In Sri Lanka, the new Chinese Silk Road is a disappointment
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Chinese President Xi Jinping has launched the French leg of his European tour to try to drum up cooperation for his global infrastructure project.
Xi Jinping arrived in France on Sunday for a three-day trip in which he hopes to gain French cooperation for his new Silk Road initiative. He already has one European success under his belt, having signed an agreement with Italy a day earlier, in which the euro-zone's third largest economy formalised its support of China’s vast programme of infrastructure investment in more than 70 countries.
For Italian President Sergio Mattarella, the agreement is crucial. Italy is counting heavily on Chinese investments to, among other things, breathe new life into the Port of Trieste, which looks set to be the flagship project of the forthcoming economic cooperation between Beijing and Rome.
A port built from scratch in south Sri Lanka
For critics of the new Silk Road, Washington being the chief one, Italy has "no need" for these investments which, ultimately, could backfire against Europe’s third biggest economic power. The Sri Lankan experience is often highlighted as an example of the dark side of the new Silk Road plan.
In the mid-2000s, Colombo (the commercial capital of Sri Lanka) agreed to let Beijing build a new port from scratch in the town of Hambantota, in the south of the island. It wasn’t yet thought of as part of a new Silk Road -- that programme was conceptualizsed by Xi Jinping in 2012 -- but all the ingredients were there. "Chinese funds and engineers are mobilised to build infrastructure outside China, as part of a partnership that was meant to be win-win: this is the very definition of the rationale of the Silk Road," said Jean-François Dufour, economist and director of DCA China-Analysis. The Chinese president integrated the Sri Lankan project into his Silk Road initiative in 2013.
At the time, Colombo thought it could make a profit from the operation of the port, while Beijing would get a key point of transit in "the very strategic Indian Ocean, through which a large percentage of Chinese commercial ships travel to Europe," the European Union Institute for Security Studies noted in an April 2018 report. The project provided China with a presence in an area of fierce competition between Beijing and the other great Asian power: India.
But in 2015, financial clouds began gathering over the future of Hambantota’s port, which cost $1.1 billion. Sri Lanka was crumbling under the debt, and was unable to repay the more than $8 billion in loans it had taken from China for several infrastructure projects in the country. Furious, Beijing turned up the heat and threatened to cut off financial support to the island nation if it didn’t quickly find a solution. In December, 2017, after two years of negotiations, Colombo finally agreed to turn over the port to China for 99 years in exchange for the cancellation of its debt.
The ports of Hambantota and Trieste: the same struggle?
The concession was humiliating for Sri Lanka, while "the opponents of China, like India, painted the entire operation as a deliberate plan to acquire strategic positions in the region," Dufour said. China was suspected of intentionally strangling Colombo with loans at a 6 percent interest rate, which was much higher than the other lenders - such as the World Bank – from which Colombo had previously borrowed.
Dufour acknowledged that "this episode shocked and pushed countries like Malaysia to reconsider their participation in the new Silk Road”. But he doesn’t see China risking compromising the credibility of its entire investment program for one port in Sri Lanka.
In any case, the episode "is a stinging reminder that the sums invested by China are not donations, but loans with consequences,” the French economist said. Italy should keep the precedence in mind as it signs the Silk Road agreement because the Italian situation bears similarities to that of Sri Lanka, Dufour said. In both cases, the ports had strategic importance for China -- Trieste would be the new gateway to Europe for Chinese goods -- and Italy is already a country heavily in debt, Dufour noted.
Admittedly, Italy is economically much more powerful than Sri Lanka, but "the risk of seeing the port of Trieste get away from Italy remains real," Dufour said. And for a government as nationalist as that of Giuseppe Conte, that would be a major political failure.