued between these countries and almost all the prime ministers of Nepal have visited China during their respective tenures in the PM office. Even the kings who reigned Nepal have also visited China in their official capacity and have maintained a strong and cordial relation with China across wide-ranging areas. From Chinese side Premier Mr. Zhou Enlai made the maiden visit to Nepal in 1957. Premier Enlai expressed hope for a closer China-Nepal relationship, while highlighting the importance of expanding cooperation in the following years. Among the notable visits of Chinese leaders are President Mr. Li Xiannian in 1984, President Mr. Jiang Zemin in 1996, and President Xi Jinping in October 2019 (Embassy of Nepal in Beijing, 2022). Mr. Li Xiannian was the first Chinese head of the State to visit Nepal. Mr. Li met former Nepal king Birendra Bir Bikram Shah and discussed a wide range of issues. During the visit of President Jiang to Nepal in 1996, both countries agreed to establish a good-neighbourly partnership for generations, which will serve as a basic guideline for the development of China-Nepal relation. President Jiang stressed that China desired to work with Nepal for a continuous growth of China-Nepal good-neighbourly cooperative relations in the new century. Nepal-China relation entered into a new era in 2015 when Nepal faced the economic blockade from India. Mr KP Sharma Oli, the Prime Minister of Nepal at that time, took a historic step to promote the

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comprehensive partnership with China which was established between both countries in December 2009 when the Nepal Prime Minister Madhav Kumar visited China (Sharma, 2018). However, it was never pursued and promoted by either side actively. However, India’s economic blockade in 2015 created severe economic crisis and forced Nepal to find alternative solution. Later the Chinese economic intervention led to new agreements and memorandums of understanding (MoU) between Nepal and China in trade, transit transport, connectivity, and financial cooperation (Sharma, 2016). In the following period, China announced to expand its economic cooperation and investment in Nepal. In March 2016 both countries signed 10 cooperation agreements or MoUs when Prime Minister Oli visited China. The MoU was signed for accessing China’s seaport facilities, enhancing railway connectivity, and building a transmission line between both countries and a regional international airport in Pokhara. Both sides also discussed signing a bilateral free trade agreement to explore oil and gas reserves in Nepal (Sharma, 2018). Along with all these agreements, Nepal also agreed to participate in the BRI. Another milestone in the Nepal-China relation was achieved in 2019 when Chinese President Xi Jinping visited Nepal. During his visit, both countries announced the elevation of China-Nepal relations to ‘Strategic Partnership of Cooperation Featuring Ever-Lasting Friendship for Development and Prosperity’. During President Xi’s visit, 23 agreements and MoUs were signed between Nepal and China covering areas from infrastructure to trade and tourism and education. Xi left Nepal having pledged US$496 million in financial assistance. Both countries agreed to develop a Trans-Himalayan railroad connecting Tibet to Nepal (Panda, 2019). The joint communiqué released after the visit mentioned the beginning of a new era in Nepal-China relations (MOFA, 2019). Until 2022, there has been significant number of official visits from both sides that led to numerous initiatives on bilateral mechanisms, economic cooperation, trade, tourism, investment, education, and cultural cooperation including regional and international affairs (Sharma & Chhetri, 2022). In addition, the high-level visits by Chinese officials reflect Nepal’s growing importance in China’s regional policy (Nayak, 2014). Over the last 70 years, China and Nepal have made excellent cooperation and achieved great accomplishments in bilateral political relations, regional affairs, and international forum. Their relation has matured over the time. The bilateral relationship has been tremendously strengthened.

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Their relationship has been shaped by a large number of factors which prominently includes the economic interest. The growing economic relationship between Nepal and China is addressed in the proceeding section of this chapter.

Nepal-China Economic Engagement Economic cooperation is a pivotal dimension of Nepal-China bilateral relations. Nepal-China economic relation primarily revolves around three aspects, viz, trade, grant aid, and investment. Similar to their diplomatic ties, Nepal-China economic relation also goes back to a long past. History reveals that Nepal’s trade with China started in the seventh century (Joshi, 1993). The principal items of exports from Nepal to China in those days were food grains, iron, and copper coins. Nepal’s import from China mainly comprised of coarse and woollen goods, raw wool, salt, chauri cattle, quicksilver, herbs, bullions, etc. (Sigdel, 2021). The history of trade relations between Nepal and Tibet also reveals the signing of a treaty in 1872. This treaty governed the relations between them and provided, among other things, for freedom of trade and commerce for the citizens of both countries. This was further strengthened after the treaty of Thapathali and continued till 1904. In 1926 the Tibetan government established a foreign office in Lhasa and this greatly facilitated official communication with foreign governments including Nepal (Pant, 1962). After establishing their diplomatic ties, both nations signed the first economic treaty on 20 September 1956 wherein they agreed to maintain friendly relations between the two countries and develop trade (Pant, 1961). This agreement allowed visa free movement for 30 km in each side of the border for the citizens of both countries to carryout trade and to visit friends or relatives (Sigdel, 2021). In the mid-1960s the so-called Friendship Highway, one of the two major routes between Kathmandu and Lhasa, was opened for motorised traffic and facilitate trade (Saxer, 2017). Despite all these efforts, the trade volume remained very low due to high transportation cost (Pant, 1962). Nepal’s trade with Tibet reduced substantially and in 1960, it was estimated to be as little as 1% of the Nepal’s total trade (Shrestha, 1970). The Nepal-China trade during 1960 primarily comprised of foods items, crude minerals, oil and chemicals, manufactured articles, and other miscellaneous items. Food products such as rice, sugar, tea, wheat, chillies, etc. constituted around 80% of the Nepal’s export to Tibet in 1959–1960. Crude materials included

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hides and skins, indigenous herbs, and drugs, and manufactured goods comprised of cigarettes, matches, batteries, and leather shoes were other prominent export from Nepal. Most of the products are from the hilly regions though a few might have come from India also (Pant, 1962). On 22 November 1981, Nepal and China entered into another trade agreement wherein they agreed to take all appropriate measures to develop trade between the two countries and promote the exchange of goods between them from a predefined list (TEPC, 2022). Another important step taken to strengthen the bilateral economic relation between Nepal and China was the establishment of the InterGovernmental Economic and Trade Committee (IGETC) in October 1982. The meeting of this committee emerged as the primary forum for discussions on Nepal-China bilateral economic and technical cooperation (Prasad, 2015). In 1999 Nepal-China Chamber of Commerce and Industry (NCCCI) was established with an aim to boost bilateral business relation. Several agreements such as Nepal-China Transport Agreement, 1994, forum on business cooperation in 1996, Nepal-China Tibet Autonomous Region Trade and other related agreement, July 2002, Agreement of cooperation for Industrial Products Inspection between Nepal and China, October 2005, Nepal-China Tibet Trade Facilitation Committee Meeting, 2005, and Transit and Transportation Agreement, 2016 further facilitated trade between these economies (Sigdel, 2021). Among all these agreements, the most critical one was the signing of the Transit and Transportation Agreement (TTA) in 2016. The TTA allowed for third-country import and export and gave Nepal access to seven Chinese sea and land ports. China provided access to its ports located at Shenzhen, Tianjin, Zhanjiang, and Lianyungang and dry (land) ports at Lhasa, Shigatse, and Lanzhou, as well as roads to these facilities (Lee et al., 2018). This helped landlocked Nepal to diversify its trade routes and reduce its dependence on India. It has also helped Nepal to reduce the freight cost substantially. In addition to these agreements, China also allowed duty free export from Nepal of 95% of the goods originated in Nepal (TEPC, 2010). Later in 2016, both nations agreed to set up a joint Feasibility Study on China-Nepal Free Trade Agreement (FTA) and a working group to conduct a comprehensive study on areas of common concern as soon as possible (MOC PRC, 2016). It is expected that ChinaNepal FTA will benefit from the further expanding of the bilateral trade and investment, and will inject new vitality to the bilateral trade and economic relation. China and Nepal have also agreed to conduct trade in Chinese RMB (Acharya, 2019).

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Nepal-China Trade in the Contemporary Period Over the time trade between Nepal and China has increased significantly. Currently, China features as Nepal’s second-largest trade partner with a share of 14.14% in total trade volume with foreign countries. China was the second-largest source country for Nepal’s total imports and the sixthlargest export market during the period 2019–2020 (Embassy of Nepal in Beijing, 2022). Although China is among the major trade partners of Nepal and they also have an old history of trade ties, their trade could not grow expectedly. Despite making several efforts and signing numerous agreements to facilitate trade, bilateral trade between China and Nepal is not flourishing. In fact, it is limited to certain products and volume. In addition, trade is highly skewed and in favour of China. Nepal has failed to export more to China over the years and therefore the issue of burgeoning trade deficit is a matter of concern for them. Nepal has a huge deficit in trade balance with China. Nepal imported NPR 211 billion (US$1.7 billion) from China in 2021–2022, according to Nepal’s Department of Customs. In contrast, Nepal’s exports to China were NPR 622 million (US$5 million) in the same period.1 The country’s trade deficit with China reached NPR 232.90 billion (US$2 billion), which formed 14% of the country’s total trade deficit. The primary products traded between Nepal and China are electronic goods, broadcasting equipments, and apparel and medical supplies. Chinese exports to Nepal mainly consist of Telephones and Electrical Transformers, and Non-Knit Men’s Suits, whereas Bells and Other Metal Ornaments, Orthopedic Appliances, and Tufted Carpets are prominent export items from Nepal to China which were directed largely to Tibet Autonomous Region, Zhejiang Province, and Guangdong Province. The data presented in Fig. 6.1 and Table 6.1 shows Nepal’s export to China between 2010–2011 and 2021–2022. It is observed that in the year 2013–2014 Nepal experienced the highest volume of export with China. The data in the above table shows that Nepal has always experienced a huge trade deficit with China. In the recent years, Nepal’s export to China has decreased continuously while import has shown a rising trend. This reveals that the slew of agreements entered by both countries has served only Chinese interest (Fig. 6.2). 1 Data is extracted from Department of Custom, Ministry of Finance, and Government of Nepal. https://www.customs.gov.np/page/fts-fy-207879.

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3500.0 3000.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0

Fig. 6.1 Nepal’s export to China (NPR, million) (Source Nepal Trade Information Portal) 300000.0 250000.0 200000.0 150000.0 100000.0 50000.0 0.0

Fig. 6.2 Nepal’s import from China (NPR, million) (Source Nepal Trade Information Portal)

There exist a number of factors that is creating obstacles in expanding the Nepal–China trade. First and foremost is Nepal’s over dependence on India. As per Nepal Trade Information Portal, Nepal imports around 80% of its goods and services from India. The effort made to diversify the export market by Nepalese policymakers could not generate expected results. Second, among the six trade points only two are operational which makes it difficult to trade efficiently and smoothly (Embassy of Nepal in Beijing, 2022). Third, China has been hesitant to issue visa to Nepalese traders making it difficult for them to access Chinese market. Fourth,

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Table 6.1 Nepal-China trade (NPR, million)

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2010–2011 2011–2012 2012–2013 2013–2014 2014–2015 2015–2016 2016–2017 2017–2018 2018–2019 2019–2020 2020–2021 2021–2022

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Export

Import

Trade balance

746.0 985.6 2176.7 2979.9 2357.3 2156.8 1809.8 2439.2 2109.8 1191.2 1016.1 808.8

45,636.0 52,924.9 68,304.9 78,568.2 100,850.6 117,210.0 130,241.4 159,980.3 205,518.6 181,920.3 233,923.1 264,783.7

−44,889.9 −51,939.3 −66,128.1 −75,588.3 −98,493.3 −115,053.2 −128,431.6 −157,541.2 −203,408.8 −180,729.1 −232,907.0 −263,975.0

Source Nepal Trade information Portal

lack of proper infrastructure facilities on either side of the border is also one of the crucial reasons for limited trade between Nepal and China. As there are fewer parking areas and go-downs on either side of the border, the traders have to keep their containers in queue for a long period. The customs yard in Nepal is very small resulting delay in clearance and cargo movement. Recently, there has been significant drop in the cargo movement between these two countries (Prasain, 2022). Finally, Nepal failed to take advantage of its potential in the agricultural produce. Despite several decades of trading practices with China or with Tibet, Nepal has never seriously explored the export potentialities of selected agro-commodities or semi-manufactured goods that could be exported to the Chinese market (Sigdel, 2021).

China’s Aid and Assistance to Nepal Chinese assistance to Nepal falls into three categories: grants (aid gratis), interest free loans, and concessional loans. The Chinese financial and technical assistance to Nepal has greatly contributed to Nepal’s development efforts in the areas of infrastructure building, industrialisation process, human resources development, health, education, water resources, sports, and the like (Embassy of Nepal in Beijing, 2022). Nepal enjoys top priority in China’s aid policy (Namboodiri, 1979). The first Aid agreement between Nepal and China was signed even before they established

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diplomatic ties. On 7 October 1950 China and Nepal Economic Aid agreement was signed wherein China agreed to offer a generous volume of aid to Nepal amounting to INR 60 million. It was agreed that onethird of the amount will be given in instalments in foreign exchange, and two-thirds in machinery, equipment, materials, and other commodities which Nepal needed, and China could supply (Pant, 1961). On 21 March 1960, another agreement on economic aid between China and Nepal was signed. The amount of aid under this agreement was 100 million Indian rupees. It was decided that the amount would be utilised along with the 40 million Indian rupees which remained unutilised from the earlier loan provided by China for various construction programmes in Nepal, particularly for revenue-yielding projects spread over a period of three years (Pant, 1961). In 1961 China provided INR 220 million to Nepal for undertaking development works. Again INR 350 million was extended in 1969. The amount was offered to build Araniko Highway and Kathmandu-Bhaktapur road connecting to Kodari road. In November 1972, China provided NPR 300 million as soft loan for the construction of Narayanghat-Gorkha road, installation of trolley bus services between Kathmandu and Bhaktapur, a textile mill, and the expansion of brick and tile factories. In the same year, China signed an agreement with Nepal to construct 407 km Pokhara-Surkhet Highway costing NPR. 800 million (FNCCI, 1999). In 1973, China agreed on other provision of agreements which included establishment of Hetauda Cotton Mill and some roads and few other projects. On 8 July 1976, China agreed to provide grant assistance worth US$4 million for the construction of a dam across Seti River in Pokhara (Sigdel, 2003, 2021). China pledged to build PokharaBaglung-Mustang road and construction of an international convention hall in Kathmandu in 1984. In 2007 China provided RMB 100 million to Nepal’s assistance (MOFA, 2007) and further announced to grant 800 million RMB to Nepal when Chinese Foreign Minister Wang Yi visited Nepal in December 2014. Kathmandu and Beijing signed a MoU in November 2014, committing to Nepal 10 million RMB (US$1.63 million) annually over a period of five years for the development of the latter’s northern border districts. In addition, China announced the construction of a police force training academy in the Kathmandu Valley which was completed in 2017 (Murton & Plachta, 2021). Until 2015, with China’s financial and technical assistance, more than 30 projects have been completed in Nepal (Prasad, 2015).

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During the period between 2010–2011 and 2016–2017, China extended total US$278 million aid to Nepal. Beijing has also provided 3 billion RMB (approx. US$456 million) for Nepal’s reconstruction to be used in 25 jointly selected major projects during 2016–2018. Again in 2016, China offered grant assistance of 1 million RMB (approx. US$152 million) for repair works to be undertaken in SyaphrubesiRasuwa highway, upgrading civil service hospital, and mutually agreed post-disaster reconstruction projects (Sigdel, 2021). After the devastating earthquake in 2015, China provided a generous amount of US$483 million for reconstruction work and restoring historically significant buildings (Pandey, 2020). Recent analysis indicates that China’s distribution of aid packages has greatly surpassed the amount initially pledged, with estimates that up to of 200 million RMB (US$32.6 million) was spent from 2014 to 2018 in Nepal’s northern border regions alone (Giri, 2019). In October 2019, China announced a 3.5 billion RMB grant to Nepal for the next two years. Again in August 2022, China announced an additional 800 million RMB to Nepal to invest in projects selected by them (Giri, 2022b). Since the beginning of their relation, China has been a prominent aid donor to Nepal. A significant increase has been observed in China’s aid to Nepal after 2006–2007 when Nepal underwent a political transition. A sector-wise distinction of the Chinese aid further shows that it has prominently focused on Nepal’s infrastructure sector (Nayak, 2014). Nepal has been immensely benefitted from the Chinese aid and assistance (Thapa, 2005). Several projects from a wide range of areas have been completed in Nepal with concessional Chinese loans. Apart from offering grant-in-aids, Chinese government and private entities have also invested largely in Nepal. This issue is addressed in the forthcoming section of the chapter.

FDI Inflows in Nepal FDI policy plays the determining role in attracting foreign investment in any country. All the foreign investment inflows, i.e., how much to come and from where largely influenced by the policy adopted by the economy. To engage with the global business community and to address the changes in the world economic environment in recent decade, Nepal introduced a new economic policy regime in the mid-1980s. The policy brought various components of economic reform measures including

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fiscal, trade, and FDI policies during the last decade. Quantitative restrictions on imports have been fully removed. Custom duties on many products have been rationalised and substantially reduced. Various reforms have also been executed on the foreign exchange system. However, political instability and civil war in the country have troubled the reform processes and the ambitions of the business community (Choudhury & Nayak, 2019). Later in 1990, after the establishment of democracy, the Nepal government initiated a series of economic measures and policy development in 1992, popularly referred to as Liberal Economic Policy. Along with intensifying and festering Economic Development the primary objective of the new economic policy was to develop an investment-friendly environment for both domestic and foreign private entities by removing licence raj system on trade and investment. Several critical sectors such as tourism, communication, and power were opened for foreign investment. In addition, many of the government-owned business enterprises were privatised to boost production in Nepal. Through trade policy reform, Nepal also launched fiscal reform and governance initiatives. The government implemented decentralised system of local bodies to initiate more effective and faster investment environment. Nepal also has enacted a number of acts and regulations like foreign investment and technology transfer act (1992), the foreign investment and one window policy (1992), etc. Necessary arrangements were made to establish bodies like the Board of Trade in Nepal, Foreign trade policy and Research Institute, Nepal Trade Promotion Organisation, Trade and Export Promotion Centre, and so on. With all these policy developments over the last three decades, Nepal has been able to attract certain amount of FDI in the recent past. However, owing to the frequent political turmoil, Nepal could not utilise the amount in its full potential. Figures of FDI inflows have shown a fluctuating trend. Sectors attracting foreign investment have also been very limited. Moreover, investment flows sources have been largely limited to a small number of countries. Among these, China features as the largest contributor to Nepal’s foreign investment for the last few years and is the largest source of FDI in Nepal, calculated in terms of commitment amount; it is also the second-largest source as per the amount invested (Embassy of Nepal in Beijing, 2022). China has committed the largest volume of FDI received by Nepal with investment pledges of 22.5 billion Nepalese rupees (188 million US dollars) in 2020–2021.

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It has topped the chart in terms of FDI pledges continuously for the last 6 years (Xinhua, 2021). Importantly China overtook India as Nepal’s largest FDI partner in 2014. However, in terms of stock, India remained the top investor with NPR 62.45 billion followed by China with NPR 30.97 billion in 2020 (Nepal Rastra Bank, 2021). Besides China and India, Japan, South Korea, the US, the UK, and Germany are the premier investor countries in Nepal. Interestingly, Chinese investments in Nepal have shown a positive trend even during the COVID-19 pandemic (Yadav, 2021). It has predominantly targeted energy-based industries. More than 99% of China’s FDI stock is concentrated in hydropower projects and cement production (Nepal Rastra Bank, 2021). Other than the energy sector, mining-related industries, construction-based industries, forest-based industries, etc. have also performed fairly in attracting Chinese investment. Hongshi Cement, ZTE, Huawei, Sino hydro, etc. are among the major Chinese business groups operating in Nepal. The data in Table 6.2 shows that Chinese FDI in Nepal has increased continuously since 2012–2013 registering a growth rate of above 60% from 2012–2013 to 2021–2022. The share of China in the total FDI inflows in Nepal has increased from 30% in 2012–2013 to 76% in 2021– 2022. Importantly, China’s share has increased over the time at the cost of India’s share. Nepal’s increasing interest to do business with China comes from India’s failure to develop Nepalese infrastructure, especially its hydropower resources. Moreover, with strong track record, China has been able to execute projects where India could not (Bhandari & Jindal, 2019). Geo-political rivalry between India and China and the Chinese ambition to exert influence in the region has also played a crucial role in increasing Chinese investment in Nepal compared to other South Asian countries (Jaiswal, 2014). Though over the past few years, Chinese investors have made commendable investments in several sectors in Nepal, it is yet far less than the satisfactory level mainly due to the lack of transparency, haphazard selection of projects, and the lack of proper assessment of the projects on the possible impacts on the national economy (Jha, 2020).

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Table 6.2 Chinese FDI in Nepal (NPR, billion)

Year

Nepal

World

2012–2013 2013–2014 2014–2015 2015–2016 2016–2017 2017–2018 2018–2019 2019–2020 2020–2021 2021–2022

97 120 154 128 184 162 166 174 140 158

317 307 370 348 400 400 345 223 185 207

Share (%) 30.60 39.09 41.62 36.78 46.00 40.50 48.12 78.03 75.68 76.33

Source Foreign Investment in Nepal (2022: A Synopsis, PP-17)

Nepal’s Engagement in Belt and Road Initiative Nepal formally joined the Belt and Road Initiative in May 2017 to seize the opportunity of developing infrastructure facilities and improving cross-border connectivity in the country. BRI can address the infrastructural development which was arguably Nepal’s most urgent requirement in the post-federalisation period (Sharma & Chhetri, 2022). Infrastructural development has been the high priority areas of 14th Periodic plan of Nepal, and it aims to overcome its development challenges arising from its ‘landlocked geographic location’ and ‘least developed economic status with the help of BRI (Shrestha, 2017; Subedi, 2017). Landlocked Nepal is surrounded by India by three sides and is almost entirely dependent on India for road connectivity and movement of goods from other parts of the world. In fact, a lion’s share of Sino-Nepali trade is routed through Indian ports (Rana & Ji, 2020). Hence, Nepal’s participation in BRI is interpreted as its attempt to reduce dependency on India (Baruah, 2018, Miller, 2022). Nepal’s participation in BRI also opens door for China to establish a firm foothold by taking advantage of the development needs of the country and making a foray into Nepal’s political, economic, and socio-cultural spheres by exploiting its fragile economic situation (Naresh, 2022). The BRI projects in Nepal are undertaken under the umbrella initiative of the Trans Himalayan Economic Corridor (THEC). THEC predates BRI and was a bilateral proposal between Nepal and China to connect Kathmandu with Beijing through a network of roads and rails. However,

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after Nepal joined BRI, the proposed economic activities were merged with THEC. As a result, all bilateral projects along the Himalayas today form a part of the Himalayan Economic Corridor and by implication, the Belt & Road Initiative (Baruah, 2018). After signing off for the BRI, Nepal set up three committees: (a) project identification committee; (b) project implementation committee; and (c) project coordination committee, to decide what projects should be taken under BRI and to coordinate timely implementation (Naresh, 2022). Nepalese officials identified a list of thirty-five potential BRI projects with a total estimated investment of US$10 billion. These projects covered a wide range of areas such as roads, railways, aviation, and communication. However, China reduced the list and agreed to work only on nine projects (Murton & Plachta, 2021). The revised list details the upgrading and improvement of the Rasuwagadhi–Kathmandu and the Tokha–Bidur roads, the construction of transport links leading from Kimathanka to Hile and from Dipayal to the Chinese border, the 762 MW Tamor Hydropower, and the 426 MW PhukotKarnali Hydroelectric Projects, the Galchhi–Rasuwagadhi–Kerung 400 kV transmission line, the Kyirong–Kathmandu railroad, and the Madan Bhandari Technical Institute, named after Madan Bhandari, a previous Communist leader (Murton & Plachta, 2021). Though China agreed to fund only nine projects under BRI, it is important to note that more than 35 projects are now underway with Chinese capital in Nepal (Adhikari & Ma, 2022). A select list of the Chinese projects in Nepal is placed in Table 6.3. Among all these projects the most important one for Nepal is perhaps the Kyirong–Kathmandu Railway. This is an extension of China’s Qinghai–Tibet rail from Xigatse to Keyrong, connecting Kathmandu. The proposed railway presents exceptional engineering and financial challenges. A pre-feasibility study conducted in December 2018 estimated that 98.5% of the proposed track constructed between Rasuwagadhi and Kathmandu would require the construction of tunnels or bridges, and the total cost of the 121 km Kyirong–Kathmandu railway could reach US$2.75 billion (Giri, 2018). In the face of staggering technical and logistical challenges, Nepalese and Chinese authorities continue to discuss modalities for the pending detailed project review and debate how to implement financing for such a spectacular BRI programme (Murton & Lord, 2020; Murton & Plachta, 2021). Importantly, the Rasuwa-Kyirong

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Table 6.3 BRI projects in Nepal 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Araniko Highway disaster and climate change project Bhittamod-Lamabagar-Lapcha corridor Construction of six ICPs in Pulang-Yari (Humla), LijiNechung (Mustang), Jilong-Rasuwa, Jangmu-Kodari, Reu-Olangchungola, and Chentang-Kimathanka Exhibition centres in all seven provinces Free trade area in Betrawati of Nuwakot and Panchkhal, Kavre Galchi-Rasuwagadhi-Kerung 400 kV transmission line Gandaki corridor (Belhaiya-Korala) Groundwater possibility in Kathmandu at Chandragiri Handicraft village in Humla, Simikot Karnali corridor (Jamunaha-Hilsa) Kathmandu Outer Ring Road Kimathanka-Hile road construction Kodari-Birgunj corridor Korala-Pokhara road Koshi corridor (Rani-Kimathanka) Lift irrigation project in Panchkhal, Kavre Mahadevkhola rainwater harvesting project Mid-Tarai lift irrigation project Multifunctional lab at Rasuwagdhi border point New city at Bheriganga, Surkhet Sunkoshi Marine diversion multi-purpose project Thori-Kerung corridor Upgrade of Rasuwagadhi-Kathmandu road View tower in Nagarkot

Source Adopted from Adhikari and Ma (2022)

corridor is a historically important trade route as majority of the NepalChina trade takes place through this corridor. Another critical project carried out under BRI in Nepal is Budhi Gandaki Hydropower Project (BGHPP), located in the Budhi Gandaki Valley of Gorkha district. It is a 1200 MW power generation plant referred as ‘national pride project’ to be completed at an estimated cost of US$2.5 billion by China Gezhouba Group Corporation (CGGC). As proposed, the BGHPP would become the largest reservoir project in Nepal, storing water that would help resolve dry season shortages and enhance Nepal’s energy security by selling its power into the domestic market (Murton & Lord, 2020).

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Challenges to BRI in Nepal The BRI projects have undoubtedly a tremendous economic significance for Nepal. Once completed, Nepal will be more integrated to the global trading system with improved connectivity and may emerge as an energy-sufficient state as well. Nepal welcomed the BRI to reduce its dependence on India but faces serious constraints in utilising BRI to promote economic or political benefits (Miller, 2022). Initially, there was a high degree of optimism in Nepal about the BRI. However, of late the BRI projects have failed to gain momentum (Naresh, 2022; Sharma & Chhetri, 2022). Since the beginning of BRI projects in Nepal, certain concerns have been raised, particularly related to planning and delay in execution of projects and meeting deadlines. Many questions have been raised regarding the alignment of BRI projects with the short- and longterm national priorities (Jha, 2021). There remains strong doubt about the feasibility of several projects. Many of the important BRI projects have also been involved in controversies (Pyakurel, 2019). Among all challenges faced by Nepal after it participated in BRI the most critical is about debt sustainability. Serious doubts have been expressed about the implementation of this flagship railway project connecting Beijing and Kathmandu as it passes through very difficult terrains of the regions. As a huge amount of cost of around US$8 billion or one-third of Nepal’s GDP is involved in this project, it may bring financial burden on Nepal (Reuters, 2017). Several studies have also warned Nepal of falling into a debt trap with Chinese loans as experienced by other countries in the region (Nayak, 2021, Sharma & Chhetri, 2022). Nepal’s concern is also related to the form of loan that China extends for BRI projects. Nepal prefers grants and soft loans over commercial loans. But loans extended by China are commercial in nature with higher rates of interest than those usually charged by the multilateral agencies like the World Bank or Asian Development Bank (ADB). Chinese loans also attach lesser repayment time with strict conditions compared to multilateral donors (Giri, 2022a; Welle, 2022). Nepal is also worried about the negotiation process that led to the finalisation of unrealistic deals from Chinese investors due to diplomatic and political pressure (Sharma & Chhetri, 2022). Nepal’s burgeoning trade deficit and falling foreign exchange reserve makes it vulnerable to financial crisis and affects its loan repayment capacity.

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Delay in project execution is another challenge for BRI in Nepal. A close investigation of the status of the projects launched under BRI reveals a very slow progress which is far behind the predefined timeline. Evidence suggests many of the connectivity projects have not even moved ahead. To expedite BRI ventures, Chinese President Xi Jinping visited Kathmandu in October 2019. But even after five years of signing the BRI, and not a single project has been completed (Welle, 2022). Nepalese officials highlight political imbalance and emerging geopolitical challenges as the primary reasons behind the slow progress in the implementation of the projects (Jha, 2021). Importantly, delay in the execution of the projects can multiply the cost of the projects which in turn adds to the financial burden. Besides the aforementioned challenges, other crucial difficulties to BRI in Nepal remain its political turmoil and concerns raised by the environmentalist about the environmental degradation due to large-scale deforestation to undertake infrastructure projects and hydropower plants. The opaque bidding process of the BRI projects and lack of transparency remain dominant threats to BRI in many parts of the world including Nepal. Civil societies, students’ associations, and political parties in the opposition have also staged protests against BRI projects in Nepal (Naresh, 2022). Several Chinese companies carrying out BRI projects have also been blacklisted in Nepal (ANI, 2022; Prasain, 2021).

Concluding Remarks The bilateral tie between Nepal and China dates back to the ancient era. Over the period their relation has matured and tremendously strengthened. The relationship between these two nations has been predominantly commercial and strongly influenced by infrastructure development and shared visions of expanding trade and investment. For a long time Nepal has been a beneficiary of Chinese financial assistance. Both nations have signed a plethora of agreements to boost trade and investment since the beginning of their formal diplomatic tie. Now, China features as Nepal’s second-largest trade partner with a share of 14.14% in total trade volume with foreign countries. China is also among the major foreign investors in Nepal. China’s economic involvement in Nepal grew significantly after 2015. In fact, the bilateral relation between them reshaped or achieved a new dynamic after 2015. The vital incidences that took place are (1) earthquake in Nepal in April 2015, (2) India’s unofficial economic

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blockade in August 2015, (3) Prime Minister KP Oli’s visit to Beijing in March 2016, and finally (4) Nepal’s joining of BRI in May 2017. In April 2015, when an earthquake of 7.8 magnitude jolted Nepal, China responded with its largest-ever humanitarian effort, committing a massive NPR 56.27 billion (US$483 million) for Nepal’s post-earthquake reconstruction, and another NPR 2.5 billion (approx. US$21,475,000) to the Nepalese Army (Nayak, 2021). At a time when Nepal was struggling with the recovery works of the devastating earthquake, India announced unofficial economic blockade against Nepal in August 2015. The blockade created huge crisis in Nepal particularly for fuel and food items (Murton & Plachta, 2021). India’s action forced Nepal to approach China. To seize the situation China took immediate action and delivered modest twelve-metric tons of petrol to Nepal via the Kyirong-Rasuwa Highway which was not even fully operational at that time. This action in a time of crisis was symbolic and geopolitically significant, and it brought the two nations closer (Rae, 2021). Nepal wanted to reduce its dependence on India for trade transit. With an aim to bolster economic ties Nepal Prime Minister visited Beijing in 2016. During his visit, both countries signed around 10 agreements including the most important Trade and Transportation agreement. Through this Nepal got the access to seven Chinese seaports and two land ports for transit of goods. This resulted in increase in trade between Nepal and China. Nepal-China relation touched a new high when Nepal joined BRI in 2017. Subsequently, both countries agreed to launch several projects covering a range of areas from infrastructure development to improve connectivity and hydropower generation. As none of the BRI projects have been completed yet, it is too early to comment on the implication of the BRI projects in Nepal’s economy.

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Nayak, S. (2021). The BRI Quandary in Nepal and Sri Lanka. In M. Pant & P. Saha (Eds.), Mapping the Belt and Road Initiative: Reach, Implications, Consequences (pp. 24–30). Observer Research Foundation. Nepal Rastra Bank. (2021). Survey Report on Foreign Direct Investment in Nepal 2019–2020. Nepal Rastra Bank, Economic Research Department. https://www.nrb.org.np/contents/uploads/2021/09/FDI-2019-20_ September-2021.pdf. Accessed on 2 September 2022. Nyaichyai, L. (2021). China and Nepal Potentials and Challenges for Partnership and Cooperation. In D. C. Bhatta & J. Menge (Eds.), Gaida’s Dance with Tiger and Dragon (pp. 149–161). Friedrich Ebert Stiftung. Panda, A. (2019, October 15). China’s Xi Visits Nepal, Elevating Ties to ‘Strategic Partnership of Cooperation’. The Diplomat. https://thediplomat. com/2019/10/chinas-xi-visits-nepal-elevating-ties-to-strategic-partnershipof-cooperation/. Accessed on 11 September 2022. Pandey, A. (2020, November 12). Economics and Influence: Chinese Investment in Nepal. South Asian Voices. https://www.stimson.org/2020/economicsand-influence-chinese-investment-in-nepal/. Accessed on 6 September 2022. Pant, Y. P. (1961). Chinese Economic Assistance to Nepal. Economic and Political Weekly, 1605–1606. Pant, Y. P. (1962). Nepal-China Trade Relations. Economic and Political Weekly, 621–624. Prasain, K. (2022, February 5). Nepal’s Trade with China Going Through Rough Patch. The Kathmandu Post. https://kathmandupost.com/money/ 2022/02/05/nepal-s-trade-with-china-going-through-rough-patch. Accessed on 12 September 2022. Prasain, S. (2021, December 20). ADB Blacklists Top Chinese Construction Firms. The Kathmandu Post. https://kathmandupost.com/money/ 2021/12/20/adb-blacklists-top-chinese-construction-firms. Accessed on 4 September 2022. Prasad, U. S. (2015). Study of Nepals Economic Relations with China. The Journal of Development and Administrative Studies, 23(1–2), 23–32. Pyakurel, U. P. (2019). The BRI, Nepal’s Expectations, and Limitations on Nepal-China Border Relations. Issues & Studies, 55(3), 1–21. Rae, R. (2021). Kathmandu Dilemma: Resetting India- Nepal Ties. Penguin India. Rana, P. B., & Ji, X. (2020). China’s Belt and Road Initiative: Impacts on Asia and Policy Agenda. Palgrave Macmillan. Reuters. (2017, May 14). Nepal in Talks with China to Build $8 Billion Cross-Border Rail Link: Finance Ministry Official. Reuters. https://www.reu ters.com/article/us-china-silkroad-nepal/nepal-in-talks-with-china-to-build8-billion-cross-border-rail-link-finance-ministry-official-idUSKBN18A05F Accessed on 11 September 2022.

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Saxer, M. (2017). New Roads, Old Trades Neighbouring China in Nepal. In Saxer & Zhang (Eds.), The Art of Neighbouring: Making Relations Across China’s Borders (pp. 73–92). Amsterdam University Press. Sharma, B. P. (2018). China-Nepal Relations: A Cooperative Partnership in Slow Motion. China Quarterly of International Strategic Studies, 4(3), 439–455. Sharma, R. (2016, March 22). Nepal, China Pen Transit Trade Treaty, Nine Other Pacts. The Himalayan Times. https://thehimalayantimes. com/business/nepal-china-pen-transit-trade-treaty-nine-pacts. Accessed on 9 September 2022. Sharma, S., & Chhetri, P. S. (2022). Nepal, China and ‘Belt and Road Initiative’: Prospects and Challenges. India Quarterly, 78(3), 458–475. Shrestha, G. D. (1970). Trade an Transit: Review of Nepal’s Overseas Trade and Export Industries. Vasudha. Shrestha, H. L. (2005). Political Aspect of Nepal China Relations. In N. N. Pandey (Ed.), Nepal China Relations (pp. 1–13). Institute of Foreign Affairs. Shrestha, M. B. (2017). Cooperation on Finance Between China and Nepal: Belt and Road Initiatives and Investment Opportunities in Nepal. The Journal of Finance and Data Science, 3(1–4), 31–37. Sigdel, B. D. (2003). Nepal’s Relation with Japan and China. Center for Policy Studies. Sigdel, B. D. (2021). Dimensions on Nepal-China Economic Relations: Present Status and Future Prospects (APAC Report). Turkish Center for Asia Pacific Studies, Ankara. http://www.asianpacificcenter.org/nepal-china-economic-rel ations.html. Accessed on 6 September 2022. Subedi, M. (2017, May 12). Nepal Officially Joins Belt and Road Initiative. China.org.cn. http://www.china.org.cn/world/2017-05/12/content_4 0801291.htm. Accessed on 5 September 2022. TEPC. (2010). Nepal China Preferential Tariff Treatment: Letter of Exchange, Trade and Export Promotion Centre. Ministry of Commerce, Industry and Supplies, Government of Nepal. http://www.tepc.gov.np/tradeagreement/ Letter%20of%20exchange.pdf. Accessed on 5 September 2022. TEPC. (2022). Nepal’s Trade and Transit Agreement, Trade and Export Promotion Centre. Ministry of Commerce, Industry and Supplies, Government of Nepal. http://tepc.gov.np/pages/trade-and-payments-agreementchina. Accessed on 5 September 2022. Thapa, H. B. (2005). Promoting Nepal-China Relations Through Boao Forum for Asia (BFA). In N. N. Pandey (Ed.), Nepal China Relations (pp. 14–25). Institute of Foreign Affairs. Welle, D. (2022, August 25). Nepal: What Happened to China’s ‘Belt and Road’ Projects? Frontline. https://frontline.thehindu.com/dispatches/nepal-whathappened-to-chinas-belt-and-road-projects/article65466849.ece. Accessed on 13 September 2022.

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Xinhua. (2021, July 21). China Remains Largest Source of FDI for Nepal for 6 Consecutive Years. Xinhua. http://www.xinhuanet.com/english/asiapacific/ 2021-07/21/c_1310075557.htm#:~:text=KATHMANDU%2C%20July% 2021%20(Xinhua),released%20by%20Nepal’s%20Department%20of. Accessed on 2 September 2022. Yadav, D. (2021). Is the Growth of Sino-Nepal Relations Reducing Nepal’s Autonomy? China Brief, 21(5), 27–32.

CHAPTER 7

Chinese Investment in Pakistan: Approaching Towards Bankruptcy

Formal relationship between Pakistan and China kicked off with Pakistan Government’s recognition of China as a sovereign state on 9 January 1950. Though the relationship was not very warm at the initial stage, it flourished in the subsequent time. Over the period, a strong diplomatic tie developed between these two nations. China emerged as a major trade partner for Pakistan and started to invest in large volume. These investments comprise both FDI by private players and government to government investment. In addition to this, China has also offered Pakistan a huge volume of grants as aid and loan at a relaxed rate of interest over the last couple of decades. In the very recent past, China has shown deep interest in developing infrastructure facilities in Pakistan, and therefore, extended them a loan of around US$62 billion for the development of various projects including Gwadar port, to be built under China-Pakistan Economic Corridor (CPEC) as a part of its grand initiative of BRI. Besides this, many other infrastructure development projects are underway in various parts of Pakistan with Chinese loan. In this chapter, we provide an assessment of the Chinese investment in Pakistan by both private and government-owned entities. This chapter also offers an overview of the bilateral diplomatic and economic relationship between these nations developed over the past decades.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 R. N. Choudhury, Mapping Chinese Investment in South Asia, https://doi.org/10.1007/978-981-99-1385-5_7

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Establishment of Diplomatic Relationship1 Pakistan recognised China a sovereign state in 1950 and opened its diplomatic mission in Beijing in 1951. Since then diplomatic engagements began and bilateral visits by state machineries started taking place. At the initial phase, the relationship was not warm, limited to routine diplomacy, and tinged with suspicion. The relationship remained stable and constant though until next decade (Khan, 2011; Syed, 1969). Among the events that took place in this decade, one of the most notables was the visit of Chinese Vice President Madam Song Ching Ling to Pakistan which marked the first high-level visit from Chinese side. This was followed by Pakistani Prime Minister H.S. Suhrawardy’s visit to China in 1956. In the 1960s, the two nations started to come closer and reached a milestone in December 1962 with signing an agreement for the settlement of location and alignment of Pakistan–China boundary in the Gilgit-Baltistan (GB) region. This marked a significant development as the entire settlement of territorial demarcation happened amicably (Allauddin et al., 2020). IndiaChina border clash of 1962 further widened the options for collaboration between China and Pakistan (Cheema, 1986). In March 1963, the two countries signed a boundary agreement on China’s Xinjiang and the adjacent areas whose defence was under the actual control of Pakistan (MoFA, n.d.). Affirming its commitment for closer relationship Chinese President Zhou Enlai visited Pakistan in February 1964 and again in September 1965. In December 1964, Pakistani President Ayub Khan visited China. Meanwhile another noteworthy moment in the Pakistan-China relation came in 1965 when Pakistan entered into a war with India. China extended full support to Pakistan in its war against India (Ali, 2017). It was a strategic move by China who wanted to curtail India’s dominance in the region by helping its unfriendly neighbour. During his visit to Pakistan, which took place immediately after the war, Chinese President Enlai announced that China is fully committed to help Pakistan in maintaining its independence, sovereignty, and national integrity (Pande, 2011).

1 Information regarding the bilateral visit of the state officials used in this section has been accessed from the websites of Ministry of foreign affairs, China and Ministry of foreign affairs, Pakistan. Websites were accessed during the period between 1 July 2022 and 10 August 2022.

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Another eventful time in Pakistan-China relation came in 1971. The period was a test for Chinese diplomacy and its foreign policy. Despite disappointment with the way Pakistan handled the situation in East Pakistan, China extended diplomatic and political support to Pakistan. However, China did not make military interventions nor it supplied any arms in the war (Ali, 2017). Addressing a press conference in Beijing in 1972 Premier Enlai said that China did not provide arms (to a country) to be used against its own people (Khan, 2011). Another milestone incidence in the Pakistan-China relation happened in the same year when the US Secretary of State Henry Kissinger secretly visited China. Pakistan played an instrumental role in facilitating his visit and provided the channel to Kissinger to meet Chinese leader which later paved the way for the US President Nixon to meet Mao Zedong (National Security Archive, 2002). This facilitation process helped Pakistan to become further close to China and also gain confidence of both the USA and China. In the following years, a series of visits by high-level officials and state heads of both sides took place. While in power, Prime Minister Z.A. Bhutto visited China thrice in 1972, 1974, and 1976. Pakistani President Zia-ul Huq visited China in December 1977. In May 1980, again Huq visited China while in June 1981; Premier Zhao Ziyang visited Pakistan (MOFA, n.d.). In 1986, Pakistan and China signed an agreement on civilian nuclear cooperation. Following this agreement, a commercial power plant was set up in Chashma in the Punjab region. Beijing played a crucial role in the development of Pakistan’s nuclear energy. China provided all the necessary assistance in construction of nuclear power plants following the International Atomic Energy Agency (IAEA) guidelines. Following the 1986 deal, China agreed to supply expertise to Pakistan with its indigenously developed Qinshan-1 nuclear power plant in 1991 (Balachandran, 2013). Pakistan and China stood together when USSR entered into a military standoff with Afghanistan. They worked together to handle the situation in Afghanistan. During the Afghan War (1979–1989), China not only extended political support to Pakistan at international level but also contributed military supplies worth US$200 million annually to the Afghan resistance groups (Munir, 2018). In response to Chinese generosity, Pakistan always extended its full support to China over issues which were vital to the Chinese national interests, like the issues of sovereignty over Tibet, Hong Kong, and Taiwan.

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Meanwhile, the leaders continued their bilateral visits. In March 1984, President Li Xiannian visited Pakistan and in November 1985, Pakistani Prime Minister MK Junejo visited China. In June 1987, Premier Zhao Zhiyang visited Pakistan again. In May 1988, Prime Minister Junejo paid another visit to China. In February 1989, Pakistani Prime Minister B. Bhutto visited China, and in November Premier Li Peng visited Pakistan. To further strengthen their bilateral ties, Chinese President Yang Shangkun also visited Pakistan in 1991. In December 1994, Pakistani President Leghari visited China. In return, President Jiang Zemin visited Pakistan in 1996 when both countries agreed to expand and strengthen their ties. The year 2001 marked the 50th anniversary of the establishment of Sino-Pakistani diplomatic relations. Several events were organised in both countries to celebrate the anniversary. Following these events, in 2001, Chinese Prime Minister Zhu Rongji visited Pakistan and then in December, General Pervez Musharraf, the-then president of Pakistan also went to China. The bilateral relations were reinforced by increased cooperation in the areas of defence production and space technology. Over the period, China emerged as the most reliable source of defence supply for Pakistan. Pakistan-China relations had so far remained smooth and in the post9/11 period their relations have attained the status of being ‘strategic partners’ and ‘good brothers’. Pakistan-China strategic interdependence increased manifold mainly due to the US presence in Afghanistan and the enhancement of Indo-US strategic cooperation. Two countries signed ‘Treaty of Friendship, Cooperation, and Good Neighbourly Relations’ on 5 April 2005. They agreed to refrain from joining any association or bloc, which violates the sovereignty, security, and territorial integrity of either nation. They further agreed that both parties would not conclude treaties of this nature with any third country. Premier Wen Jiabao visited Pakistan in December 2010. During his visit, Premier Jiabao addressed the Pakistani parliament. Following this Pakistan and China issued a joint statement which states that the two countries will undertake substantive cooperation under bilateral and multilateral framework. They pledged to jointly fight the forces of terrorism, separatism, and extremism. It also mentions that their relation has gone beyond bilateral dimensions and acquired broader regional and international ramifications (Mahmood, 2011).

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At the initial phase, their relation was focused on bilateral diplomatic issues which subsequently covered defence and strategic cooperations. They both have a long-standing defence ties. From friendly relationship in the 1970s evolved a traditional friendship in the 1980s and then to a comprehensive relation in 1990. Sino-Pakistan relation further evolved from comprehensive friendship in the 1990s to an all-weather friendship by 2010. Their relationship further deepened when Pakistan joined BRI in 2013. Subsequently, they termed their relationship as ChinaPakistan all-weather strategic cooperative partnership. Thus, since the beginning the relationships between these two nations have flourished and strengthen constantly. It evolved in a remarkable consistency despite internal changes in both countries and various geopolitical developments around the world (Chawla, 2022). Sino-Pakistani relation has evolved from addressing bilateral issues to some of the regional or global issues as well (Khalid, 2021).

Sino-Pakistani Military Ties Along with close diplomatic and political ties, China and Pakistan have developed a closed military tie as well. Due to the similar nature of their military structures, there had been constant interactions between highlevel military officials of the two countries. China has been providing military assistance to Pakistan for a long time and it is a critical component of the Sino-Pakistani relation. To advance its strategic interest, China facilitated easy flows of arm supplies to Pakistan on relaxed modes of payments (Chawla, 2022). Chinese military assistance to Pakistan started to increase after the 1971 war when the US suspended its military assistance to Pakistan. After the 1971 war, Pakistan’s military strength was remarkably weakened. It caused serious damage to Pakistan’s arms and ammunition (Ahmed, 1981).The US embargo on arms trade with Pakistan further deteriorated the situation. Following this, China remained the sole supplier of defence equipment to Pakistan. With Chinese aid, Pakistan made up the losses and fostered defence potential (Khan, 2011). Pakistan’s re-equipment process began in the spring of 1972 with the delivery of Chinese MIG-19 fighters and T-59 tanks (Ahmed, 1981). China assisted Pakistan to equip two new military divisions and replace those sent to East Pakistan. In May 1972, China provided 100 MIG19 fighter planes and a number of T-59 tanks to Islamabad. Since the

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1971 war China has delivered US$300 million worth of arms to Pakistan. Afterwards, militaries of both nations started to come closer to each other. This led to more frequent bilateral visits of the army personals. A military goodwill mission led by General Tikka Khan, the Chief of Staff of the Pakistan Army, visited Peking in early January 1973. His visit was followed by a study tour of a team of the Pakistan National Defence College in March 1973. The People’s Republic of China reciprocated by sending in January 1974 a high-level military delegation led by the Deputy Chief of the General Staff of the People’s Liberation Army, Chang Tsai-chein (Ali, 1974). Advancing defence ties, China and Pakistan signed a comprehensive nuclear cooperation agreement in 1986. Since then China helped Pakistan in the development of its ballistic missile programme which enormously strengthened its military capability. In January 1990, both countries agreed to design, develop, and manufacture battle tank MBT2000 Al-Khalid jointly. The design is an upgrade of the original T902M. The initial prototypes were produced in China and fielded for trials in August 1991. The tank was delivered to the Pakistan army in 2001. To reduce the dependence on the Western jet-fighters, Pakistan entered into another agreement with China called ‘Thunder Programme’ in 1999 to produce JF-17 jet fighter (Munir, 2018). In 2009, China delivered the first frigate F-22p named PNS Zulfiquar to Pakistan who was negotiating with China for the provision of 4 frigates since the late 1990s. But the agreement was signed between both countries when the negotiations for financing and transfer of technology had been finalised in 2006. China Shipbuilding Industry Corporation (CSOC) and Pakistan Navy jointly manufactured a fast-attack craft named PNS Azmat which was launched in 2012 (Makhdoom et al., 2014). Among the recent procurements, the Pakistan army inducted its first batch of Chinese-made VT-4 battle tanks. The VT-4 tanks, built by the Chinese state-owned defence manufacturer, Norinco, were supplied to Pakistan starting in April 2020 (Rajagopalan, 2021). Apart from the above-discussed military procurements, armies of both countries have conducted several joint exercises and training programmes. Along with diplomatic and defence ties, Pakistan has also developed close economic relations, academic collaborations, and cultural exchange programmes with China (Wolf, 2020). China is one of the largest trading partners of Pakistan who heavily relies on China for importing a large number of items. Along with trade, China has also emerged as one of the

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biggest investors and lenders to Pakistan in the recent past, especially after it launched its ambitious infrastructure project BRI. The forthcoming section of the chapter analyses the Sino-Pakistani economic relation. This is followed by Sino-Pakistani investment relation and Pakistan’s participation in BRI.

China-Pakistan Economic Relation The formal trade relation between China and Pakistan goes back to the 1950s, i.e., immediately after the establishment of bilateral diplomatic ties. China was primarily interested in importing cotton from Pakistan while semi-industrial goods from China too found a market in Pakistan. Sizable volume of trade was taking place between them. To facilitate trade, they also entered into several trade facilitating agreements. Between the period 1953 and 1958, there were eight bilateral commercial agreements signed between Pakistan and China (Leng, 1969). Although the number of agreements does not always reveal the actual volume of trade, it does signify the desire and efforts made by partners to enhance their trade. In 1953, total trade between Pakistan and China was US$10.5 million of which US$7.7 million was exported to China and remaining US$3.3 million was imported from China (Leng, 1969). On 4 October 1958, the two countries assigned the Most-Favoured Nation (MFN), granting reciprocal treatments to each other (Malik, 2017). The bilateral trade registered a modest growth in the next couple of years and crossed US$18 million in 1960 of which US$14.8 million was Pakistan’s export and US$4 million was its import from China (Hussain et al., 2020). In 1963, China and Pakistan signed a trade agreement wherein it was decided that the proposed agreement will be in force for a year and then extended automatically, unless one party gave three months’ notice before the date of expiration (Vertzberger, 1983). Through this agreement, Pakistan agreed to import from China items like iron and steel manufactures, coal, cement, machines, chemicals, and various raw materials and seeds, while it would export jute, jute products, cotton, hides, textiles, sporting goods, medical instruments, and chromium. In 1964, both countries signed first barter trade agreement which led to further increase in the trade volume. Later, the opening of roads between Gilgit and Sinkiang and the Karakoram Highway running through the Khunjerab Pass increased the volume of commodities exchanged between

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Pakistan and China manifolds. The major items traded at that period were leather, leather products, nylon cloth, cotton products, dry fruit, and herbs which were exported from Pakistan, and items like silk, textile products, hardware, and farm tools were imported from China (Vertzberger, 1983). In the next decade, the trade volume increased further and touched US$389.1 million in 1980. In the same year, Pakistan imported Chinese goods worth US$167.8 million and exported goods worth US$221.3 million to China (Vertzberger, 1983). To enhance the horizon of cooperation China and Pakistan set up Joint Committee on Economic, Trade, Scientific, and Technology Cooperation in October 1982. Over the period, the pattern of trade reversed and Pakistan started experiencing trade deficit with China which started in 1972. Since then the trade volume continued to be tilted towards China with an exception of few years in the early 1980s. The primary reason of the expanding Chinese trade is change in the Chinese policy and tremendous economic growth that it started to witness since the late 1970s. Another vital reason for the rising exports from China was the 1971 war and the loss of East Pakistan. This substantially reduced Pakistan’s exporting capacity as the eastern part of the country was the primary source of items such as processed cotton, jute, etc., which were exported to China by Pakistan. The US embargo on Pakistan on several occasions and the growing diplomatic closeness between China and Pakistan has also influenced the flourishing trade between these two nations. The bilateral trade scenario remained largely constant over the next three decades. The trade balance remained highly unfavourable to Pakistan with its constantly rising dependence on China.

Sino-Pakistani Trade Relation in Twenty-First Century In the post 2000 period, Sino-Pakistan economic cooperation entered into a new phase. The two countries further enhanced their economic ties and signed several agreements. During the visit of Chinese Prime Minister Zhu Rongji to Pakistan in 2001, both countries signed six agreements spanning from expanding tourism to developing communication infrastructure (Rahman, 2006). China and Pakistan signed a Preferential Trade Arrangement (PTA) in November 2003 which was enforced on 1 January 2004. China allowed

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tariff concessions to Pakistan on 893 items whereas Pakistan gave concessions to China on nearly 200 items (Malik, 2017). Both the nations set up a Joint Study Group to negotiate a Free Trade Agreement between the two countries and have simultaneously negotiated an Early Harvest Programme. In December 2004, they signed seven more agreements in trade, communications, and energy sector and drew up a framework for greater cooperation. These agreements were designed to enhance bilateral trade, advancement on preferential trade agreement, setting up of joint agro-based industries, and increase Chinese investment in Pakistan. China and Pakistan on 5 April 2005 signed an Early Harvest Scheme which is considered as a precursor to a free trade agreement. This agreement came into force on 1 January 2006. Under this agreement, China removed tariff on 767 items and proposed to implement a free trade agreement by 2008 covering 90% of the commodities while keeping the rest of the goods under sensitive list (Rahman, 2006). The FTA on trade in goods was signed on 24 November 2006 and implemented on 7 July 2007. The FTA on trade in services was signed on 21 February 2009 and was made operational in 10 October 2009. After signing of this three-part agreement, Pakistan had a comprehensive FTA with China covering trade in goods, investments, and services (Malik, 2017). In addition, China and Pakistan signed a treaty of currency exchange in 2013 to facilitate trade in their own currencies. Through this agreement, both states enabled trading in the mutual currency as a replacement of the US dollars or any other foreign currency. Despite having deep political and security ties, trade and investment between China and Pakistan has long been a weak element in their relationship (Small, 2015). Several policy level arrangements could not do much as the trade between China and Pakistan remained highly in Chinese favour. Chinese export to Pakistan crossed the billion marks in early 2000. In 2021, China exported goods worth US$24.24 billion while imported merely US$3.5 billion from Pakistan surpassing trade deficit by more than US$20 billion. The Table 7.1 and Figs. 7.1 and 7.2 show the bilateral trade between these two countries for the last two decades. The data reveals Pakistan’s export and import both reached to its peak in 2021. Pakistan primarily imported items such as machinery and parts, road and railways vehicles, iron and steel, chemical, medical, and pharmaceutical products while it exported cotton fabric and yarn, rice, fish, and fish preparations (Hussain et al., 2020).

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Table 7.1 Pakistan’s trade with China (Billion US$)

Year

Export

Import

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0.56 0.57 0.59 0.83 1.01 1.10 1.01 1.26 1.73 2.12 3.14 3.20 2.75 2.48 1.91 1.83 2.18 1.81 2.12 3.58

1.24 1.85 2.47 3.43 4.24 5.83 6.05 5.52 6.94 8.44 9.28 11.02 13.24 16.48 17.47 18.31 16.97 16.17 15.36 24.24

Source TradeMap

4.00 3.00 2.00 1.00 0.00 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Fig. 7.1 Pakistan’s export to China (Billion US$) (Source Trade Map)

China-Pakistan Investment Relations Foreign Direct Investment in Pakistan The FDI policy in Pakistan has gone through successive development since the 1950s. Immediately after its formation, Pakistan followed a restrictive approach towards foreign investment. Most of the sectors were

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

30.00 25.00 20.00 15.00 10.00 5.00 0.00

Fig. 7.2 Pakistan’s import from China (Billion US$) (Source Trade Map)

prohibited from foreign participation. A major step taken to promote foreign investment was by passing the Foreign Private Investment (Promotion and Protection) Act 1976. Pakistan started to encourage FDI in areas of technology, and physical and human capital development in the form of joint venture with domestic investors. This act allowed remittance of profit and capital, and provided relief from double taxation for countries with which Pakistan had agreement on avoidance of double taxation. FDI was especially encouraged in export-oriented industries. However, FDI was highly regulated. There was a requirement of approval by the Federal Government and Central Investment Promotion Committee to set up projects with investment above 3 million. Alongside, projects with FPI needed to be approved by the Investment Promotion Bureau. Despite making so much effort, Pakistan failed to attract any sizable volume of investment (Khan, 1997; Khan & Kim, 1999; Sadiq et al., 2021). Pakistan made substantial amendments in FDI policy in 1991. It removed the mandatory requirement of government approval for FDI for all the sectors with only a few exceptions. Foreign investment was permitted up to 100% providing equal treatment to local and foreign investors. Foreign investors were allowed to purchase equity in existing industrial companies. Along with amending FDI policy, government also liberalised the foreign exchange regime in early 1990s. Pakistani rupee was made convertible with effect from 1 July 1994. Residents and nonresident Pakistanis and foreigners are now allowed to bring in, possess, and take out foreign currency, and to open accounts and hold certificates on foreign currency. Foreigners using foreign exchange were given access to the capital market. A comprehensive list of investment incentives in the form of flexible credit facilities, fiscal incentives, and relaxed visa policy were announced. Pakistan further allowed a three-year tax holiday to

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all industries across Pakistan set up between 1 December 1990 and 30 June 1995. Together with tax holidays investments will enjoy five special custom duty and sales tax concessions (Khan, 1997; Khan & Kim, 1999). In November 1997, Pakistan launched the New Investment Policy that includes major policy initiatives. Through this policy Pakistan allowed foreign investment in sectors like agriculture and services which were earlier listed in prohibited category. Pakistan introduced an Investment Policy in 2013 that further liberalised investment policies in most sectors to attract foreign investment. Through this policy Pakistan eliminated minimum initial capital investment requirements across sectors with the exception of investments in the airline, banking, agriculture, and media sectors. Foreign investors in the services sector may now acquire 100% equity, subject to obtaining permission from the concerned authority. In addition, sectors such as education, health, and infrastructure sectors were allowed to have 100% foreign ownership (BOI, 2013).

FDI Inflow in Pakistan Immediately after the formation of a new state in 1947, Pakistan faced several economic challenges. As mentioned earlier, initially it concentrated on the development of domestic industries relying less on the foreign capital. However, it realised the importance of FDI soon and took several measures to attract foreign capital. It was among those economies that opened during the 1970s. However, enacting several pro market initiatives and despite having a large size market and considerable stocks of natural resources Pakistan remained unattractive for the foreign investors. Numerous efforts to woo foreign investors could not generate positive result. Due to rapid political changes, infrastructural bottlenecks and inconsistency in policies the level of FDI remained low compared to other developing countries (Aqeel et al., 2004; Khan & Kim, 1999). In 1960– 1961, Pakistan received only US$17.63 million foreign investments which increased to US$305.10 in 2000 (Aqeel et al., 2004). Post 2000, FDI started to increase to some extent. Countries like the UAE, China, UK, US, and Netherlands were the primary investors in Pakistan. Mining and quarrying, manufacturing and construction were the prominent sectors that attracted foreign investment in Pakistan. The total FDI inflow from the world to Pakistan is presented in Table 7.2.

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Table 7.2 FDI inflows in Pakistan (Million US$)

157

Year

China

World

Share of China (%)

2013 2014 2015 2016 2017 2018 2019 2020 2021

109.8 745.8 1143.3 1097.0 817.2 1418.0 701.6 973.5 1083.0

2665.3 2847.4 2842.9 3256.3 3110.8 3494.5 2785.2 3322.1 3061.4

4.1 26.2 40.2 33.7 26.3 40.6 25.2 29.3 35.4

Source State Bank of Pakistan

The Bilateral Investment Treaty signed in 1989 by China and Pakistan sets the ground for the smooth implementation of investments and projects for each other. In order to enhance economic ties, Pakistan and China adopted Framework for Greater Economic Cooperation in 2004. Following this, Pakistan–China Joint Investment Development Fund was set up in Pakistan (Hussain et al., 2020). Pakistani and Chinese businessmen signed 20 joint ventures worth US$250 million in 2003. Again in 2006 China and Pakistan signed 23 MoUs worth US$555 million to set up joint ventures in various sectors including real estate, financial infrastructure, media, power generation, steel, and pharmaceuticals. In 2006, during the visit of the Chinese President Hu Jintao, both countries signed 31 agreements and MoUs to promote bilateral investment (Kumar, 2007). Later in December 2007, both countries launched the Pakistan—China Joint Investment Company with an authorised capital of US$200 million. The equity in this company is equally contributed by the Pakistan Government and China Development Bank.2 The Chinese FDI in Pakistan is presented in Table 7.2. Data shows that Chinese investment has significantly increased over the last couple of years. It jumped from US$109.8 million in 2013 to US$1 billion in 2021. The share of Chinese investment which was only 4% in 2013 has crossed 40% in 2015 when Pakistan joined the BRI. After joining BRI, Chinese FDI in Pakistan has remained very high. It is possibly due to the fact that many

2 The information is accessed from the website of Pakistan–China Joint Investment Company. http://pakchinainvest.com/index.php. Accessed on 28 July 2022.

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Chinese companies who supply raw materials to BRI projects have made investment in Pakistan to establish their base. Although at the initial phase Chinese companies had not shown much interest, later many of them made investments in Pakistan. In 2005, there were only around 50 Chinese companies registered in Pakistan (Rahman, 2006). The figure jumped dramatically crossing 2100 in 2022 as per the data released by the Pakistan-China joint Chamber of Commerce and Industry (PCJCCI, 2022). Chinese companies have invested in different sectors of Pakistan’s economy. Chinese firms are operating in varied areas such as oil and gas, information technology, telecommunications, power generation, engineering, automobiles, infrastructure, and mining, among others. Among the major Chinese private players operating in Pakistan are Huawei Technologies, ZTE Corporation, China National Petroleum Corporation, China Mobile, China State Construction Engineering Corporation, Dong Fang Electric Corporation, CMEs, China Ocean Shipping Corporation, and Air China. While Pakistan seeks Chinese investment, the Chinese Government encourages its public and private sector to actively take part in the projects based in Pakistan (Rahman, 2006). Under the Five-Year Economic and Trade Cooperation framework, nearly, 20 Chinese companies have committed to invest in the real estate sector in Pakistan especially in the Punjab province. Pakistan allocated around 200 hectors of land exclusively for the Chinese investment (Kumar, 2007). In January 2022, Pakistan launched an investment forum with China to increase Chinese companies’ funding in Pakistan and to promote business to business industrial cooperation. The forum consists of 18 Chinese and 19 Pakistani companies (Radio Pakistan, 2022). Following this in February 2022 Pakistan Government informed that a consortium of 3 Chinese companies Huazhong Technology, China Communication Construction Company (CCCC), and Zhejiang Seaport Company will set up a paper mill in Pakistan at an estimated cost of US$4.5 billion. In addition, a Chinese textile company will establish a Special Economic Zone, which will be a Chinese textile cluster, with an investment of US$250 million (Haider, 2022). In the post-pandemic period, several Chinese medicine companies have also shown interest in investing in Pakistan (ANI, 2022).

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Chinese Infrastructure Investments in Pakistan China and Pakistan share a very old infrastructure development relation. In fact, at the initial phase of the economic cooperation, China predominantly invested in several infrastructure projects in Pakistan. China’s economic assistance consists mostly of grants and loans for projects. China assisted Pakistan in establishing several infrastructure projects since the early 1970s. One of the very important projects funded by China at the beginning of the Sino-Pakistani economic cooperation is the construction of the Karakoram Highway (KKH). The 800 kms Karakoram Highway was built at an estimated cost of Pakistani Rs 600 crores. Inaugurated in 1982, this road connects Kashgar in China’s Xinjiang Uighur Autonomous Region with Islamabad in Pakistan. The road was constructed for the explicit purpose of fostering trade and people-to-people contact (Haider, 2005). China granted its first loan to Pakistan in 1964 for US$60 million. The loan was interest-free and the repayment was to be made by exporting in Pakistani products to China starting from 1966. Under this agreement, China offered the necessary equipment and technical know-how for building a heavy industry complex in Pakistan that would manufacture cement, sugar, and road building and railway equipments (Copper, 1976). At the end of 1968, China and Pakistan signed a technical and economic agreement under which China pledged to offer Pakistan an interest-free loan of US$25 million for 20 years. Like earlier agreements again, the payment was decided to be made through export of Pakistani products (EIU, 1968). Again in 1970, China extended Pakistan a US$200 million interest-free loan for 20 years, with a grace period of 10 years after the grant of the loan (Vertzberger, 1983). China also participated in the construction of a hydroelectric plant in Tarbela, Balochistan, after discovering iron ore deposits there and developing a heavy industry project around these deposits. Additionally, a textile mill in Azad Kashmir and heavy engineering complex in Taxila region was constructed with Chinese loan. In 1978, Pakistan constructed a sugar mill with production capacity of 400,000 tons with Chinese aid. In 1982, a fertiliser production plant in Haripur was set up with Chinese capital (Vertzberger, 1983). Chinese companies signed deals in 2002 for involvement in the Saindak copper and gold project in Chaghm and the Duddhar lead-zinc

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mining project in Lasbela district, Balochistan (Dumbaugh, 2010). One of the milestones in the Sino-Pakistani infrastructure cooperation is the construction of the Gwadar port in 2002. For the construction of the first phase of the port China extended US$198 million of the US$248 million required for that phase. The port is also one of China’s biggest foreign aid projects to Pakistan. China also financed the Makran Coastal Highway from Gwadar to a central Balochistan town, connecting Karachi and Quetta (Azeemi, 2007). The construction of the road started in 2002 and was completed in 2004. China supports Pakistan in the hydroelectric power sector to overcome the energy crisis and also helped the country economically and technologically. Addressing the challenges of power crisis in Pakistan, the two countries signed a memorandum of understanding in 2010 to build 12 small-to medium-sized dams (Hussain et al., 2020). The biggest development in Sino-Pakistani infrastructure funding happened in 2015 when Pakistan joined the Chinese initiative BRI. During his visit to Pakistan in April 2015, Chinese President Xi Jinping and Pakistani Prime Minister Nawaz Sharif unveiled China-Pakistan Economic Corridor (CPEC), one of the flagship projects of BRI. For CPEC, China pledged to offer US$46 billion loan to Pakistan, highest amount offered to any single country at that time. Under the ambit of CPEC, numerous infrastructure development projects are underway in several parts of Pakistan. These projects include construction of road, ports, and railways, among others. The infrastructure development under BRI in Pakistan is analysed in detail in the forthcoming section.

BRI in Pakistan: A Game Changing Opportunity or Threat to Pakistan? Pakistan is located at a strategic point in the entire BRI plan. It officially joined BRI when Chinese President Xi Jinping visited Pakistan in 2015 and the two countries jointly launched the China-Pakistan Economic Corridor (CPEC). The China-Pakistan Economic Corridor is a 3,000 km network of roads, railways, and pipelines intended to transport oil and gas from southern Pakistan’s port of Gwadar to the city of Kashgar in northwest China’s Xinjiang Uygur autonomous region (Andersen & Jiang, 2018). It is one of the 6 international economic corridors that have been envisaged in BRI and has been identified as a flagship project under the initiative.

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The idea of developing an economic corridor between Pakistan and China predates BRI. The project was conceptualised in 2013 when the Pakistan Prime Minister visited Beijing. During his visit, two countries announced to construct a corridor connecting China with the Chineseinvested Pakistani port of Gwadar through highway, rail, and pipeline infrastructure with an estimated cost ranging between ten and twenty billion US$ (Andersen & Jiang, 2018). The project was later redesigned and launched as China-Pakistan Economic Corridor under the BRI, covering a larger area of infrastructure development. The estimated completion year of the project was finalised to be 2030 with a revised cost of US$46 billion of which 71% (US$32 billion) was to be invested in energy, 8% in rail, 13% in road links, and 4% in the Gwadar port. By 2017, this total had been raised to US$62 billion (McCartney, 2021). The importance of the CPEC arises from the fact that it connects the ancient Chinese plan of the Silk Route Economic Belt (SREB) with the twentyfirst century Maritime Silk Road. It will offer easier and faster access to China to enter Europe through Central Asia. The Gwadar port developed under the BRI provides China easy entry into the Pacific and Indian Ocean and offers China virtually direct access to the Strait of Hormuz, through which some 40% of global daily oil transit ferries (Ghiasy, 2021; Khan & Khan, 2019; Wolf, 2020). The development works proposed under the CPEC would improve the infrastructure facilities and address the long-standing power shortages in Pakistan (Boni, 2020). China and Pakistan agreed to develop multiple projects under the umbrella of CPEC which will be financed by Chinese Government while the projects will be undertaken by the Chinese companies. Under the deal, Chinese companies will be allowed to run the projects as profit-making units. Chinese investments in CPEC constitute three types of loans, i.e., commercial, concessional, and interest-free ones/grants. After joining the BRI, Pakistan along with China designed a LongTerm Plan, starting in 2017 and completing in 2030 to execute the implementation of the projects. The BRI projects in Pakistan are developed under four distinct phases. In the first phase, also referred to as Early Harvest Projects, it developed important infrastructure projects like the 125 mile tunnel connecting China and Pakistan, improving existing highways and railways across Pakistan, up-gradation of Karachi, Lahore, and Peshawar highway, constructing a railway track to Kashgar in China’s Xinjiang Province, etc., that were undertaken in this phase. This phase

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was completed in 2020. The second phase will focus on the improvement of energy sector. In this phase, construction will be carried out to build power generation plants, coal plants, and gas and oil pipelines across Pakistan. Second phase is spanned between 2020 and 2025. The third phase would develop the Gwadar port and finally establish the nine special economic zones in Pakistan around the projects developed under the first three initiatives (Miller, 2022). The third and fourth phases are scheduled to be finalised by 2025 and 2030, respectively. Beijing attaches a few conditions to their support for Pakistan. It requires Pakistan to establish a stable security environment, it must ensure national harmony and consensus, and it must achieve timely implementation of the CPEC projects. Although, all the projects under CPEC have fixed timeline regarding the beginning and completion of the same, it seems to be only a basic guideline that is open for further modification not only regarding the size and nature of the projects but also the duration of the initiative (Wolf, 2020). This is reflected in the financial outlay which was initially estimated to be US$46 billion to already cross US$62 billion by 2020. Many projects are also not been completed as per the schedule. In addition, project lists are frequently updated and existing projects are often repackaged as CPEC projects (Shafqat, 2021).

Implementing Critical Projects Under CPEC Gwadar Port and the Port City The development of the Gwadar port and the Gwadar port city is one of the most highly ambitious projects and was seen by many as the flagship project of CPEC. The small port town of Gwadar, located in the southwest of Pakistan will be developed into a smart port city, while the port itself will be developed as a world class commercial port. The city will be divided into 11 functional zones and a special economic district, and the population is projected to reach 2 million by 2050 (Aamir, 2020). The idea of developing Gwadar port predates BRI or CPEC. It was 2001 when China agreed to construct and develop the deep seaport in Gwadar. In 1993, Pakistan started feasibility studies for the development of a major deep-water seaport at Gwadar. The construction work began on 22 March 2002 and the first phase was completed in December 2005 (Anwar, 2011). Upon completion of the project, the operation of the port was handed over to Singapore Port Authority (SPA) as management

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partner for US$750 million with 40 years lease (Ali, 2020). But, later in 2013 the management of the port was transferred to China Overseas Port Holding Company (COPHC) as Singapore Port Authority violated the contract norms. The port was transferred to COPHC for 40 years lease from February 2013 to February 2055 (Anwar, 2011). In 2015, after Pakistan joined the BRI initiative, it was decided that the port would be further developed under CPEC and a modern city will be built around the port. Along with this several road projects connecting the Gwadar port with different parts of Pakistan and China was also conceptualised. The port was officially inaugurated on 13 November 2016, when goods from Kashgar in China’s Xinjiang, journeying through the built corridor, reached the port on 12 November. Following this, a consignment of 250 containers was dispatched on Chinese ships to Africa and Middle East, thereby recording the first utilisation of the facilities at Gwadar (Dinesh, 2021). Since the beginning of the operation, especially after the deploying naval ship in the port, Gwadar port has been under controversy for various reasons. The controversy ranges from the security threat to financial burden imposed on Pakistan due to the skyrocketing cost of the port and the infrastructural development works undertaken around the port. The controversy regarding the port and the entire CPEC has been discussed in the forthcoming section of the chapter.

Energy Cooperation Through Establishing Power Plants The Dawood wind power station is located outside Karachi in the Sindh province, Pakistan. It is one of the first 14 priority energy projects identified under the CPEC. Notably, it is the first Chinese investment project to complete financing closure and achieve commercial operation under the corridor framework. HydroChina, a subsidiary of PowerChina, holds 93.89% of the equity of Dawood Power Company, and set up a China-Pakistan joint venture, HydroChina Dawood Power (Private) Limited (HDPPL), registered in Karachi to develop the Dawood wind farm. Dawood has an installed capacity of 49.5 megawatts and a total investment of 115 million dollars, with a debt-to-capital ratio of about 7:3. Northwest Institute of PowerChina is the Engineering, Procurement and Construction (EPC) general contractor, responsible for the project design, procurement, and integration management of construction. The project adopts the BOO (Build-Own-Operate) pattern and has

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signed a 20-year power purchase agreement with the Pakistan Power Grid Corporation (Hong, 2020). Sahiwal Power Plant is another important project developed under the CPEC. It is located at Qadirabad, 18 km northeast of Sahiwal city and 160 km southwest of Lahore. The total cost of the project was approximately US$1.808 billion, and it was implemented on a build, operate, transfer (BOT) basis in which the power plant’s ownership will be transferred to the Punjab Government after 30 years of operation. The project was financed with a debt-to-equity ratio of 75:25 (Aid data, N.D). It is the first and one of the biggest and advanced coal-fired power plants in operation built under CPEC (Rauf, 2020). In fact, the plant was built ahead of its scheduled time. The first unit of the Sahiwal Coal Power Project was brought online in May 2017.

Establishing Inland Connectivity3 The CPEC enhances road and rail connectivity between Kashgar and Gwadar. The intra-Pakistan CPEC road network can be divided into three zones—the western, central, and eastern. All these are existing routes and CPEC is upgrading them. CPEC largely expands or improves existing road networks in Pakistan, builds off recently completed infrastructure projects, and leverages ongoing projects funded by the Government of Pakistan or other international lenders. Importantly, the up-gradation work is not entirely financed by China. Agencies like USAID, ADB, and others have also invested there. Before CPEC was launched, Beijing and Islamabad initiated an upgradation of the highway from the Khunjerab border in China to Raikot in the Gilgit-Baltistan region. Under CPEC, the highway is being upgraded from Raikot to Thakot in Khyber Pakhtunkhwa province using a combination of a grant and a concessional loan from Beijing totalling US$150 million. Another critical infrastructure developed in the eastern route is the Karachi-Lahore Motorway, which provides quicker travel between Pakistan’s two largest cities. Among the multiple segments of the road, one segment is financed under CPEC. A series of urban rail transport projects are also included in the CPEC infrastructure portfolio. One such project is the Orange Line Metro

3 Information used in this section is largely adopted from Rafiq (2017).

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project in Lahore. The US$1.62 billion Orange Line was slated for completion in late 2017 or early 2018 but could not be completed due to several reasons. In addition to the public transportation projects in Karachi, Circular Railway, the Greater Peshawar Region Mass Transit system, and the Quetta Mass Transit system are also part of the CPEC’s connectivity development initiative. Besides the few projects discussed in detail, several other projects are also under construction or approved for construction under the CPEC in Pakistan. Although there is no comprehensive or final list of the CPEC projects, scholars have attempted to provide lists on different occasions. It is difficult to identify the CPEC projects since the information is not Table 7.3 Select list of BRI projects in Pakistan Projects name

Estimated cost US$ million

Dawood 50 MW Wind Farm UEP Wind Farm (Jhimpir, Thatta) Sachal Energy Wind Farm Quaid-e-Azam Solar Park (Bahawalpur) Coal-fired Power Plants at Port Qasim Karachi Sahiwal Coal-fired Power Plant China-Pakistan Friendship School, Faqueer CPEC Emergency Medical Centre in Gwadar Cross Border Optical Fibre Cable Feasibility study for Upgradation of ML1 and Establishment of Havelian Dry port of Pakistan Railways Three Gorges Second and Third Wind Power Projects KKH Phase II (Thakot-Havelian Section) Peshawar-Karachi Motorway (Multan-Sukkur Section) Orange Line-Lahore Gwadar East-Bay Expressway Karot Hydropower Station CPHGC 1,320 MW Coal-fired Power Plant, Hub, Balochistan Gwadar Port Operation and Development of Free Zone Suki Kinari Hydropower Station Thar Coal-fired Power Plant Gwadar Smart Port City Master Plan Pilot Project of Digital Terrestrial Multimedia Broadcast

115 252 134 460 2085 1800 0.399 1.6 44 3 224 1315 2889 1626 144 1698 1995 250 1802 2000 4 23

Source Embassy of the People’s Republic of China in the Islamic Republic of Pakistan. Available at: https://www.mfa.gov.cn/ce/cepk/eng/zbgx/CPEC/t1626105.htm. Data accessed on 4 August 2022

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readily available or are scattered across sources or changes frequently. Even within the same sources, there are overlapping and ambiguous lists, project lists are unstable and frequently updated, and existing projects are often repackaged as CPEC projects (Shafqat, 2021). However, despite these challenges, we tried to compile a list of important CPEC projects, as portrayed in Table 7.3.

Challenges to CPEC Although CPEC is a very ambitious project and aims to bring massive transformation to the infrastructure development in Pakistan, it involves several unavoidable risks. Since the beginning, CPEC is facing several challenges and has been involved in numerous controversies. These risks and controversies arise from both within Pakistan and outside its national boundary. One of the major challenges to CPEC comes from the security threat posed by insurgent groups active in the Balochistan region. These organisations frequently try to hamper the project pace by carrying out attacks on construction sites and physically damaging the property. They also attack the Chinese labour force engaged in the CPEC projects. Chinese workers have been killed and kidnapped from different sites on multiple occasions (Sabahat & Nazia, 2017). A suicide attack was carried out on Chinese engineers working in the Dalbandin area of Balochistan in August 2018 injuring three Chinese workers. An attack on the Chinese consulate in Karachi took place in November, the same year. In May 2019, the insurgent group attacked Chinese tourists at the Pearl Continental Hotel in Gwadar (Haider, 2022). In a recent incidence on 26 April 2022, a suicide attack by a Baloch separatist outside the Confucius Institute of the Karachi University killed four people, including three Chinese staff and their Pakistani driver (Ali & Ahmed, 2022). In order to secure CPEC against this threat, Pakistan’s military set up a ‘Special Security Division’ of 15,000 troops in 2016, which was soon after joined by a special naval detachment to protect Gwadar (ABB et al., 2021). The local residents around Gwadar Port do not see it as benefitting them; rather they see it as part of China’s larger design to fulfil its own geopolitical ambitions. The Gwadar port project has displaced thousands of fishermen from their sole source of livelihood. Local community fears that Balochistan will be robbed of its natural resources, especially gas and minerals. In November 2017, Pakistan’s minister for ports and fisheries

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informed that China would receive 91% of Gwadar port-generated profits over 40 years and the Gwadar Port Authority, controlled by the Pakistan Government, will receive the remaining 9%; Balochistan’s provincial Government would get nothing (Khan, 2017). The Baloch community also feels cheated of their expectations as the highway connecting Gwadar prioritise eastern route over Western route (Jetly, 2021). Frustrated with failed promises of prosperity from the Gwadar port, fishermen and other residents of Gwadar organised mass protests against CPEC (Bokhari & Parkin, 2021). CPEC is criticised for imposing unsustainable burden of loan on Pakistan. IMF data suggests Pakistan’s total public and publicly guaranteed external debt stood at US$44.35 billion in June 2013, only 9.3% of which was owed to China. By April 2021, this external debt had ballooned to US$90.12 billion, with Pakistan owing 27.4% or US$24.7 billion of its total external debt to China. IMF warned that Pakistan’s capacity to repay could deteriorate at a faster pace, with faster depletion of foreign exchange reserves and significant implications for economic growth. Pakistan’s public debt jumped from Rs. 6.8 trillion in 2008 to Rs. 30 trillion in 2018. Several scholars accuse CPEC as being directly responsible for the debt burden (Safdar, 2022). Studies have questioned the feasibility of several projects and raised concerns about Pakistan falling into the Chinese debt trap. Pakistan is among the eight countries identified by a CFR study conducted by Hurley et al. (2018) that is prone to Chinese debt trap. Many scholars have questioned the CPEC project’s lack of transparency and accountability (Merkey & West, 2016). The agreement in its present form is shrouded in secrecy, and the lack of information has severely impeded a proper cost-benefit analysis of the project. There are suspicions that the agreement may be heavily skewed in favour of China. This apprehension comes from the way the projects are being handled—for example, all materials (except cement, which is sourced from Pakistan), equipment, and manpower are being brought from China, with little or no participation by the local communities (Venkatachalam, 2017). CPEC has also been criticised by the Pakistan Government led by Imran Khan. The agreement on CPEC was signed by Pakistani Government led by PM Nawaz Sariff. After assuming power, PM Khan had remarked that the trade and investment accords with Beijing needed to be reviewed. He said the initiative needed to be more transparent and fairer in regard to economic burden and debt sustainability, mostly

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pointing the finger at his predecessor Nawaz Sariff (Hussain, 2018). The high level of financial ambiguity in the CPEC projects can be understood from the fact that even the governor of the Pakistan Central Bank had no clear idea of the financing of the scheme that he revealed in an interview (Small, 2017). PM Khan set up a nine-member committee to look into all CPEC-related agreements, putting deals on hold while this took place (Sala, 2018). An investigative report presented to the Imran Khan Government in June 2020 exposed the level of corruption in the power sector of CPEC, where Chinese companies were making huge extraordinary profits and Chinese investors were favoured under the deals signed by the Pakistan and Chinese Governments (Shah, 2021). The charges of corruption and increasing resentment among the citizens also forced the Pakistani Government to suspend the road projects worth one-trillion Pakistani rupees (Wani, 2020). Corruption charges of US$1.6 billion against the Lahore Orange Line Metro project constructed under CPEC forced The National Accountability Bureau of Pakistan to initiate an investigation in 2021 (Rana, 2021). Across the border, neighbouring country India remains the biggest critic of CPEC. From the beginning, India not only protested the CPEC but was also against the entire BRI. India opposes CPEC for two reasons. First, India considers CPEC as illegal as it passes through parts of the Union Territories of Jammu & Kashmir and Ladakh which are under the control of Pakistan. India views this as a violation of its sovereignty. Second, it perceives Gwadar port as a serious security threat. India believes Chinese motivation for having a sustained presence in Pakistan is more geopolitical than geo-economic (Sharma, 2019). It also believes that CPEC will evolve China-Pakistan strategic cooperation into a bilateral military alliance against India (Panneerselvam, 2017). Indian scholars are of the view that sooner or later China will use the port for military activities by building its second naval base in the Gwadar port after Djibouti in 2017 (Kajal, 2018).

Conclusion This chapter highlighted how China is extending its economic and diplomatic spare in Pakistan. China has leveraged its friendly diplomatic relation to assert economic influence on Pakistan that has been developed by both countries over several decades. Our analysis finds that, at the initial stage, both countries were having regular diplomatic ties which

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started to deepen since the mid-1960s, especially after India and Pakistan war took place in 1965. During the war, China extended its full support to Pakistan against India. From their early days of relation, both countries have signed several bilateral agreements to expand the relationship and cooperate in the areas of economy and trade, defence and security, civil nuclear, and many more. They have peacefully settled their boundary issues. In case of trade, Pakistan enjoyed trade surplus for the initial two decades; however, from the mid-1970s, particularly after the creation of Bangladesh, Pakistan’s trade with China started to tilt towards China. Over a very small period of time China not only converted the trade figures in its favour, it also became one of the largest trade partners of Pakistan. China has also provided a sizable volume of development assistance in the form of grants and loan to Pakistan who, greatly benefitted from Chinese loan, had built several infrastructural facilities in the country. China’s engagement with Pakistan stepped into a new era in 2015 when the later joined BRI and they jointly decided to build the China-Pakistan Economic Corridor. It is one of the 6 international economic corridors that have been envisaged in BRI. Along with the promise of prosperity, CPEC also brought a lot of inherent risks with it. From its inception, it attracted opposition from India who consider the plan to be an illegal activity and intrusion to its sovereignty. CPEC has also been criticised for having lack of transparency, spreading corruption, displacing locals, and violating their rights. It has imposed heavy burden of unsustainable foreign loans on Pakistan and pushed it to a debt trap. Within less than 5 years of its launch, the gross budget of CPEC has been revised from US$46 billion to US$62 billion. Pakistan is in a dire position to repay the loans and has already approached bilateral and multilateral donors multiple times for a bailout package. The current performance of the Pakistani economy leaves one with a big doubt about its repaying capacity of the Chinese loan that it availed for CPEC projects. Undoubtedly, Pakistan would have tough policy choices in the future regarding the CPEC and its relation with China. It remains to be seen how Pakistan manages to repay its loan and if its all-weather friendship with China comes into its rescue if a situation of bankruptcy arises.

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Finance and Development Center. https://greenfdc.org/the-pakistan-daw ood-wind-power-project-a-climate-investment-and-financing-project-in-thebelt-and-road-initiative-bri/. Accessed on 17 June 2022. Hurley, J. et al. (2018). Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective (CGD Policy Paper). https://www.cgdev.org/sites/default/files/examining-debt-implicati ons-belt-and-road-initiative-policy-perspective.pdf. Accessed on 2 August 2022. Hussain, I. et al. (2020). History of Pakistan-China Relations: The Complex Interdependence Theory. The Chinese Historical Review, 27 (2), 146–164. Hussain, T. (2018, August 12). Where Does Imran Khan’s Government Stand on China’s Belt and Road? South China Morning Post. https://www.scmp. com/week-asia/geopolitics/article/2159245/where-does-imran-khans-gov ernment-stand-chinas-belt-and-road. Accessed on 13 June 2022. Jetly, R. (2021). The Politics of Gwadar Port: Baluch Nationalism and Sino-Pak Relations. The Round Table, 110(4), 432–447. Kajal, P. (2018, May 8). China-Pakistan Economic Corridor and Security Threat to India. Indian Defence Review. http://www.indiandefencereview. com/news/china-pakistan-economic-corridor-and-security-threat-to-india/. Accessed on 19 July 2022. Khalid, M. (2021). Pakistan-China Relations in a Changing Geopolitical Environment (ISAS Working Paper No-357). Institute of South Asian Studies, National University of Singapore. Khan, A. H. (1997). Foreign Direct Investment in Pakistan: Policies and Trends. Pakistan Development Review, 36(4), 959–985. Khan, A. H., & Kim, Y. H. (1999). Foreign Direct Investment in Pakistan: Policy Issues and Operational Implications (EDRC Report Series No. 66). Asian Development Bank. Khan, I. A. (2017, November 25). China to Get 91pc Gwadar Income, Minister Tells Senate. Dawn. https://www.dawn.com/news/1372695/china-to-get91pc-gwadar-income-minister-tells-senate. Accessed on 3 July 2022. Khan, M. Z. U., & Khan, M. M. (2019). China-Pakistan Economic Corridor. Strategic Studies, 39(2), 67–82. Khan, R. M. (2011). Pakistan-China Relations: An Overview. Pakistan Horizon, 64(4), 11–28. Kumar, S. (2007). The China-Pakistan Strategic Relationship: Trade, Investment, Energy and Infrastructure. Strategic Analysis, 31(5), 757–790. Leng, C. S. (1969). Communist China’s Economic Relations with Southeast Asia. Far Eastern Survey, 28(1), 1–11. Mahmood, K. (2011). Pakistan-China Strategic Relations. Strategic Studies, 31(1/2), 9–15.

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Makhdoom, A. W. et al. (2014). Study of Pakistan-China Defense Relations: 2000–2012. Research on Humanities and Social Sciences, 4(22), 184–192. Malik, A. R. (2017). The Pakistan-China Bilateral Trade: The Future Trajectory. Strategic Studies, 37 (1), 66–89. Markey, D. S., & West, J. (2016, May 12). Behind China’s Gambit in Pakistan. Council on Foreign Relations. https://www.cfr.org/expert-brief/behind-chi nas-gambit-pakistan. Accessed on 13 May 2022. McCartney, M. (2021). The Dragon from the Mountains: The CPEC from Kashgar to Gwadar. Cambridge University Press. Miller, M. C. (2022). China and the Belt and Road Initiative in South Asia (Discussion Paper). Council on Foreign Relations. Washington, DC. https://www.cfr.org/report/china-and-belt-and-road-initiativesouth-asia. Accessed on 13 September 2022. MOFA. (n.d). China Pakistan Relations. Consulate General of the People’s Republic of China in Karachi. https://www.mfa.gov.cn/ce/cgkr//eng/ zbgx/t263901.htm. Accessed on 8 August 2022. Munir, M. (2018). Pakistan-China Strategic Interdependence. Strategic Studies, 38(2), 21–42. Pande, A. (2011). Explaining Pakistan’s Foreign Policy: Escaping India. Routledge. Panneerselvam, P. (2017). Maritime Component of China-Pakistan Economic Corridor (CPEC): India-China Competition in the Arabian Sea. Maritime Affairs, 13(2), 37–49. PCJCCI. (2022). Chinese Companies Registered in Pakistan. Pakistan China Joint Chamber of Commerce and Industry. https://pcjcci.org/chinese-companiesregistered-in-pakistan/. Accessed on 25 July 2022. Radio Pakistan. (2022, January 3). PM Launches Pak-China Business Investment Forum. https://radio.gov.pk/03-01-2022/launching-ceremony-of-pakchina-business-investment-forum-underway-in-islamabad. Accessed on 28 July 2022. Rafiq, A. (2017). The China Pakistan Economic Corridor: Barriers and Impact. United States Institute of Peace Studies. USA. https://www.usip.org/publicati ons/2017/10/china-pakistan-economic-corridor. Accessed on 3 July 2022. Rahman, F. U. (2006). Pakistan-China Economic Relations: Opportunities and Challenges. Strategic Studies, 26(2), 53–72. Rajagopalan, R. P. (2021, July 9). The China-Pakistan Partnership Continues to Deepen. The Diplomat. https://thediplomat.com/2021/07/the-china-pak istan-partnership-continues-to-deepen/. Accessed on 2 July 2022. Rana, S. (2021, May 4). Lahore Orange Line on NAB’s Radar. The Express Tribune. https://tribune.com.pk/story/2298077/lahore-orangeline-on-nabs-radar. Accessed on 2 July 2022. Rauf, A. (2020). Sahiwal Col Fired Power Plant. View Point. Pivot, 2(1), 32–33.

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Sabahat, J., & Nazia, B. (2017). Baloch Insurgency and Its Impact on CPEC (MPRA Paper No. 90135). https://mpra.ub.uni-muenchen.de/90135/. Accessed on 23 June 2022. Sadiq, M. et al. (2021). Nexus Between Economic Growth and Foreign Private Investment: Evidence from Pakistan Economy. Cogent Economics & Finance, 9(1), 1–16. Safdar, S. (2022). Debt Sustainability and the China Pakistan Economic Corridor (ECIDC Project Paper PB 06). UNCTAD, Geneva. https://unctad.org/ system/files/information-document/BRI-Project_policy-brief-06_en.pdf. Accessed on 27 June 2022. Sala, I. M. (2018, September 10). Pakistan’s New Government Is Trying to Walk Back Fromalarming Chinese. Quartz. https://qz.com/1384295/pakistan-istrying-to-back-away-from-a-debt-trap-with-china/. Accessed on 25 July 2022. Shafqat, S. (2021). CPEC and Changing Dynamics of China-India Relations. In R. Ranjan & G. Changgang (Eds.), China and South Asia: Changing Regional Dynamics, Development and Power Play. Routledge. Shah, K. M. (2021). CPEC: Building a Path for Pakistan’s Financial Ruin. In H. V. Pant & P. Saha (Eds.), Mapping the Belt and Road Initiative: Reach, Implications, Consequences. Observer Research Foundation. Sharma, M. (2019). India’s Approach to China’s Belt and Road Initiative— Opportunities and Concerns. The Chinese Journal of Global Governance, 5, 136–152. Small, A. (2015). The China Pakistan Axis: Asia’s New Geopolitics. Hurst and Company. Small, A. (2017). First Movement: Pakistan and the Belt and Road Initiative. Asia Policy, 24, 80–87. Syed, A. (1969). Sino-Pakistan Relations: An Overview. Pakistan Horizon, 12(2), 107–119. Venkatachalam, K. S. (2017, June 16). Can Pakistan Afford CPEC? The https://thediplomat.com/2017/06/can-pakistan-afford-cpec/. Diplomat. Accessed on 20 July 2022. Vertzberger, Y. (1983). The Political Economy of Sino-Pakistani Relations: Trade and Aid 1963–82. Asian Survey, 23(5), 637–652. Wani, A. (2020, May 27). Pakistan: Govt. Report Uncovers Corruption in CPEC Projects. ORF Commentaries. Observer Research Foundation. https://www.orfonline.org/research/pakistan-govt-report-uncovers-cor ruption-in-cpec-projects-66801/. Accessed on 27 July 2022. Wolf, S. O. (2020). The China Pakistan Economic Corridor of the Belt and Road Initiative: Concept, Context and Assessment. Springer.

CHAPTER 8

China’s Investment in Sri Lanka: Trap of Debt

Development of China-SL Bilateral Relationship Sri Lanka shares a very close and long-term relationship with China. The bilateral relationship between these two economies can be traced back from the history book which recorded the incidences of trade and the trade routes in the second century. Sri Lanka due to its strategic location in the middle of Indian Ocean region has been a central point of transit for ships and vessels ferrying from and to the region. For centuries Sri Lanka has been the centre of Silk route connecting China to the European region. It holds a crucial position in Chinese maritime trade. The Sri Lanka-China relationship has strengthened owing to their shared religious and cultural values (Weerakoon & Wijayasiri, 2019). Both countries signed a trade pact known as Rubber-Rice pact in 1952 even before establishing formal diplomatic relationship. Through the rubber-rice agreement, Sri Lanka agreed to import 270,000 metric tons of rice each year while China agreed to purchase 50,000 tons of rubber each year for a period of five years. Both the parties agreed to renew the agreement in five years interval (Li, 2017). This constituted a significant proportion of trade between the two nations as export of rubber to China accounted for around 10% of Sri Lanka’s export while import of rice too accounted for around 10% of its import at the same time. The Rubber-Rice agreement was renewed in 1958 and was extended © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 R. N. Choudhury, Mapping Chinese Investment in South Asia, https://doi.org/10.1007/978-981-99-1385-5_8

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to cover coconut and coal as well to widen the scope of business between the two nations (Jayasundera, 2017). Renowned Sri Lankan economist Kelegama (2014) claimed this agreement was one of the most successful and durable South-South trade agreements in the world. This accord significantly deepened the Sri Lanka-China diplomatic relation as the pact was signed and enforced defying the US warning to Sri Lanka of imposing battle act and stopping of the US aid (Wijayasiri & Senaratne, 2018). The formal diplomatic relation between China and Sri Lanka was established in February 1957. With the signing of Economic and Technological cooperation in 1962 China-Sri Lanka marked the first milestone of bilateral cooperation in a diplomatically engaged environment. Thereafter, in 1963 both the nations signed maritime agreement to offer Most Favoured Nation (MFN) status to all commercial vessels engaged in cargo and passenger services between the two countries and a third country. Another milestone in the bilateral relation between China and Sri Lanka was achieved with the construction of the Bandaranaike Memorial International Conference Hall (BMICH) with Chinese donation of LKR 35 million (approximately US$6 million) as a gift to the people of Sri Lanka.1 With an aim to boost bilateral trade, the Sino-Lanka Joint Trade Committee and Sino-Lanka Economic and Trade Cooperation Committee were formed in 1982 and 1984, respectively. However, in 1991 these two committees were merged to form Sino-Lanka Joint Commission for Economic and Trade Cooperation. Strengthening the commercial ties further the two countries established Sri Lanka-China Business Cooperation Council in 1994 (Janaka & Senaratne, 2018). The friendship between these two allies continued in the twenty-first century as well. The relationship in this century can be described more as need-based and strategic in nature, particularly focusing on the development of infrastructure facilities. During his historic visit to China in 2007 to celebrate the golden jubilee of diplomatic relations, Sri Lankan President Mahinda Rajapaksa signed 8 MoUs with China (Kelegama, 2014).

1 For detailed information please see the website of Bandaranaike Memorial International Conference Hall. https://www.bmich.com/.

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1. Agreement on Economic and Technical Cooperation between China and Sri Lanka 2. MoU between the Ministry of Construction, China and the Ministry of Urban Development and Sacred Area Development, Sri Lanka 3. Agreement between the city of Guangzhou of China and District of Hambantota of Sri Lanka on the establishment of Friendship City Relationship 4. MoU on two-way investment promotion cooperation between the Investment Promotion Agency of the Ministry of Commerce, China and the Board of Investment, Sri Lanka 5. MoU on Cooperation in the Film Industry between the Film Bureau of the State Administration of Radio, Film, and Television, China and the National Film Corporation of Sri Lanka 6. MoU for the Donation of Eye Corneas and Promotion and Cooperation, exchanges, Technical and Technology Transfer between the Red Cross Society of China and the Eye Donation Society of Sri Lanka 7. MoU between the Chinese Academy of Agriculture Mechanization Sciences and Department of Agriculture of the Ministry of Agriculture of Sri Lanka 8. MoU of Academic Exchange between the Beijing Foreign Studies University of China and University of Kelaniya of Sri Lanka. As the civil war ended in Sri Lanka in 2009, China became the key development partner in Sri Lanka with investments in several megainfrastructure development projects spanning from port to highway to airport and many more. Among many projects, the Chinese loans were primarily utilised for building power generation capacity (900 mw coal fired power plant, transmission lines, the jetty, and related facilities), irrigation (Moragahakanda reservoir and hydropower project), port (Hambantota), airport (Mattala), railway infrastructure (Matara– Kataragama line), expressways (Colombo–Katunayake and Galle–Matara), highways (Dambulla–Kankesanturai), and the Lotus Pond Theatre over the last decade. The Colombo-Katunayake expressway was the main infrastructure development project in the transport sector, while Hambantota seaport and Mattala airport were intended to advance the maritime and aviation sectors, respectively. Importantly, many of these projects were stalled for a long time due to lack of funds as their preceding financers failed to fulfil their commitments (Jayasundera, 2017).

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In May 2018, Ministry of Megapolis and Western Development in Sri Lanka signed an agreement with the China Petroleum Pipeline Engineering (CPPE) to construct underground sewage and pipelines in Colombo with a deadline to complete the project by 2020 (China Daily, 2018). In the same year China extended loan of US$1 billion for construction of road linking Colombo and Kandy (NDTV, 2018). Later in 2018, Bank of China opens its first branch in Sri Lanka (Singh, 2018). In May 2013 both the countries signed a Strategic Cooperative Partnership (SCP) agreement covering a wide range of issues related to trade, investment, and financial assistance (Weerakoon & Wijayasiri, 2019). Later formalising this agreement in 2014 they entered into a Free Trade Agreement (FTA). In the current Sri Lanka-China relationship the most crucial point came in 2013 when China launched the BRI. Sri Lanka became a partner to this plan and strongly supported the initiative. Chinese investment in Sri Lanka through BRI projects surpassed all the past records and also attracted maximum number of controversies. To enhance trade Sri Lanka and China launched negotiation for a bilateral free trade agreement in 2014. Through this agreement, Sri Lanka expected to get access to vast Chinese market at a preferential tariff rate. The agreement would also help Sri Lanka to diversify its trade while reducing its heavy dependence on western markets. But this proposed FTA started to face hurdles since 2018 when Sri Lanka demanded inclusion of review clause in the agreement and do the same after ten years of enforcement. China rejected the Lankan request. Another major reason of disagreement was that China wanted tariff free trade of 90% of goods the two countries sold to each other immediately after the enforcement of the deal. The Sri Lankan negotiators were determined to implement zero tariffs on only half of the products concerned and subsequently expand the list over the next 20 years (Aneez, 2018). Since 2018, the negotiation remained stalled after six rounds of discussion. Latest development in the negotiation took place when Chinese State Councillor and Foreign Minister Wang Yi visited Sri Lanka in January 2022 and proposed to restart the negotiation (Global Times, 2022). However, no update regarding the negotiation has been made by either side. Despite having any preferential trade agreement, the bilateral trade between these two economies grew exponentially over the last few years. Similarly, investment flows, loans, and development assistance from China to Sri Lanka recorded a spontaneous growth over the last decade.

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Noteworthy, during this decade, China emerged as the largest source of foreign funds in Sri Lanka. China as the Biggest Investor in Sri Lanka As noted in the preceding section, China and Sri Lanka have shared a strong and close tie for decades. Likewise, Chinese investment in Sri Lanka has a deep-rooted history. Wignaraja et al. (2020) points out that Chinese capital flown to Sri Lanka has changed in nature from outright grants in the 1970s to commercially viable interest-bearing loans and direct investment to infrastructure development in the later days. The cordial ties between policymakers of these two nations have resulted in an increased Chinese presence in Sri Lankan economy, primarily through large-scale infrastructure development projects. Several projects to develop internal connectivity, energy generation, and telecommunications were launched with the Chinese capital. Inflow of Chinese capital in Sri Lanka was much more than in any other country in the recent time. Moreover, China facilitated Sri Lanka with several mega projects to bridge its infrastructure investment gap which was never been supported by any other country earlier. Because of its limited economic strength and capacity to repay, many multilateral organisations tried to keep distance from the island nation. Even if they offered any loan, it often came with a series of tough and mandatory obligations and requirement of structural changes in the economy. They also came with handful of strict restrictions. In this conjuncture, it was easy for China to lure Sri Lanka with a loan which was comparatively easy to access, though it came with a huge cost. As a result, Sri Lanka’s economic reliance on China grew continuously over the time. Wignaraja et al. (2020) outline that the cumulative value of Chinese infrastructure investment in Sri Lanka amounts to US$12.1 billion between 2006 and July 2019 or equivalent to 14% of Sri Lanka’s 2018 GDP. China accounted for about 10% of Sri Lanka’s US$35 billion foreign debt as of April 2021 (Guardian, 2022). There is no denying that Chinese investments are helping Sri Lanka to bridge the gap in infrastructure finance to a great extent. Studies have been conducted to estimate the gap between the infrastructure spending and the actual requirement for the same. The OECD estimates a global infrastructure investment need ranging annually between US$2.9 trillion and US$6.3 trillion (OECD, 2018). Asian Development Bank reports an

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investment need of around US$26 trillion until 2030 for infrastructure sector in Asian region only. Globally, by sector, the largest investment needs lie in transport and energy infrastructure (ADB, 2017). They are followed by rail transport, telecommunications, and water infrastructure. Calculating the region-wise needs of investment, as a percent of GDP, scholars find that the numbers are such: 9.1% in the Pacific region, 8.8% in South Asia, 7.8% in Central Asia, around 5.7% in Southeast Asia, and 5.2% for East Asian economies (OECD, 2018). The World Bank reports that Sri Lanka requires US$36 billion or 40.5% of its GDP to bridge its infrastructure investment gap in 2018. Even if we deduct the Chinese commitment of infrastructure Sri Lanka needs an additional amount of US$23.9 billion to fill the gap (Wignaraja et al., 2020).

Sri Lanka as FDI Destination Being a developing country, Sri Lanka has always strived to attract foreign direct investment from across countries. It looked for strong investment relation with developed and industrial economies to boost its domestic economy with the help of foreign investment and wanted to use the foreign investment as a tool to its economic growth. However, due to its ongoing civil war, countries were hesitant to invest in Sri Lanka especially in big amount. The FDI increased initially due to favourable investment climate created by the 1977 reforms, liberalisation, and increased level of openness of the economy. During the 1983–1989 periods, the incentives for FDI were damaged by the setbacks on foreign trade; moreover, the investment environment further deteriorated during the same period as a result of political misalignments. Although it has a cordial and longstanding trade and diplomatic relationship with almost all the developed countries including its neighbours, it could not attract investment to its optimum level. Sri Lanka is the first country in South Asian region to open its economy. It started its economic reform process in 1977. Based on Foreign Investment Act in 1978, investment policies in Sri Lanka have been engineered to attract foreign investment (Athukorala, 2003). The major features of the economic reform were removal of administrative controls over domestic prices, reductions in and targeting of food subsidies, relaxation of credit controls, opening of previously fenced off sectors to the private sector, active encouragement of foreign direct investment in place of the previous highly restrictive policies, and later on (in the

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early 1990s) the privatisation of public sector firms. The Sri Lankan government established Greater Colombo Economic Commission in 1978 which was restructured and renamed as Board of Investment in 1992. To promote export, Sri Lanka also established Export Development Board in 1979. The establishment of Free Trade Zones (FTZ) and the high growth of export have helped Sri Lanka to attract significant amount of inflows of FDI which played a significant role in expanding the manufacturing sector of Sri Lanka. Sri Lanka has six free trade zones, also called export processing or investment promotion zones, located in Katunayake (1978), Biyagama (1986), Koggala (1991), Pallekelle (1996), Mirigama (1997), and Malwatte (1997). There are over 155 foreign export processing enterprises operating in these zones (Athukorala, 2003). Foreign firms are allowed to participate in most of the sectors of the economy with only a few exceptions. In select sectors investments are either subject to prior approval or reserved for Sri Lankan citizens. Foreign investors are given national treatment and they are also benefitted from the wide range of incentives provided by the Board of Investment (BOI) of Sri Lanka or from the Treasury. Full foreign ownership is allowed in most industries and in a number of services activities including banking, insurance, finance, construction, mass transportation, telecommunications and information technology, and petroleum distribution (Trade Policy Review, 2010). Sri Lankan investment regime does not incorporate clauses like localcontent requirements, trade-balancing requirements, foreign exchange balancing requirements, exchange restrictions, etc., which might have adverse implications on itself.2 Sri Lanka has entered into Double Taxation Avoidance Agreement (DTAA) and Bilateral Investment Protection Agreement (BIPA) with several countries for attracting investment from these locations. Figure 8.1 shows the trend in FDI inflow in Sri Lanka from 2011 to 2020. The data shows that the value of FDI inflow increased constantly from 2011 to 2014. The values decreased in 2015 and 2016 while it maintained an increasing trend till 2017. In general, a fluctuating trend is noticed in the FDI inflow during the reference period. Sri Lanka received its highest volume of foreign capital in 2018 followed by 2017. The 2 For detail information please see WTO document G/TRIMS/N/1/LKA/1, 31 March 2000. Noted from WTO (2004).

2011

2012

1,066

2013

1,338

2014

1,391

2015

1,616 970

2016

801

2017

2018

1,710

2019

2,367

2020

1,189 687

Fig. 8.1 Trends in FDI inflows in Sri Lanka (Million US$) (Source Annual Reports, BOI Sri Lanka)

0

500

1,000

1,500

2,000

2,500

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impact of COVID-19 is also reflected in the investment data recorded in 2019 and 2020. It is observed that the infrastructure sector (telecom, power generation, etc.) and manufacturing sector (textile, chemicals, rubber, etc.) are among the major recipients of foreign investment. It is evident from the data recorded in Fig. 8.2 that over the period of 2010–2019, China remained the largest investor in Sri Lanka followed by Hong Kong, India, and the UK. One can notice that foreign capital in Sri Lanka came from a limited number of countries. It is noteworthy that combined investment volume of China and Hong Kong is around 45% of the total investment received by Sri Lanka in this period. Interestingly, many of the Chinese investments are routed through Hong Kong and many Chinese businesses invest in Sri Lanka through their Hong Kong subsidiary. As the data regarding this is not available in any reliable source, the identification of Chinese capital flowing via Hong Kong becomes difficult. Though India and the UK invested a significant volume in this island nation, their volume is far less than the Chinese investment. It is also important to understand that many of the Indian investments in Sri Lanka are made due to strategic reasons which may not be supported by economic feasibility very much. Sri Lanka has also been affected by the power rivalry between India and China and their aspiration to be the USA Mauritius UAE Singapore Netherlands Malaysia UK India Hong Kong China 0

500

1000

1500

2000

2500

3000

3500

Fig. 8.2 Major Investors in Sri Lanka 2010–2019 (Million US$) (Source Annual Report 2019, BOI Sri Lanka)

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dominant power in the South Asian region. Despite having less volume of investments compared to China, some experts suggest that India is more influential among Sri Lankan lawmakers. Analysing the sector-wise investments, it is found that the maximum volume of foreign capital in the period between 2010 and 2019 has flown into manufacturing sector with a contributing share of 23%. It is followed by the housing & property development and the telecommunication sector contributing 19% each. Port and container sector are two other major areas in Sri Lanka that attracted 14% of the total foreign capital in the same period. FDI as a percentage of GDP in Sri Lanka in our reference period (2010–2019) varies widely. The share of FDI in Sri Lankan GDP in 2010 was mere 0.91% which increased to 2.4% in 2014 and fell sharply afterwards with an exception in 2018 when it reached its peak with 2.68%. It is important to mention that despite the growth in the share of FDI in GDP, Sri Lanka lags far behind other nations in attracting FDI compared to its GDP (BOI, 2019). Table 8.1 depicts the list of the major countries who invested in Sri Lanka between 2011 and 2019. The combined share of these countries remains around 90% every year with only a few changes. It is important to notice that apart from the UK and Netherlands no other country from the European region features in the list. Strikingly, the US’s investment volume is also found to be very minimal which could not even Table 8.1 FDI inflows in Sri Lanka (Million US$) China Hong India UK Malaysia Netherlands Singapore UAE Mauritius Japan Kong 2011 2012 185 2013 240 2014 404 2015 151 2016 53 2017 628 2018 1088 2019 293

139 259 139 74 188 120 296 411 137

147 52 160 38 51 70 52 383 68 29 112 28 174 67 341 70 139 157

89.5 47 176 37 65 88 88 88 54

51 56 118 99 90 133 72 54 43

53 88 112 103 30 33 81 25 97

53 214 111 31 18 12 19 48 41

Source Authors compilation from Annual Reports 2011–2019, BOI Sri Lanka

253 66 23 98 139 0 0

27 26 38 15 0 30 46 19 32

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make it qualify among the top investors. Many developed and industrially advanced countries did not even invest in Sri Lanka and those who invested, their amounts were significantly low. Mauritius used to be a big investor in early 2000 but did not invest after 2015. Throughout the period, China and Hong Kong remains the major investor followed by India. Sri Lanka recorded the highest Chinese capital inflow in 2018 which includes the investment in the controversial Hambantota port city. Interestingly, there remains a huge gap between Chinese and Indian investments in Sri Lanka despite these two emerging powers competing against each other for establishing their supremacy and influence in the region including in Sri Lanka (Attanayake, 2022; Pant & Shivamurthy, 2022; Rajagopalan, 2021). The sector-wise investment flow in Sri Lanka over the period 2011– 2019 presented in Table 8.2 gives us a somewhat scattered picture. The sectors such as power generation, energy, and agriculture which were important to investors earlier, no longer remain attractive in 2015 and afterwards. Sectors such as housing and property development, port and container development, IT, etc., emerged as major industries attracting FDI, while manufacturing, hotel, and restaurant constantly appealed foreign investors. The share of housing and property development sector which was merely 9% in 2011 jumped to 38% in 2019. The share of manufacturing sector always remained around 25% with only exception in 2018. In the recent time, all the big projects launched in Sri Lanka in terms of their values of investment are in infrastructure development sectors. Among them prominent ones are Hambantota ports, AVIC international hotels, Sino-Lanka Hotels, Colombo city centre, LAUGFS terminal ltd, and Monarch Imperial (BOI, 2019). Among the South Asian partners, Indian firms have been investing in Sri Lanka for a long time. For instance, an assembly plant for sewing machines was set up by the Shriram group at Ratmalana, Sri Lanka, in 1962 (Choudhury & Nayak, 2019). Also, Indian FDI in Sri Lanka has been noticed with the subsidiaries focusing on exporting their products into India (Pradhan, 2008). The Indian investors have also been encouraged by the option of re-exporting to India by benefiting from the lower tariffs on raw materials in Sri Lanka (UNCTAD, 2003). It is observed from the BOI sources that Indian investments in Sri Lanka have been mostly in the areas of manufacturing (oil, margarine, Vanaspati ghee, steel products, PVC, furniture, herbal products, electronic items, copper, metal products, palm, rubber, value added tea, garments, petroleum

322(30) 308(23) 360(25.9) 334(21) 256.99(26.5) 247.72(36.42) 347.6(20) 291(12) 319(27)

91.5(9) 56(4) 218(15.6) 339(21) 212.11(21.9) 79.46(12) 540.6(32) 397.76(17) 455(38)

0 7(1) 8(0.6) 6(0.4) 3.86(0.4) 1.89 1.4 0.46 15(1.3)

216(20) 117(9) 68(4.9) 68(4) 181.90(18.8) 32.81(4.82) 253(15) 223.37(9) 154(13)

197(18) 242(18) 360(25.9) 152(9) 138.84(14.3) 243.6(35.82) 209(12) 522.18(22) 138(12)

Telephone and telecom network

Note Fingers in brackets are share of the respective sector Source Authors compilation from Annual Reports 2011–2019, BOI Sri Lanka

2011 2012 2013 2014 2015 2016 2017 2018 2019

Agriculture Hotel and restaurant

Sector-wise inflow of FDI in Sri Lanka (Million US$)

Manufacturing Housing and property development

Table 8.2

0 202(15) 164( 11.8) 178(11) 51.22(5.3) 1.63 292.8(17) 850(36) 47(4)

Port and container 5(4) 109(8) 85(6.1) 88(6) 59.91(6.2) 47.61(7) 41.2(2.5) 22.86(1) 33(3)

Other services

1.06(1) 26(2) 19(1.4) 25(2) 13.57(1.4) 22.98(3.3) 25(1.5) 59(2) 40(3)

IT and BPO

109(10) 66(5) 40(2.9) 5(0.5) 46.84(4.8) 1.58

Fuel

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products, and food processing), housing (residential apartments, building complexes, etc.), infrastructure (mobile and telecommunication), services (computer software), trading houses, etc. A number of Indian investments in the tourism sector in Sri Lanka are expected in the future (High Commission of India in Colombo, 2011). The Board of Investment, Sri Lanka claims that a huge volume of employment has also been generated by foreign firms. The cumulative employment of foreign funded projects as in December 2019 was recorded as 521,438. 60% of the total cumulative employments of foreign projects are in the textile, apparel, and leather sector and 19% are in other manufacturing sectors. Services and infrastructure sector including agriculture represented by 21% of the total cumulative employment in 2019 (BOI, 2019).

Volume of Chinese Investment in Sri Lanka As mentioned above, China is the leading investor in Sri Lanka. Several factors have influenced China to invest in Sri Lanka in huge volume. The primary factor is China’s ambition to establish itself as a dominant regional power. China provided the necessary funds to undertake large projects in Sri Lanka when many of the developed nations were hesitant to invest there. A long-standing bilateral relationship between these two nations also favoured Sri Lanka to secure heavy investments from Chinese entrepreneurs. Kelegama (2014) argues that Sri Lanka-China Business Cooperation Council (SLCBCC) has made great efforts and played a crucial role in successfully attracting Chinese investors in Sri Lanka. The SLCBCC provided all the necessary information to both Sri Lankan and Chinese investors by arranging relevant meetings and events. Through their flagship event ‘Kunming Trade Fair’ organised in 2011– 2013 and ‘How to Do Business in China’, SLCBCC offered detailed understanding about the business and culture prevailing in China. In addition to the role of the SLCBCC, the Sri Lankan government has provided Sri Lankan passports to the Chinese investors on the basis of its ‘Second Home’ passport—for those who invest at least US$25 million (Fernando, 2010). All these factors helped China to become the largest investor and development partner in the island nation. As illustrated in the above discussion, China emerged as the top investor in Sri Lanka within a very short span. Chinese interest in Sri Lanka jumped particularly after the end of civil war. In 2005, China’s FDI into Sri Lanka was

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US$16.4 million, or just under 1% of the total Sri Lankan FDI. By 2015 Chinese private investment reached US$338 million constituting 35% of Sri Lanka’s total FDI (Bhatia et al., 2016). In 2019, Chinese investment in Sri Lanka crossed the US$3 billion mark contributing around 28% of the total investment focussing especially on the infrastructure sector, telecommunications, and power and energy industries. In terms of individual projects, Textured Jersey Lanka PLC, Norochcholai coal power plant, Mega Ten Bio Energy Pvt. Ltd, Taprobane Seafoods (Pvt) Ltd, and Creative Cycles (Pvt.) Ltd. are just some of the leading Chinese projects in Sri Lanka in terms of realised investment and employment (BOI, 2012). The prominent investors are mostly Hong Kong billionaires, including Lai Weixuan’s AVIC International Hotels Lanka which is investing US$250 million in luxury housing in Colombo, Robert Kuok’s Shangri-La Hotels Lanka which has invested US$16 million in a fivestar hotel in Colombo, and Li Ka-Shing’s Hutchison Telecommunication which is spending US$20 million on improving its already large mobile network in Sri Lanka (Bhatia et al., 2016). In addition, Hong Kongbased conglomerate Huichen Investment Holdings Ltd invested US$28 million to develop the zone located at Mirigama, while China’s Huawei Technologies has heavily invested in Sri Lanka and has agreements with all telecom companies in the country. China Harbor Engineering Company (CHEC), China Machinery Engineering Corporation, and China Communications Construction Company (CCCC) Power China are some of the key companies executing Chinese-funded projects in Sri Lanka. The overview of the Chinese project finance in Sri Lanka can be understood from Table 8.3. The table enlists the sources of Sri Lankan foreign project finance. In a statement issued by the Sri Lankan officials, it is mentioned that long-term borrowing from China came at interest rates ranging from 2–3% and 6–7% under strict conditions laid down by Chinese lending institutions. The statement mentions that Chinese loans were the only options available to Sri Lanka to implement postwar development projects in the country. Sri Lanka also received several soft loans from China at an interest rate of 2–3% with maturity terms of 20 years, with 5 years expandable on condition, and 2–5 years grace period. Notably, the rate of interest charged by Chinese agencies against their loan is much higher than the rates charged by multilateral agencies. In addition, unlike multilateral agencies and other countries, details of

343.2 154.3 53.8 336.5 250 27.9 125.7 1000 123.2 2414.6

2010 291 217.2 110.9 373.5 198.8 208.3 300.4 1000 181.1 2881.2

2011 302.2 172.6 77.8 399.2 242.3 295.1 475.6 1000 187.5 3152.3

2012

146.3 2187.3

280.8 215.8 34.9 277.1 351.1 297.1 584.2

2013 346.1 218.5 16.7 299.5 213.3 193.1 408.7 1500 153.3 3349.2

2014 289.1 155 12.1 175.1 259.4 104.9 407.8 2150 111.3 3664.7

2015

52.5 1317

336.6 153.3 8.1 74.4 207.2 44.1 440.8

2016

102 2458.4

423 427 97 431 116 320 542.4

2017

37.8 1602.7

279.5 177.7 4.7 187.5 228 39.1 648.4

2019

317.4 322.3 12.9 170.2 155.9 55.6 324.2 500 24.5 1883

2020

Note Western countries include UK, Netherlands, Sweden, Spain, France, Austria, Belgium, Germany, Denmark, Australia and the US. Others include—South Korea, Kuwait, Hungary, Saudi Arabia, Iran, Pakistan and Russia Source Annual Reports, Ministry of Finance, 2015 and 2020. Annual Reports Department of External Resources, Government of Sri Lanka

286 201.9 110.8 310.9 242.5 47.4 14.2 500 139.8 1853.5

2009

Utilisation of Foreign funds for project development

ADB WB UN JICA Western countries India China Capital Market Others Total

Table 8.3

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Chinese loans, other financial assistance, and the rate of interest are often not fully disclosed to the public (Sirimanna, 2011a). Data in Table 8.3 clearly portrays Chinese emergence as the biggest foreign financer for project development activities in Sri Lanka over the last 10 years. During this period, China has always maintained financing of more than 300 million annual records. Noteworthy, China has invested far more than any other country or multilateral agency. China’s investment in Sri Lanka is also more than the combined investments of all the European nations. Other than China, Japan, and neighbouring India have made significant volumes of investment in Sri Lanka. Interestingly, the power tussles for the recognition of dominance in the region influences both India and Japan compete against China on many fronts. Apart from the individual investors, Asian Development Bank granted maximum volume of funds for project development in Sri Lanka during the period between 2009 and 2020. Sector-wise analysis of the data reveals that majority of foreign funds have been utilised in the transport infrastructure (road, bridge, port, and rail), water supply & sanitation, health & social welfare, and energy among others.

Strengthening Relations Through BRI Sri Lanka is located in a critical position of the Belt and Road Initiative that aims to redefine the land and maritime connectivity in the region. Located in the middle of the Indian Ocean, Sri Lanka has a great relevance to the twenty-first-century Maritime Silk Road initiative. As discussed in detail in Chapter 2, BRI is a mega-infrastructure scheme that aims to bridge the gap in the infrastructure investment across countries. Sri Lanka’s economic development vision especially in the post-civil war era resembles the objectives of BRI. The ambitious development blueprint conceptualised by Mahinda Chinthana and implemented by Mr. Mahinda Rajapaksa to transform Sri Lanka into a hub of five centres of excellence of Maritime Center, Aviation Center, Energy Center, Commercial Center, and Knowledge Center finds proximity to the BRI goals. To an extent, the goals have also been materialised through BRI capital. This is reflected in the fact that Sri Lanka is among the frontrunners to avail the development projects funded under the BRI by China. Sri Lanka’s political inclination towards China had a pivotal role in securing high volume of loan from the latter. Noteworthy, Sri Lanka is the second-largest loan receiving countries in the region under the BRI scheme. Through BRI, Chinese

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capital started pouring in Sri Lanka who was already attracting a large volume of FDI for a while. Within a short time multiple infrastructure projects were launched in Sri Lanka with Chinese funds. These include both newly designed projects as well as extension of previously completed ones. Among them some were remarkably large scale, such as Hambantota Port Development project, the Puttalam Coal Power project, Outer Circular Highway Project—Phase 3, Extension of Southern Expressway, and Section 1 of the Central Expressway Project (Weerakoon & Wijayasiri, 2019). Although these are Chinese-funded infrastructure development projects, there remains ambiguity if all of these come under the BRI umbrella. There is no official list of BRI projects in Sri Lanka issued either by Lankan authority or by the Chinese government. Confusion gets aggravated as many projects that predate BRI are also treated as BRI-funded ones (Hillman, 2018). Even the Chinese government operated website China.gov.cn (accessed on 20 February 2022) reports the Lotus Tower as a BRI project. The construction of the tower started well before the launch of BRI. Many studies considered almost all the infrastructure development activities in Sri Lanka as BRI projects in their analysis, while no reliable study is available that distinguishes BRI and non-BRI projects in Sri Lanka. Due to unavailability of reliable data, we are unable to offer any clarity on this confusion. Therefore, in our analysis we are also considering these projects as BRI. In this section, BRI and Chinese projects are used interchangeably. However, despite all these confusions, the fact remains the same—that all these are Chinese-funded development activities irrespective of being levelled as BRI or non-BRI projects. The source and nature of the loan, the implementing agency, and the core purpose of the loan remain unchanged in either case. A select list of such Chinese-funded projects is presented in Table 8.4. These connectivity projects have significantly improved domestic road connectivity, enhanced safety, and reduced the duration of the journey. Extending terminal at Colombo port and building the new Hambantota port in Southern Sri Lanka expanded the port capacity and therefore the ability to handle containerised cargo from mega container ships. Hambantota is located at one of the busiest east-west shipping routes in the world. This enabled Sri Lanka to leverage its strategic geographical location in the Indian Ocean, and it considerably increased the cargo movement (Wignaraja et al., 2020). Colombo port is another BRI project at mega scale and the only stateof-the-art deep-water terminal in South Asia which can handle ultra large

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Table 8.4 Select Chinese-funded projects in Sri Lanka Project name

Loan/investment

Amount (Mil US$)

Loan terms (Fixed, %)

Contractor

Southern Expressway

Loan

1545

2

Outer circular highway Loan

494

2

Colombo-Katunayake expressway

Loan

248

6.3

Hambantota International Airport

Loan

190

2

Hambantota Port Development project

Loan

1335.7

2–6.5a

CICT Colombo terminal Norocholai Power Station

Investment

500

NA

Loan

1346

2

Colombo Port city

Investment

1300

NA

Lotus Tower

Loan

88.6

NA

China Communications Construction Company Ltd Metallurgical Corporation of China Ltd China Metallurgical Corporation group China Harbour Engineering Company China Harbour Engineering Company China Merchant Port Holdings China Machinery Engineering Corporation China Harbour Engineering Company China National Electronics Import and Export Corporation

Source Wignaraja et al. (2020), a Fixed and variable

container carriers (ULCC) or more than 20,000 twenty-foot-equivalentunit (TEU) vessels. In 2019 Colombo port was ranked as the11th best connected port in the world as reported by global maritime consulting and advisory firm, Drewry (Sunday Observer, 2019). Norocholai power station, also refereed as the Puttalam power plant, emerged as the permanent solution to the electricity supply problems faced in the northern part of the country. It was jointly financed by Chinese loans amounting to US$1.4 billion and with additional finance

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from the Government of Sri Lanka under the BRI arrangement. These investments have the potential to help Sri Lanka attain the same quality of roads as seen in upper-middle-income economies like Malaysia (Wignaraja et al., 2020). BRI projects in Sri Lanka have significantly developed the tourism infrastructure in the country. The improved facilities helped the island nation to attract a large volume of tourists in the past years. For a long time, Indians were the major visitors in Sri Lanka. However, in the very recent times, Sri Lanka registered a considerable increase in the number of its Chinese visitors. From a near non-existent base, the numbers of Chinese tourists visiting Sri Lanka have grown exponentially to account for about 13% of all arrivals in 2016 compared to India’s larger share of about 18% in 2019 (Weerakoon & Wijayasiri, 2019). BRI has also facilitated Sri Lanka to enhance its trade with China. During the period between 2016 and 2018 Sri Lanka’s export to China increased from US$17.45 to 19.43 registering a growth of 11.35%.3

Critical Assessment of BRI in Sri Lanka4 Despite bringing economic development in Sri Lanka to some extent, BRI projects have been strenuously criticised all over the world. Soon Chinese investments under BRI became subject to intense discussion around the around. Owing to their size and nature of the investment, they attracted global attentions. In fact, the criticism of BRI projects prominently started from Sri Lanka and it faced the sharpest criticism in this island country. The BRI projects in Sri Lanka attracted considerable discontent at domestic, regional, and international levels. They have been criticised for pushing Sri Lanka to huge financial crisis. Though any mega-infrastructure project carries several risks due to their size and scale, the risk gets multiplied in the developing countries especially attributed to weak domestic institutions, poor economic fundamentals, and large-scale corruption (Baniya et al., 2019). The primary concerns about the BRI projects in Sri Lanka focus on their implications in the socio-economic fabric, in particular contesting their suitability, sustainability, procedural

3 Detail data is available at: https://tcdata360.worldbank.org/. 4 Figures used in this section are in Sri Lankan currency unless otherwise

mentioned.

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propriety, and economic viability. Many of the projects were not found to be economically viable, and it was kind of impossible to earn return out of the investment. Sri Lanka, a lower middle-income economy, has very limited sources of income generation. Hence, when such a country borrows too large a sum of capital and invests it in an economically unviable or poorly earning project, it puts them into a tremendous pressure. Sometimes it becomes difficult to repay even the interest amount, leave aside the principal. This is exactly what happened in the case of Hambantota port. Constructing the port with the Chinese capital ignoring the feasibility of the project led to the accumulation of mounting debt burden on Sri Lanka. Due to the inability to repay the debts, Sri Lanka signed a debt-equity swap agreement with China Merchants Port Holding allowing it a 99-year lease of the port and transferred a controlling stake of 80%. In addition, Sri Lanka offered 15,000 acres of land around the port for the development of an industrial zone exclusively for Chinese investors (New York Times, 2018). Other than Hambantota, several other projects such as Colombo City projects, Lotus Tower, and Mattala Rajapaksa International Airport, are some of the prominent Chinese-funded projects that drew global attention for their commercial unavailability, corruption, and various procedural irregularities. A classic example of mismanagement of funds of economically unviable projects in Sri Lanka is related to the construction of Mattala Rajapaksa International Airport. It is located in Sri Lanka’s southern Hambantota district around 250 kilometres from Colombo. China invested heavily in this airport. Inaugurated in 2013 and constructed with a cost of US$190 million loan issued by the Export–Import Bank of China, it is often referred to as the white elephant, an investment project with a negative social surplus, and hailed as the world’s emptiest airport due to its lack of flights (RoyChaudhury, 2019). The government’s plan to construct this airport was in criticism from the beginning as the Strategic Enterprises Management Agency (SEMA), an agency responsible for securing governance at state-owned enterprises, advised against building another international airport at Mattala. Instead, they advised expansion of the existing international airport at Colombo. The government approved the plan ignoring the recommendation (Daniel, 2022). The airport was open for commercial operations in March 2013. Initially, a few flights operated from this airport but subsequently the number started to decline. It was primarily serving as a transit point, but due to lack of locals availing international flights and any noted commercial hub or tourist attraction

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nearby, flights used to get hardly any passenger. By 2015, the traffic grounded to just one daily flight. Even the national carrier Sri Lankan Airlines suspended flights to the airport because it burned more jet fuel than its earnings every time it flew there (Shepard, 2016). This airport equipped to handle 1 million passengers per year served only 40,386 passengers in 2014 and handled 214 metric tonnes of cargo against the capacity of 45,000 mt. The number further declined to only 1,536 passengers in 2019. No cargo flights operated from this airport in 2019 (Daily Mirror, 2020). Sri Lanka and China signed an agreement to jointly build a tower named as Lotus Tower. The agreement mentions China extending a buyers’ credit loan of US$88.6 million or 85% of the total estimated investment of US$104.3 million. It is a 350-metre tall multifunctional telecommunication tower resembling a lotus situated in the centre of Colombo city. The objective was to develop the tower primarily as radio and TV transmission centre along with restaurants, hotels, conference & exhibition facilities, and a leisure park in the vicinity. It was projected to be the tallest tower in the South Asian region (Aid-data, 2021). The tower was at the centre of debate as critics find it to be essentially an expensive political vanity project, creating a huge burden on the economy that the country is not ready to bear. The tower came under scrutiny when the newly formed government in Sri Lanka sought to review the procedures followed in the construction of the tower and its necessity itself. The then Ports and Aviation Minister Arjuna Ranatunga commented that Sri Lanka does not need a tower like the Lotus Tower. Ranatunga also remarked that the tower was constructed on land which belongs to the Sri Lanka Ports Authority (SLPA) without following the necessary procedures (Daily FT , 2015). The Auditor general’s office in Sri Lanka in their annual report in 2015 and 2017 had identified several irregularities in the construction of the Lotus Tower. The reports primarily highlighted five points of concern. The contract to construct the tower was awarded to two Chinese companies who have no experience of building large-scale construction, leave aside multi-transmission towers. Second, the initial contract period of up to May 2015 for the completion of the construction was extended by another two years to October 2017, without seeking necessary Cabinet approval. Third, there was an understatement of the borrowing and insurance cost of the project by Rs. 265 million and Rs. 682 million,

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respectively. Fourth, a vehicle car park was constructed with an investment of Rs. 4 billion and was leased to a company to manage the car park, keeping the cabinet in dark. Finally, there was no feasibility study conducted before approving the project, despite the fact that the project was economically unavailable (Warusavitarana, 2019). The report further outlined that the total agreed amount of loan could not be secured due to the delay of constructions. The loan amount disbursed had been limited to US$67.2 million by Chinese EXIM Bank. The value of the budgeted income of the project had been overstated by Rs. 2,038 million. Involvement of severe corruption was also mentioned in the audit report. The AG also revealed that two Sri Lankan Telecommunication Regulatory Commission officers had obtained allowances illegally from Moratuwa University for providing services to the Lotus Tower Project. The Director (Project) had obtained allowances totalling to Rs. 3.3 million and a Development Officer had obtained allowances totalling to Rs. 2.1 million in contrary to the professional ethics as per Sri Lanka’s accounting standard. Delayed construction of the tower resulted in a revenue loss of over Rs. 5.4 billion to the government exchequer (Auditors General, 2015, 2017). Until 2019 it did not generate any income (Ceylon Today, 2021). A parliamentary committee was formed in 2019 to investigate the corruption charges against Chinese company’s involvement in the construction of the tower (Aneez, 2019). Another mega project the Grant Skyline Hotel also attracted debate for various procedural irregularities. China National Aero Technology Import and Export Corporation (CATIC) purchased a land of 10 acres in Galle Face to build a luxurious hotel and shopping complex (Daily FT , 2011). It was alleged that there was lack of transparency and accountability over the government’s deal with CATIC. Several other financial discrepancies of serious nature were also found in the government documents and the MoU signed with the CATIC (Sirimanna, 2011b).

Burdening Sri Lanka with Chinese Loan Due to China’s huge loan extended to Sri Lanka both the nations were severely criticised. Sri Lanka was criticised on the ground that it took Chinese loan at a very high rate of interest and invested it in several commercially unviable projects which led the country to severe economic crisis (Behuria, 2018; Bhatia et al., 2016). China, on the other hand, was blamed for its debt trap diplomacy. The term ‘debt trap diplomacy’,

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coined by Indian political analyst Chellaney (2017) referred to a tactic of extending loans of very high amount to an economy that is often not sustainable and also under strict repayment method. Later, when the debtor country fails to repay the loan, creditor takes control of the property constructed by its loan. There was also concern raised by experts that maintaining debt will create an unfavourable degree of dependency of Sri Lanka on China as a creditor (Chellaney, 2017; Hillman, 2018; Smith, 2019). These scholars believe that large-scale Chinese investments in various mega projects which were neither necessary nor economically viable created financial mess in the island country. They were of the view that the entire debt burden of Sri Lanka is attributed to the Chinese loan. Many believe that geopolitical shifts and rivalries have played a major role in establishing the narrative that Chinese loans have been the primary cause of Sri Lanka’s struggles in managing a growing debt burden, irrespective of what available data suggests (Weerakoon & Wijayasiri, 2019). However, another set of literature shares an opposite opinion to this. They accept the burden of Chinese loan on Sri Lankan economy but believe that it is not the only reason for the entire financial chaos in the country (Weerakoon & Jayasuriya, 2018; Weerakoon & Wijayasiri, 2019; Wignaraja et al., 2020). Similar thoughts are also shared by IMF in its report published in 2019 (IMF, 2019). Both the arguments can be better understood from Table 8.5 which displays the data of Sri Lanka’s external debt from various countries and agencies in four-time points. Sri Lanka’s total outstanding external debt was US$35.1 billion in 2021 which is around 40% of its GDP. In this total debt burden, China shares around 10% with US$3388 million. Sri Lanka’s debt to China Table 8.5 Sri Lanka’s external borrowing (Billion US$)

Total China Japan Bilateral agencies Multilateral agencies Financial market Other

2012

2015

2018

2021

23.7 2.2 4.3 3 6.6 7 3

28.6 4.8 3.4 2.3 7.3 10.8 0.1

34.7 5 3.4 2.2 7.9 16.2 0.1

35.1 3.3 3.3 NA 7.6 16.3 3.8

Source Wignaraja et al. (2020) and performance report of ERD 2021

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is increasing continuously along with its share in the total debt. The total public debt to China doubled from US$2.2 billion to US$5 billion between 2012 and 2018 with a significant rise in 2014 onwards. Despite this China is not the largest foreign creditor in Sri Lanka. In 2021, Sri Lanka owed US$16 billion to financial markets (e.g. holders of international bonds issued in Sri Lanka) which is around 47% of the total debt and 20% of the GDP. The other major creditors were Asian Development bank US$4 billion or 13%, Japan 10%, and the World Bank 9% (Department of External Resources, 2018). These figures establish the fact that China is not the primary source of external debt to Sri Lanka and it is not the only cause of Sri Lanka’s debt entanglement. However, Chinese loan played a critical role in aggravating the debt problem in the island state. It is important to note that China emerged steadily within a decade to account around 9 percent of Sri Lanka’s gross external debt from mere 0.5% in 2006. In that time, Japan’s share fell from 28% to just 11%, while India’s share grew modestly from 1 to 3% (Weerakoon & Wijayasiri, 2019). Hambantota Case Study Hambantota, located 240 kms away from Colombo, in the southern part of Sri Lanka, is the main town in Hambantota District with a population size of 0.52 million (Central bank of Sri Lanka, 2019). It is a small town with not much industrial activities where the local citizens primarily rely on fishing for their livelihood. It is considered as one of the backward towns in Sri Lanka. The Hambantota town was devastated by the Tsunami in 2004. Since then several development projects were launched in this district to develop it as a major urban centre in the island state after the capital Colombo. Some of the prominent development projects initiated in this district are Mattala Rajapaksa International Airport, The Hambantota International Port, and Mahinda Rajapaksa International Cricket Stadium. Notably, all the projects are primarily foreign funded, have been controversial since their inceptions, and are economically non-viable. Among all these, Hambantota has been the most controversial project not only in Hambantota but also in the entire island. The idea of developing an international port in Hambantota had been hovering among Sri Lankan policymakers for a long time but it was delayed due to the civil war. In addition, many studies to assess the feasibility of setting up a port did not support the plan (RoyChaudhury, 2019; Wang & Ye, 2019). However, the idea got

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impetus with Mahinda Rajapaksa, a resident of Hambantota, assuming the Prime Minister’s office in Sri Lanka in 2005. His office made ardent efforts to convince foreign governments to invest in the port which was declined by all. Then the Sri Lankan government turned to China and the Chinese government happily agreed to develop the port with their generous loan. Following Chinese agreement, a feasibility study was conducted by Ramboll, a Danish consultancy firm who approved the plan (Hillman, 2018). In 2007 China Harbour Engineering Group (CHEC) and the Sri Lankan Port Authority (SLPA) signed the contract to jointly work on the project. The Chinese state-owned enterprise CHEC which has done some amount of aid policy implementation work in the aftermath of Tsunami in 2004 was entrusted to construct the port. The entire development work was divided into three phases. The first phase of the contract included two 100,000-ton container terminals, a 100,000-ton tanker terminal, a 420,000-squaremetre yard, and other port facilities and operating equipments. The second phase of the project principally involved the construction of four 100,000 DWT container berths, one 100,000-ton terminal, two 30,000-ton berths, one offshore artificial island, and 400,000-square metres of road yard. The estimated cost of US$361 million for the first phase was shared at a ratio of 85:15 between China and SLPA. The first phase started in 2008 and was completed in 2010. For the second phase, they estimated a cost of around US$810 million which started in 2012 and the work is still in progress (RoyChaudhury, 2019). The final phase of the port development started in 2013 and is expected to be completed by 2023 with an estimated cost of US$550 million. The total cost incurred till 2020 in the entire project was US$1335.7 million (Wignaraja et al., 2020). Planned as the centre of development process, the port was supposed to be connected to the Mattala Rajapaksa International Airport through a 25 km long expressway. Developing an industrial park to facilitate shipping and logistic services and fish and food processing units in the vicinity of the port was also part of the bigger plan. This was undoubtedly a holistic plan of infrastructural development to boost the economy. However, it depends on the commercial usability of the facilities and their potential to generate revenue. If the projects are not economically viable, they would not generate sufficient income or income at all to the repay the huge amount of a loan which is further aggravated by the accumulating interest. Constructed with a huge cost, the port was not performing as per expectation. There was a huge shortfall in revenue generation. The debt began to

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grow. Sri Lanka was facing difficulty in repaying the loan and in maintaining the port due to its high maintenance cost. Amid these concerns Sri Lanka elected its new government headed by Maithripala Sirisena. Seeking solution to the mounting debt and to reduce its burden Sri Lanka requested China to transfer the franchise for the Hambantota port to a Chinese company by way of ‘debt-for-equity swap’. In 2017, the Sri Lanka government signed an agreement to transfer 80% of the stake to China Merchants Holdings Port Co. Ltd against a lease period of 99 years. Sri Lanka additionally transferred 15,000 acres of land surrounding the port to build an industrial park. China continued the construction work in the port. After completion it will be the largest port in the region with several advanced facilities. The development of the port has faced multiple challenges from diverse fronts. Hillman ( 2018) argues that Hambantota’s main challenge came from within Sri Lanka itself. Questions were raised about the rationale for building the port. As New York Times ( 2018) reported, ‘officials questioned the wisdom of a second major port, in a country a quarter the size of Britain and with a population of 22 million, when the main port in the capital was thriving and had room to expand’. India raised several concerns about using the port as Chinese naval base despite the fact that final lease agreement forbids military activity in the port without Sri Lanka’s invitation. Indian accusation finds its base in the incident that took place in 2014 when a Chinese submarine docked at Colombo ( Hillman, 2018). Mass protests were organised against the government accusing it of selling the country’s sovereignty. Allegations were also reported about large payments made by Chinese port construction companies to the election campaign. Fund flowed directly to campaign aides and activities for Mr. Rajapaksa who had agreed to Chinese terms in building the port (New York Times, 2018). The viability of the port, Sri Lankan ambition to develop infrastructure, and Chinese motive to finance still attract intense debate among policymakers, academics, and the civil society. It will remain so for years to come. The Hambantota port is at present partially operating with the existing facilities. The port is a failure for Sri Lanka but not a failure for the Chinese investors. They are successfully operating the shipping and related activities in the port. However, like any other project, it will also take some more time to start earning profit. It is too early to declare the project of this size a failure. It may generate limited benefit for Sri Lanka but the scope for the

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Chinese investors is enormous. The case of Hambantota also offers a lesson to the seekers of Chinese loan, especially under BRI.

Colombo International Port City Colombo International Port City is another ambitious BRI project in Sri Lanka which faced controversy as doubts were raised against its utility and the high amount of loan availed to undertake the construction. Under BRI, Sri Lanka and Chinese firm China Harbour Engineering Company agreed to build a mega city of around 665 acres by reclaiming new lands in the coast of Colombo. China Harbour Engineering Company would receive ownership of one-third of the city for 99 years under a lease agreement against their investment (Mobley, 2019). But due to vehement opposition of the lease agreement by the civil society for possible loss of sovereignty and by Indian government for the suspicious use of military activity by China, the project was reframed with a new clause. After renegotiation, Sri Lanka renamed the project as Colombo International Financial City. However, the essence of the initial project remained unchanged (Mobley, 2019). The development of the port city encompasses 5 different precincts, such as the Financial District, Central Park Living; Island Living, The Marina, and the International Island. It was claimed that with multiple high rises, the city will compete with other island cities such as Singapore, Hong Kong, and Dubai. The total estimated cost of the project is US$15 billion, of which the first phase will have 1.4 billion of investment and will be completed in three years; for the second phase of the work, it will require more than US$13 billion investment (Wang & Ye, 2019) and the project will be completed in 25 years. It is estimated that around 80,000 people will live in the residential blocks to be developed in the city. It would offer tax holidays for those that invest and do business there (Ethirajan, 2022). The city would be a special economic zone and all transactions including salaries will be made in US dollars as the parliament approved the port city bill in 2021 (Marasinghe et al., 2021). The Colombo port city has been the target of criticism from the beginning. It was termed as the ‘Chinese enclave’ and the project was criticised as a potential threat to the islands’ national security and sovereignty. It was alleged that the reclaiming work started without any sufficient environmental impact assessment. Environmentalists warned that the reclamation

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work would negatively impact the biodiversity and marine life and destroy the livelihoods of the several fishermen living along the coastal area. The tax holiday announced in the city also triggered concerns in several quarters. Economists feared of revenue loss by the exchequer. The US issued warning against use of the city as a heaven by the money launderers. After a series of allegations, the newly appointed government headed by Sirisena ordered to review majority of the foreign funded projects including some of China’s loans and investment projects for cracking down corruption and mismanagement of funds. Accordingly in March 2015, the construction work at the city was halted by the new government on the grounds that its ‘environmental impact needs to be reassessed’ and that the ‘relevant examination and approval procedures’ were lacking. After clearing all the necessary assessment on 8 March 2016, Sri Lankan cabinet presented and approved the environment assessment report while allowing the resumption of the construction work. The cabinet also approved the extension of the project completion time by another six months (Wang & Ye, 2019).

Summary and Conclusion Due to its strategic location, Sri Lanka has been the centre of maritime connectivity in the Indian Ocean region for transit of ships and vessels ferrying from and to the region. Sri Lanka always enjoyed a cordial relationship with most of the trading nations including China. Owing to its deep economic interest China marked its presence in Sri Lanka for a very long time. After establishing formal diplomatic relation in 1957 China and Sri Lanka signed a trade pact known as Rubber-Rice pact. Thereafter, in 1963 both the nations signed maritime agreement to offer MFN status to all commercial vessels engaged in cargo and passenger services between the two countries and a third country. The relationship continued with certain amount of trade, investment, and other cultural exchanges between these two nations. Over the last decade, China emerged as the primary source of foreign investment and loans for Sri Lanka, surpassing traditional sources, such as Japan and India. China also emerged as the largest overseas development assistance provider in Sri Lanka in the recent past. The bilateral relationship between these economies reached to a new high with Sri Lanka joining the mega Chinese initiative BRI wherein Sri Lanka availed huge volume of Chinese funds under BRI, charged at much higher interest rates than the multilateral agencies and the amount was more than the

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repayment capacity of the tiny island nation. The Chinese project and the loan extended for the infrastructure development were the target of intense debate and criticism all over the world after Sri Lanka had to transfer the ownership of the flagship BRI project Hambantota to China as it could not repay the loan. Perhaps all the criticism against BRI surfaced after this incidence took place in 2018. Accessing high volume of loans without assessing the repayment capacity and the commercial viability of the projects created a mounting pressure on Sri Lanka’s debt burden. The growth-hungry island chose loans with easier terms compared to multilateral loans and gradually entered into the debt trap. Mismanagement of funds, high corruption, and political rivalry deepened the crisis. The loans availed under the BRI scheme is, therefore, largely responsible, though not entirely, for the debt burden and the economic mess created in the island. The Sri Lankan experience of availing Chinese infrastructure fund offers useful lessons for the countries availing Chinese investment, especially in the infrastructure sector. Chinese loan to Sri Lanka under BRI can be a guiding principle for those accessing Chinese capital under this mega plan.

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