It was recently announced by China Merchants Port Holdings (CMPH) that it was transferring 23.5% of its 85% shareholding of the Hambantota Industrial Port Group (HIPG). More details can be found here.
There are several interesting nuances to this arrangement, particularly as Hambantota has been showcased as the epitome of China’s debt diplomacy. Whilst an analysis of the Hambantota deal in 2017 suggests that there is no debt diplomacy conspiracy in play, this new ownership arrangement suggests indicates a shift in the geopolitical makeup of Sri Lanka’s role in the Belt Road Initiative. As a reminder, the 2017 deal with China created two companies, with CMPH controlling 85% of HIPG that is responsible for the commercial operations of the port. The second company in which the Sri Lankan government owns 51% that ensures that the Sri Lankan Port Authority retains security control over the port.
It is noteworthy that the transfer of the shareholding was to Fujian Maritime Silk Road Investment and Management Group. Strategically, this will give direct access to the Port of Xiamen. Whilst Xiamen is an attractive sister city as it is one of the earliest established Special Economic Zones that has undergone significant upgrades in recent times, it does present challenges when seen in the context of defence capability.
From a purely trade perspective, it does open trade and access opportunities to Chinese hinterland markets as well as Far East markets of Japan and South Korea. However, with this opportunity comes risk to Sri Lanka. Whilst this pairing of the two ports is an important gateway, it does have the potential for Xiamen to be used as an intercept trade port. This is particularly true when seen in the context of cargo and trade flows between Sri Lanka and the markets of South Korea and Japan. Consider the current motor vehicle transhipment arrangements struck between HIPG and the likes of NYK. In future settings, it is feasible that these transhipment arrangements shift from Hambantota to Xiamen once the geopolitical arena is settled.
Taking a defence capability framework, the rising geopolitical tensions in the region have stretched Chinese resources and limited its ability to engage with all conflict interfaces. Whilst these tensions require a realignment of resources, Xiamen is in a critical location with regards the One China policy, due to its proximity to Taiwan. As the Covid-19 pandemic sweeps the globe, Taiwan is emerging more confident to state its case internationally, with several countries now challenging China’s claims of a One China with two systems. The Taiwan Straits is emerging as the next regional military flashpoint for China. With Chinese military resources stretched across the region, it would make any intervention in Taiwan very difficult, particularly should Taiwan declare independence.
Compounding the issue is the slowdown of China’s economy and potential monetary catastrophe associated with 60% of BRI projects stalled or slowing. These projects carry large financial debt and exposes China to significant cash and foreign reserve restrictions. The dilemma is being played out within the CCP hierarchy as it attempts to separate economic activity from the current geopolitics malaise. Essentially there is a recognition that China needs economic activity and trade to restore domestic confidence, and Xiamen, as a port and a special economic zone plays an important role. However, trying to balance economic realities with strategic intent requires a realignment of capability such that both the military presence and ongoing trade are catered for. It is therefore likely that Hambantota is part of China’s redundancy planning. In the short term it will benefit from increased cargo flows as it steps into the breach to offset Xiamen’s transfer of port capability to defence to keep China’s wheels of trade turning. However, the risks mentioned early on, will come into play once the region settles down.
It is also worth noting that this changed share ownership comes at a time when the Sri Lankan government is considering rejecting the US’s Millennium Challenge Corporation’s $480m grants offer. The panel assessing the proposal found that it was detrimental to Sri Lanka’s sovereignty, particularly with regards social, economic, and political freedoms. Whilst some reports say that the proposal has been rejected, the truth of the matter is that it is up for final consideration in August. It is suggested that the required changes to the proposal will be made and that it will be signed off, with funds being used for Colombo Port supporting infrastructure. Did this affect CMPH’s decision making, seeing that Sri Lanka is now taking a more critical evaluation of foreign investment contracts?
Essentially, the new Sri Lanka / China Hambantota share ownership structure raises Sri Lanka’s strategic profile within the BRI. The question is whether this will be in Sri Lanka’s long-term interest.