Han Peril: China ensnares vulnerable states in a debt trap

Cheap credits are used to secure influence and grab control of strategic assets
By Brahma Chellaney
A ship departs a port in Zhanjiang, China, in July for Africa's Djibouti to dispatch members of the People's Liberation Army to man a military base there.

"There are two ways to conquer and enslave a country," American statesman John Adams (U.S. president from 1797 to 1801) famously said. 

"One is by the sword. The other is by debt."
China has chosen the second path.  

Aggressively employing economic tools to advance its strategic interests, Beijing has extended huge loans to financially weak states and ensnared some in debt traps that greatly strengthen its leverage.
After establishing a growing presence in the South China Sea, Beijing seems increasingly determined to extend its influence in the Indian Ocean, not least in countries surrounding India, its regional strategic rival.
From Djibouti in Africa to the Indian Ocean island of Sri Lanka, China has converted big credits into political influence and even a military presence.
Now a political crisis in the Maldives has highlighted the fact that China has quietly acquired several islets in the heavily indebted Indian Ocean archipelago.
Mohamed Nasheed, the nation's first and only democratically elected president who was ousted at gunpoint, says the country cannot repay the $1.5bn-$2bn it owes China, equivalent to 80% of the total foreign debt. 

"Without firing a single shot, China has grabbed more land" in the Maldives than what Britain's "East India Company did at the height of the 19th century."
Among the unpopulated Maldivian islands China has acquired on lease are Feydhoo Finolhu, lying close to the capital Male and previously used for police training, and the 7km-long Kalhufahalufushi, with a magnificent reef. 

For Feydhoo Finolhu, it paid $4 million, which is what a luxury apartment in Hong Kong sells for; Kalhufahalufushi was even cheaper.
China is the only country to come out in support of Maldives' embattled authoritarian president, Abdulla Yameen, who came to power in 2013. 

Beijing has also issued an open threat against India, which has traditionally been the dominant foreign influence in the Maldives, since the islands were granted independence from Britain. 

Chinese state-controlled media has warned that if India militarily intervenes in the Maldives, Beijing won't "sit idly by" but will "take action to stop" it.
To be sure, China claims sound commercial grounds for acquiring its Maldivian islands. 

But across the Indian Ocean, port projects that China insisted were purely commercial have acquired military dimensions.
After lending billions of dollars to Djibouti, China last year established its first overseas military base in that tiny but strategically important state, located on the northwestern edge of the Indian Ocean. 

In Pakistan, Beijing has deployed its warships for the security of the Chinese-built Gwadar port, whilst seeking to establish a military base nearby.

Beijing's creditor diplomacy scored a major success in December when Sri Lanka formally handed over its strategically located Hambantota port to China under a 99-year lease valued at $1.12 billion. 

Earlier, after Sri Lanka's $500-million, largely Chinese-owned Colombo Port container terminal opened in 2014, Chinese submarines arrived quietly and docked there.
Further east in Myanmar, there are concerns in India and the West that Kyauk Pyu, a deep-water port to be developed and financed largely by China, could eventually also serve military purposes.
In the Maldives, Beijing has shown interest in turning an uninhabited island into a naval base by cutting through the surrounding coral reefs to create passageways for its warships. 

Or it could create an artificial island and militarize it, as it has done in the South China Sea.
Underscoring Beijing's strategic calculations, three Chinese frigates visited the Maldives about six months ago, docking in Male and at Girifushi Island and imparting special training to Maldivian troops.
Meanwhile, China's stepped-up naval presence in the Indian Ocean in recent weeks might be intended to send a message to India, including seeking to deter it from militarily intervening in the Maldives, as New Delhi did with Western backing in 1988, when Indian paratroopers foiled a coup attempt. 

The action reinforced India's claim to be the region's peacekeeper.
The current ruler, Yameen, has facilitated China's island acquisitions in his country by amending the constitution in 2015 to legalize foreign ownership of land. 

The amendment appeared tailored for China; the new rules for foreign ownership require a minimum $1 billion construction project that involves reclaiming at least 70% of the desired land from the ocean.
By also awarding Beijing major Chinese-financed infrastructure contracts, Yameen is saddling the Maldives with mounting debt that is likely to prove unserviceable.
Several countries that have fallen into debt servitude to China are India's immediate neighbors, including Bangladesh, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka. 

This holds major foreign-policy implications for India, which is seeing its influence erode in its backyard. 

By establishing a Djibouti-type naval base in the Maldives, China could open an Indian Ocean front against India in the same quiet way that it opened the trans-Himalayan threat under Mao Zedong by gobbling up Tibet, the historical buffer.
China's strategy in southern Asia and beyond is aimed at fashioning a Sinosphere of trade, communication, transportation and security links.  

By financially shackling smaller states through projects it funds and builds, it is crimping their decision-making autonomy in a way that helps bring them within its strategic orbit. 

It is even replicating some of the practices that were used against it during the European-colonial period when, in the words of the Chinese nationalist revolutionary leader Sun Yat-sen, "India was the favored wife of Britain while China was the common prostitute of all powers." 

One such practice is the long-term lease, an echo of the 99-year-lease through which 19th-century Britain secured control of the New Territories, expanding Hong Kong's landmass by 90%.
The International Monetary Fund has warned that Chinese loans, offered at rates as high as 7%, are promoting unsustainable debt burdens. 

The price that such loans exact can extend to national sovereignty and self-respect. 

The handover of Hambantota was seen in Sri Lanka as the equivalent of a heavily indebted farmer giving away his daughter to the cruel money lender.
In Pakistan, Chinese state companies have secured energy contracts on terms that include ownership of the plants and 16% guaranteed yearly returns, very high by global standards. 

The "economic corridor" that China seems intent on building across Pakistan has become a vehicle for a deep Chinese penetration of the Pakistani state, with most of the investment going into energy, agricultural and security projects often unrelated to a corridor.
Against this background, the word "predatory" is increasingly being used internationally about China's practices. 

U.S. Secretary of State Rex Tillerson has called China a "new imperialist power" whose practices are "reminiscent of European colonialism."
Mao said, "Political power grows out of the barrel of a gun." 

But with China emerging as the first major power in modern history without real allies, an additional principle is guiding its policy: buying friendship by opening a fat wallet. 

China is co-opting states into its sphere of influence by burying them in debt.

China's $10 Billion Strategic Project in Myanmar Sparks Local Ire

By REUTERS

KYAUK PYU, Myanmar — Days before the first supertanker carrying 140,000 tonnes of Chinese-bound crude oil arrived in Myanmar's Kyauk Pyu port, local officials confiscated Nyein Aye's fishing nets.
The 36-year-old fisherman was among hundreds banned from fishing a stretch of water near the entry point for a pipeline that pumps oil 770 km (480 miles) across Myanmar to southwest China and forms a crucial part of Beijing's "Belt and Road" project to deepen its economic links with Asia and beyond.
"How can we make a living if we're not allowed to catch fish?" said Nyein Aye, who bought a bigger boat just four months ago but now says his income has dropped by two-thirds due to a decreased catch resulting from restrictions on when and where he can fish. 

Last month he joined more than 100 people in a protest demanding compensation from pipeline operator Petrochina.
The pipeline is part of the nearly $10 billion Kyauk Pyu Special Economic Zone, a scheme at the heart of fast-warming Myanmar-China relations and whose success is crucial for the Southeast Asian nation's leader Aung San Suu Kyi.

Embattled Suu Kyi needs a big economic win to stem criticism that her first year in office has seen little progress on reform. 

China's support is also key to stabilising their shared border, where a spike in fighting with ethnic armed groups threatens the peace process Suu Kyi says is her top priority.

China's state-run CITIC Group, the main developer of the Kyauk Pyu Special Economic Zone, says it will create 100,000 jobs in the northwestern state of Rakhine, one of Myanmar's poorest regions.
But many local people say the project is being rushed through without consultation or regard for their way of life.
Suspicion of China runs deep in Myanmar, and public hostility due to environmental and other concerns has delayed or derailed Chinese mega-projects in the country in the past.
China says the Kyauk Pyu development is based on "win-win" co-operation between the two countries.

"AVOIDING PANIC"
Since Beijing signalled it may abandon the huge Myitsone Dam hydroelectric project in Myanmar earlier this year, it has pushed for concessions on other strategic undertakings -- including the Bay of Bengal port at Kyauk Pyu, which gives it an alternative route for energy imports from the Middle East.
Internal planning documents reviewed by Reuters and more than two dozen interviews with officials show work on contracts and land acquisition has already begun before the completion of studies on the impact on local people and the environment, which legal experts said could breach development laws.
The Kyauk Pyu Special Economic Zone will cover more than 4,200 acres (17 sq km). 

It includes the $7.3 billion deep sea port and a $2.3 billion industrial park, with plans to attract industries such as textiles and oil refining.
A Reuters' tally based on internal planning documents and census data suggests 20,000 villagers, most of whom now depend on agriculture and fishing, are at risk of being relocated to make way for the project.
"There will be a huge project in the zone and many buildings will be built, so people who live in the area will be relocated," said Than Htut Oo, administrator of Kyauk Pyu, who also sits on the management committee of the economic zone.
He said the government has not publicly announced the plan, because it didn't want to "create panic" while it was still negotiating with the Chinese developer.

AMBITIOUS DEADLINE
In April, Myanmar's President Htin Kyaw signed two agreements on the pipeline and the Kyauk Pyu port with Xi Jinping, as Beijing pushed to revive a project that had stalled since its inception in 2009.
The agreements call for environmental and social assessments to be carried out as soon as possible.
While the studies are expected to take up to 15 months and have not yet started, CITIC has asked Myanmar to finalise contract terms by the end of this year so that the construction can start in 2018, said Soe Win, who leads the Myanmar management committee of the zone.
Such a schedule has alarmed experts who fear the project is being rushed.
"The environmental and social preparations for a project of these dimensions take years to complete and not months," said Vicky Bowman, head of the Myanmar Centre for Responsible Business and a former British ambassador to the country.
CITIC said in an email to Reuters it would engage "a world-renowned consulting firm" to carry out assessments.
Although large-scale land demarcation for the project has not yet started, 26 families have been displaced from farmland due to acquisitions that took place in 2014 for the construction of two dams, according to land documents and the land owners.
Experts say this violates Myanmar's environmental laws.
"Carrying out land acquisition before completing environmental impact assessments and resettlement plans is incompatible with national law," said Sean Bain, Myanmar-based legal consultant for human rights watchdog International Commission of Jurists.

JOB OPPORTUNITIES?
CITIC says it will build a vocational school to provide training for skills needed by companies in the economic zone. 

It has given $1.5 million to local villages to develop businesses.
Reuters spoke to several villagers who had borrowed small sums from the village funds set up with this money.
"The CITIC money was very useful for us because most people in the village need money," said fisherman Thar Sai Aung, who borrowed $66 to buy new nets.
Chinese investors say they also plan to spend $1 million during the first five years of the development, and $500,000 per year thereafter to improve local living standards.
But villagers in Kyauk Pyu say they fear the project would not contribute to the development of the area because the operating companies employ mostly Chinese workers.
From more than 3,000 people living on the Maday island, the entry point for the oil pipeline, only 47 have landed a job with the Petrochina, while the number of Chinese workers stood at more than double that number, data from labour authorities showed.
Petrochina did not respond to requests for comment. 

In a recent report it said Myanmar citizens made up 72 percent of its workforce in the country overall and it would continue to hire locally.
"I don't think there's hope for me to get a job at the zone," said fisherman Nyein Aye. 

He had been turned down 12 times for job applications with the pipeline operator.
"Chinese companies said they would develop our village and improve our livelihoods, but it turned out we are suffering every day."