What Xi is looking for in Colombo and South Asia

By Ranga Jayasuriya
Chinese President Xi Jinping who is arriving in Colombo on Tuesday ( 16), on the second leg of his South
Asian tour, would sign nearly 20 bilateral agreements including a Memorandum of Understanding on
the handling of the Chinese funded Hambantota port, and another on the proposed 260 hectare
Colombo Port City, two projects which could drastically transform our fortune. However, naysayers of
the Chinese economic involvement in Sri Lanka would not see those benefits. Ideological and idealistic
reasons for their resentment are well understood. However, idealism alone does not make good political
decisions. But, realism, i.e rational policies driven by self interest of states, does. ( Sri Lanka learnt that
in the hard way during the decades of our unflinching adherence to the policy of nonalignment during
the cold war. While Sri Lankan leaders of the time were flaunting their non aligned credentials, despite
their manifest penchant to disastrous Soviet modeled controlled economy, South East and East Asian
nations - Singapore, Taiwan, South Korea and to some degree Thailand- which sided with the Western
bloc benefitted from the Western capital and technology transfers, and leapfrogged in their economic
growth).
Granted that, rising China offers an ideological challenge to Sri Lankas liberal elites and their
counterparts worldwide. That is also reflective of the dilemma that China faces as it seeks a global
standing commensurate to its new found economic clout. In a world where liberal democracy has
consolidated itself as the dominant political philosophy and civil liberties and fundamental rights are the
barometer of a countrys moral authority -- rightly so since all other alternative political systems have
enslaved and degraded the man kind in the Stalinist gulags, Nazi concentration camps and killing fields
of Cambodia-- Chinas political structure inhibits its search for moral authority in the world platform.
Nonetheless, todays China has deep pockets, far deeper than any of the liberal democracies in the West
and is willing to funnel a sizable portion of those funds abroad. China which has historically bought the
US treasury bonds has now sought to diversify their investment of surplus foreign reserves.
It looks for opportunities to invest its surplus capital and has thrown an economic lifeline for countries
in Asia, Africa and Latin America.
That is exactly why the Rajapaksa administration is right in its initiative to nurture and deepen its
economic cooperation with China. Enhanced cooperation with China is obviously the best strategic
foreign policy decision that the Rajapaksa government, or any other SLFP governments made in the
independent history of Sri Lanka. In fact, that decision has paid off. Out of over US $6 billion ( US $
6026 million to be exact) Chinese development assistance extended to Sri Lanka since 1971 to the end
of 2013, 94 per cent have been delivered since 2005, during the tenure of the Rajapaksa administration
(source: Department of External Resources).
( See box for the Chinese funded projects and latest Chinese loan commitments)
Naysayers also say that Sri Lankas inability to pay back Chinese loans would turn it into a vassal state of
China. In the first place, such arguments disregard the potentials of the Sri Lankan economy. Second, it
ignores the fact that Chinese development assistance in Sri Lanka, though amounted to a lion share of
Sri Lankas external financing, is still a fraction in terms of Chinas outbound investment. The total
Chinese loan commitment in Sri Lanka for the period of 2013 and 2014 is nearly US $ 3.3 billion.
Whereas Chinas outbound investment in 2013 was US $ 108 billion, which makes China the third
largest global investor. Much of that investment went to Australia, US, Canada and Indonesia.
Another comparison: Mr Xi, will leave Colombo for Delhi on Sep 17, and he would be carrying an
investment package worth $ 100 billion, which covers, among others, proposed investment in a
network of bullet trains and industrial parks, including one earmarked for Tamil Nadu, a state which has
regularly raised fear psychosis over perceived Chinese encroachment in Sri Lanka.
The proposed Chinese Investment package to India is nearly three times of 35 billion strategic
investment plan announced by the Japanese Prime Minister Zhinzo Abe during Prime Minister
Narendra Modis earlier visit to Tokyo.
The Chinese government has deep pockets, partly because of the nature of State capitalism it has
championed and also due to repressed wages of Chinese workers. Investment to GDP ratio in China has
hovered over 40 per cent during the last twenty years. In 2013, it spiked to 49 per cent, though returns
to investment has greatly diminished in recent years, suggesting major structural problems in the
export driven economy and lack of efficiency and productivity.
Nonetheless, over the past two decades, the Chinese government has transformed countrys
infrastructure landscape by pumping hundreds of billions of Yuan in a state driven infrastructure drive.
The Central Chinese city of Wuhan, a major transport hub, where I am based now has a US $ 200 billion
investment budget for the next five years, equivalent to five times of Sri Lankas gross national product.
What Sri Lanka gets is only a fraction of the overall Chinese external financing, even though China has
emerged as the main development partner in Sri Lanka in recent years. However, without Chinese
economic assistance, it would have been harder for the incumbent government to finance recent
infrastructure development projects, which are truly transforming and reinvigorating Sri Lankan
economy.
Sri Lankas access to concessionary loans has depleted as its economy is heading towards the middle
income status. In 2000, when the per capita income (in market value) was hovering around US $ 800,
concessionary loans accounted for nearly 98 per cent of countrys foreign debt. In 2012, when the GDP
per capita reached US $ 3000, the portion of concessionary loan was down to 50 per cent. The
incumbent government is striving to invest 6 per cent of annual GDP in public investment, a refreshing
change from its predecessor, who had been dillydallying over the proposal to built two expressways
throughout her two term presidency. And, in the absence of adequate domestic savings, 40 per cent of
public investment expenditure is financed through external financing. Without the Chinese loans,
bridging that gap would have been harder.
In the 21 century, international relations are increasingly defined by trade and investment. When Mr Xi
arrives here, he would be accompanied by a host of Chinese CEOs and business delegates. So did his
Japanese counterpart Mr Abe who arrived in Colombo last week. Some of those ventures, such as China
Harbour already have established business interests in Sri Lanka, nonetheless, all of them have their
eyes wide open to much lucrative opportunities to be explored in India. Sri Lanka is not the only girl on
the beach and it should not squander new opportunities due to its misplaced egotism.
Some 28 years ago when Li Xiannian, the then president of Peoples Republic of China visited Colombo,
China had only begun to emerge from chaos that marked the Mao era and its immediate aftermath.
Nonetheless, though he was one of the eight elders of the Chinese Communist Party at the time, Li was
more a ceremonial president. Paramount leader Deng Xiaoping, who introduced market reforms to
China in 1978, called the shots. Then, China was poor, insular and had no discerning global ambitions.
Three years later, it would witness mass demonstrations in Tiananmen, which would end in a
monumental tragedy.
28 years on, China is a different country. Dengs free market reforms have fuelled a supersonic
economic growth in a country once called the Middle Kingdom . During the next three decades since
1978, Chinese economy grew at over 9 per cent. The same Communist Party, of which disastrous Great
Leap Forward cost 30 million lives in the late 50s, lifted 400 million people from poverty since 1978,
marking, probably the greatest human emancipation campaign, of which only possible rival could be
the industrial revolution. This year, China will overtake the United State as the world largest economy,
measured in Purchasing Power Parity (PPP). In 2024, it is projected to become the Worlds largest
economy in market value.
When its economy is soaring, countries of the size of China naturally tend to develop geopolitical
ambitions. However, in the 21
st
century, where the power has increasingly diffused among one super
power and a host of established powers ( UK, France, EU) and emerging powers ( India, South Africa and
increasingly assertive Japan etc) it is hard to accomplish ones global ambitions without having
legitimacy.
During his visit, more than anything, Mr Xi would be looking to garner that missing ingredient in Chinese
power: legitimacy and global standing commensurate to Chinas growing economic power.
Throughout its history, PRC has suffered a deficit of legitimacy in the eyes of the key protagonists of the
international system. Also, its relations with its neighbours, even with fellow travelers of communism
had been uneasy. It parted ways with the Soviet Union over ideological differences and attempted a
failed incursion in Vietnam and fought a brief boarder war with India. Its relations with Vietnam, Japan,
Philippines and South Korea, the latter three being strong allies of the United States are shadowed by
disputes over contested islands in the South China sea.
The size alone does not confer legitimacy. If that is the case, Nigeria could have been an African super
power long ago. But, soft power diplomacy does uphold a countrys global standing and even sustains
its place even after some of the hard power attributes of the state have gradually declined. Great
Britain and its continuing positive global influence, in its former colonies and around the world is a
classic example.
In the Chinese political thought , this particular attribute is described as Comprehensive National Power
(CNP), which is a combination of gross military (hard power) and soft power ( economic, cultural,
societal influence) of a nation state. The state affiliated Chinese think tank which calculated the CNP of
major states, ranked China at 7
th
in the list. The US reigned at the top.
The Chinese political thought advocates to maximalize the CNP of the PRC by enhancing its soft power.
And the Chinese government has quietly working on that , through out the world, both in less fortune
corners of Africa and in Confucius centres in the West. Now China offers more scholarships to African
students, than the US, UK and France put together.
When Mr Xi visits South Asia, he brings with him an investment package of which size would dwarf any
western economic partnership initiative, including all the conceivable benefit of the civil nuclear
cooperation that George W Bush offered to India, ( which the Indian parliament shunned by passing an
expensive nuclear liability law) would have generated. By doing so, China is reassuring the region that
with its growing economic clout, it is prepared to take additional responsibilities for the sake of mutual
growth. The latest Chinese foreign policy doctrine is also named the Harmonious world. To showcase
Chinas new global role, there is no better place than South Asia, the British empires testing ground for
democracy and the home to worlds largest democracy. Indias new pro- business prime minister, Modi
who has proved to be a shrewd realist than his Oxbridge educated counterparts in the Congress Party
would be impressed by the Chinese mercantilism. And that would lessen Sri Lankas troubles as it
deepens its economic cooperation with China. That however is not an excuse for Sri Lanka to be
complacent of Indias geo political sensitivities. Fear mongering will always be there, in the form of
String of Pearls theories and many others, many of which based on perception than reality.
However in the long run, in a world where liberal democracy has won the final battle against
communism, fascism and other lesser evils, marking the end of history, as Fukuyama said, whether
China, with its existing political structure would achieve its due global standing and recognition is to be
seen. However those ideological discourses should not overwhelm Sri Lanka.
For the moment, Chinese economic assistance offers Sri Lanka an easy way out from many dilemmas
that a country would face at the middle income stage. Moreover, Chinese loans have already helped the
government clear a backlog of infrastructure projects.
While reaping the benefits of the Chinese windfall, what president Rajapaksa should do is to restore
civil liberties and independent institutions that his government has dismantled in recent years. Even, if
he does not do that, the organic growth of market capitalism and growing income levels, partly helped
by Chinese investment, would push a future government to do that. In that sense, paradoxically
though, no string attached Chinese loans, loathed by some liberal opponents here, would, in the long
run help democratize the country. Dont forget practicing democracies in South Korea and Taiwan etc
were cemented on economic take off achieved under pro- growth autocrats in the sixties and seventies.


BOX
Where Yuan went
Projects to be financed by Chinese government loans ( 2013- 2014) ( Source: Department of External
Resources)
Projects to be financed with the loan assistance from EXIM Bank of China in 2013/2014
1. Construction of Outer Circular Highway (OCH) (Kadawatha to Kerawalapitiya)- US $ million 520
2. Gampaha, Aththanagalla & Minuwangoda Intergrated Water Supply Scheme- US $ Million 229
3. Kurunegala Water Supply & Sanitation Project US $ million 77
4. Hambantota International Hub Development Project - Rehabilitation of Roads and Construction of two
Flyovers: $ million 252
5. Hambantota International Airport Development Project Cost Overrun and Additional Work: US $ million
122
6. Rehabilitation of Roads in southern part of Sri Lanka : US $ million 143.7
7. Relocation & Development of the Institute of Technology, Moratuwa University: US $ million 76
8. Southern Expressway Extension Project (Matara - Beliatta Mattala Hambantota Airport 94km): US $
Million 1,200
Total - EXIM Bank 2,619.7

Projects to be financed by China development bank
1. Road project loan 3 (phase 1 and 2) US $ million 440
2. Water supply projects ( Kandy, Tambuttegama and Katana) : US $ million 240
Total : US $ million 680
In addition , US $ 1.5 billion, 30 percent of Chinese loan portfolio is allocated for electricity generation
projects, of which lion share ( 1.3 billion) went to Puttalam coal power plant.
US $ 3 billion Chinese investment has been earmarked for the Northern expressway ( from Peliyagoda to
Kurunegala and Ambepussa)
..
Some of the previous major projects
1. Hambantota Port Development Project (Cost US$ 1.168 billion)
2. Katunayake Expressway project (US$ 292 million)
3. Mattala International Airport (US$ 209 million).
4. The construction of the Matara-Beliatta Section of the Matara-Kataragama Railway Extension Project
(of US$ 278 million)
5. Railway: The total assistance obtained from China for railway projects was USD 168 million which
include a Chinese Government Concessional loan of RMB Yuan 700 million (approximately USD 102.5
million) for procurement of 13 Diesel Multiple Units for Sri Lanka Railways in 2010
6. The Bandaranaike Memorial International Conference Hall (BMICH).
7. Nelum Pokuna Performance Arts Theatre.
8. Superior Court Complex.
9. Lady Ridgway Hospital .
10. Rehabilitation of the road from Kiribathgoda to Kadawatha was funded by a Chinese grant.
11. The Moragahakanda Development Project (US$ 214 million )
12. Road rehabilitation projects in 2010 and 2011 (US$ 652 million)