The Emperor’s New Road: China and the Project of the Century

by Jonathan E. Hillman

  Ironically, the debt-diplomacy narrative is actually too generous to China. Foreign-policy experts occasionally see strategy where it does not exist, viewing their competitor’s actions as more coordinated than they are in reality. The trope is that China is masterfully planning for decades, if not centuries, while Western politicians are struggling to survive tomorrow and next week. Too often, China’s governance style is viewed as a strength, the assumption being that its authoritarian government has lasting and superior control while democratic governments are thrown out every few years.

  Behind the Hambantota fiasco is not a unitary China but a host of interest groups, each with its own parochial interests, most of which have nothing to do with long-term objectives in general and military aims in particular. In planning for a range of scenarios, Chinese officials must have considered the possibility that Sri Lanka would not be able to pay back its loans, but it is not clear that taking over Hambantota Port was their primary objective.

  It is more likely that Hambantota is the result of an absence of strategy among both Chinese and Sri Lankan officials. Eager to support Xi’s signature vision, Chinese officials approved loans for projects without adequate due diligence. Chinese firms were eager to build the projects and would get paid regardless of their commercial viability. Sri Lankan officials took the loans without coordinating projects under a coherent development plan. They reaped the immediate political, and in some cases financial, benefits of building new projects. Everyone took something for themselves, eagerly and without much care for the longer-term repercussions. It was chaotic, not strategic.

  Getting the story right matters. Preventing the next Hambantota could require greater, not less, oversight and coordination of Chinese lending. China has so far refused to join the world’s other major official creditors, which belong to the Paris Club and agree to cap their lending rates, share information, and coordinate debt relief. China is an observer and must be persuaded to become a member, so it is required to play by the same rules or, at the very least, to raise its lending standards.

  The debt-diplomacy narrative also ignores the costs China incurs for troubled projects. The unstated, and inaccurate, assumption is that China wins even when its projects fail. The reality is that China will face financial and reputational costs as its projects fail. Hambantota, a fishing village, has become a global lighthouse, warning against getting too close to China. In taking the port, China tarnished its own major foreign-policy vision and will struggle to remove the stain.

  It is difficult to imagine China changing its behavior, however, without incurring further losses. It derives a comparative advantage in staying outside the Paris Club, able to pursue a wider range of actions and make offers that other major lenders cannot. Likewise, it gains speed from not adhering to the same risk-assessment processes as the World Bank, ADB, and other multilateral development banks. But China also assumes greater risk, as history cautions. The world’s major creditors did not bind themselves out of philanthropy but out of self-interest, after suffering the reputational and financial consequences of going it alone. China may have to repeat more of their mistakes before adopting more of their solutions.

  Critically, the debt-diplomacy narrative, and China’s rebuttal to it, minimizes Sri Lanka’s agency, which is where responsibility and solutions ultimately lie. Fixating on the port’s commercial failure and military value misses the mechanism that made it all possible: politics. There are interest groups that want to build projects, regardless of their commercial or strategic value, especially politicians looking to give back to their home bases of support. By far the largest share of Sri Lanka’s foreign debt is bond issuances and term loans, which are sold in auctions run by the state.52 In 2018, Sri Lanka’s auditor general even admitted that he could not say with certainty how much public debt the country owed.53 If there was a debt trap, Sri Lanka’s leaders laid it and walked into it.

  “Grave Responsibilities”

  The next test for Sri Lanka could be on its east coast. In July 2018, the government unveiled a master plan for turning the city of Trincomalee into an “eastern gateway” by 2050. On its face, it is an ambitious proposal that seeks to leverage Sri Lanka’s geography and tap into regional economic trends. Trincomalee has one of the world’s largest naturally protected harbors. By 2050, the Bay of Bengal region, which includes India, Sri Lanka, Bangladesh, and Myanmar, is expected to have nearly three billion people.

  Tucked into the plan are some red flags. It includes a $1 billion port project that would take several years to complete.54 It would have two container terminals with additional capacity that Sri Lanka does not urgently need. It also proposes a $65 million airport that would be able to handle one million passengers a year.55 The problem is that Trincomalee already has a domestic airport that it wants to expand.

  The political incentives are clearer than these economic projections. The proposal does not adequately take into account other developments in Sri Lanka, just as Hambantota Port was pursued without enough attention to the Port of Colombo. The plan is also too forward looking. When projections are stretched into decades, it is tempting to believe that an investment will pay off handsomely. It is sobering how many of those projections become outdated after five years.

  The challenge for China’s competitors in Sri Lanka is to avoid throwing good money after bad. Indian and Japanese officials have expressed interest in developing Trincomalee’s port, which media already describe as a “counter” to Chinese influence. Japan has already made several investments to improve the existing airport.

  India has considered turning the Mattala Rajapaksa International Airport into a flight school. Given the airport’s track record of incidents, including bird strikes and elephants attacking workers, it would be an unusually challenging proving ground for new pilots. Privately, Indian officials suggest that owning and operating the airport could serve as a deterrent, helping to check Chinese naval activities at Hambantota. India could even land military aircraft during training exercises, with the permission of Sri Lanka’s government, to reinforce that message.

  But India’s interest in this failed project sends an odd signal. It is responding to military concerns around a commercially dubious project by potentially militarizing it. The prospect of turning around a failing project is tempting, and if it works, India could play the hero, rescuing its southern neighbor from a Chinese-built boondoggle. But if it fails, India risks assuming some of the reputational damage that China would otherwise suffer. India’s bailout might also contribute to a sort of moral hazard, providing future Sri Lankan officials with a false sense of security to pursue more risky projects. Rather than India playing China’s game and having its reputation dragged into the mud, it might be better served by focusing on economic fundamentals.

  For China, Sri Lanka’s 2015 election was a leading indicator of trouble to come. During 2018, opposition candidates harnessed criticism of the BRI in Malaysia and Pakistan, as Chapters 6 and 7 recounted, as well as in the Maldives. All three governments, heavy supporters of the BRI, were replaced. After Mohamed Ibrahim Solih took office in the Maldives, he discovered that the country’s debt to China was twice as high as expected.56 This backlash is the natural result of a cycle of too much lending without adequate transparency and oversight. It was happening even in a global economy that was performing well, softening and concealing the extent of the BRI’s risky lending. As those conditions deteriorate, more problems will surely come to the surface.

  Whether the BRI brand becomes toxic will depend not only on how China reacts but also on whether recipient countries are willing and able to exercise greater oversight and discipline over their project decisions. Sri Lanka’s experience suggests that will be difficult, demonstrating that it is not enough to warn against embarking on risky projects. When leaders weigh the short-term incentives of starting projects against the long-term risks of debt and subpar performance, the former often wins out. Better financing alternatives could limit
recipient countries’ exposure to high interest rates and project terms that create dangerous dependencies. Capacity-building measures could help train governments to evaluate projects and negotiate terms.

  But no source of alternative financing will solve the fundamental challenge of walking away from unviable projects, from declining to build the next Mattala airports and Hambantota ports. Better financing alternatives cannot and should not be made available for all proposed projects. Some projects simply should not be pursued. That responsibility falls to government officials and, in democracies, the citizens who elect them. As Sri Lanka’s first prime minster, D. S. Senanayake, told the nation upon its independence, “Freedom carries with it grave responsibilities.”57

  Rajapaksa’s ambition is undiminished. In 2018, Sirisena fired Ranil Wickremesinghe and replaced him with Rajapaksa as prime minister, throwing Sri Lanka into a constitutional crisis after the new government was unable to form a majority and parliament was dissolved. After Sri Lanka’s Supreme Court intervened, Rajapaksa was forced to step down. He was prime minister for less than two months, but that was long enough to sign two deals worth more than $50 million with Chinese firms for port upgrades.58 “We will bring the forces opposed to the country down to their knees by organizing the people,” Rajapaksa said defiantly in his resignation speech.59 It was a setback for a political climber who had only moved up throughout his career, from member of parliament to fisheries minister, opposition leader, and prime minister.

  But Rajapaksa has always found opportunity in chaos, and after Sri Lanka’s Easter Sunday bombings in 2019, the political winds turned again in his favor. Rajapaksa rushed to remind Sri Lankans of his strongman credentials, claiming, “the Easter Sunday attacks would have never taken place under our government.”60 Although Mahinda was ineligible to run for a third presidential term, his brother Gotabaya, the former defense secretary, ran and won in November 2019. Naturally, Gotabaya appointed Mahinda as prime minister. Sri Lanka’s financial future may be cloudy, but the forecast for Mahinda Rajapaksa and his family is improving.

  Rajapaksa’s legacy will be felt in Sri Lanka for decades to come. The true cost of his personal ambition has yet to be tallied. The government plans to resume flights at Mattala Airport and restart other projects in Hambantota.61 It is impossible to go far in Hambantota without seeing something that elevates Rajapaksa at the country’s expense. In addition to the port, airport, and cricket stadium, there are smaller signs as well. When you climb down from Hambantota’s Martello Tower, the colonial fort that Rajapaksa turned into a national fisheries museum, there is a plaque and picture of him, smiling, at the bottom of the ladder.

  PART IV

  Danger Ahead

  East Africa

  Center for Strategic and International Studies, Reconnecting Asia Project; TeleGeography

  CHAPTER NINE

  War and PEACE

  East Africa

  THEY WILL SHOOT IF we go closer,” my guide said, pointing toward China’s first military base on foreign soil, while his other hand gripped the fishing boat’s throttle. Old trawlers were anchored between us and the cluster of sand-colored buildings on shore, forming a rusty partial blockade that obstructed a closer approach and suggested there was nothing new to see. Under a nuclear sun, we bobbed up and down with the waves. It was eerily quiet along the coast of Djibouti, where commercial and military moves mix as easily as the Red Sea and the Indian Ocean.

  Djibouti is a riddle that only geography can answer. It is deprived and small, and yet it commands the attention of the world’s most powerful countries. Its greatest natural endowment is salt, a supply that is believed to be limitless but is barely exported. It is roughly the size of New Jersey and has less than a million citizens, hardly a blip on Africa’s booming demographic landscape. Its ethnic divisions are old, its national identity still cohering. Its neighbors—Eritrea to the west, Somalia and self-declared Somaliland to the east, and Yemen to the north—all had greater economic advantages and have fared worse.

  Their turmoil has been Djibouti’s opportunity. It is a landing point of relative stability amid turmoil, a desert that sells access to the ocean. “Here, beggars do not ask for money; they ask for water,” a French naval strategist once wrote.1 The same logic applies to great powers, which have come begging for access to Djibouti’s coastline. Roughly 20 percent of global trade travels through the Gulf of Aden and past Djibouti’s doorstep. On the Horn of Africa’s coastline, Djibouti is king. It hosts five foreign military bases, the most of any country in the world, and military rents make up almost a fifth of its GDP.2

  You cannot be a real country without a beer and an airline, to steal a line from the American musician Frank Zappa, but it helps to have a military base in Djibouti. The United States sent troops to Djibouti in 2002, as part of its response to the 9/11 attacks, and never left. U.S. facilities have expanded to include nearly five hundred acres at Camp Lemonnier, which became part of U.S. Africa Command in 2008. Japan established its first long-term overseas base in Djibouti in 2009 and, after China’s arrival in 2017, announced that it would upgrade the facility and station at least one Japanese personnel for every ten Chinese military personnel.3 France and Italy have bases, too. Not to be left out, Russia and Saudi Arabia have expressed interest in setting up bases.

  One of Djibouti’s greatest assets is beneath the waves. It is a major landing point for underseas fiber-optic cables and a critical stop on China’s “digital silk road.” Globally, there are about 380 active underseas cables, which carry the vast majority of international data. Data from cell phones, for example, is sent to a tower and then onward across terrestrial and submarine cables. These cables will only become more important with the arrival of 5G and other services that will increase the speed and volume of data that is transferred. Using the cloud, despite its name, often requires data to travel under the ocean.4

  Western policy makers were slow to grasp the challenge that China’s dominance in global telecommunications could present. More recently, they have mainly focused on security risks at home. But as Western capitals debate whether to allow Chinese technology into their next-generation wireless networks, Chinese firms are rapidly connecting the world’s next-generation markets. Half of the world’s population growth through 2050 is expected in Africa, which is also home to the fastest-growing internet market.5 With generous financing, artificially low costs, and a knack for connecting rural areas, Chinese tech firms are positioning themselves to grow even if their Western presence withers.

  China has set ambitious industrial targets for winning global market shares in high-tech sectors, and using the BRI as a primary avenue, it is marching toward them. In 2008, Chinese companies were involved with just a handful of cables, almost exclusively in China, Taiwan, and Hong Kong. A decade later, Huawei Marine, an offshoot of the Chinese tech giant Huawei, was involved with ninety submarine cables around the world. Under Made in China 2025, Xi Jinping’s signature policy for taking the commanding heights of high-tech manufacturing, Beijing aims to capture 60 percent of the global market for fiber-optic cables. Of all the BRI’s dimensions, its digital connections may ultimately prove the most consequential.

  Beijing’s commercial and strategic motives in global communications are difficult to untangle, as one flagship project illustrates. Beginning with its name, the Pakistan and East Africa Connecting Europe, or PEACE, cable seems relatively benign. The underseas cable was originally named the Pakistan and East Africa Express but was rebranded after the addition of France as a landing point. It is slated to become the shortest route for high-speed internet traffic between Asia and Africa when it becomes operational in late 2020. The company behind the project estimates that it will pull in annual profits of $130 million.6

  The project could also pay strategic dividends. A century and a half ago, British dominance of global telegraph networks was initially driven by commercial motives, as Chapter 2 recounted. British firms dominated the market with their innov
ative materials and cable-laying techniques and had a leading role in setting global standards. At the close of the nineteenth century, the British government began developing a smaller system of cables touching only Britain and its possessions. These cables were useful in peacetime for espionage, and when World War I erupted, the British were better prepared than anyone to maintain communications among their forces while monitoring and disrupting enemy communications.

  The cable’s developer, Hengtong Group, is China’s largest producer of fiber-optic cables and a darling of the People’s Liberation Army (PLA).7 The Chinese government has praised Hengtong as a model of “civil-military integration” for developing military-grade cable technology.8 The PLA gave it an innovation award in 2015, and the following year, they formed a partnership to research underseas cables.9 A separate company was formed to oversee the PEACE cable, common practice in an industry that often relies on forming consortia-style partnerships for each project. Its chief operating officer spent nearly two decades as an employee of Hengtong Group, including as deputy general manager of the subsidiary that partnered with the PLA.10 Further strengthening these ties, in late 2019, Hengtong announced plans to acquire Huawei Marine.

  In the spring of 2019, I set out to visit three of the PEACE cable’s proposed stops in East Africa. It will stretch from Gwadar, Pakistan, which could become a Chinese naval facility, as Chapter 7 described, to Djibouti, home to China’s first military base. Ethiopia, which is landlocked and connects to underseas cables landing in Djibouti, will access the cable as well. It will also land in Mombasa, Kenya, home to a major port that Kenya’s auditor general has warned China could take if Kenya defaults on its loans.11 In all three countries, China’s high-tech footprint is expanding along with the other signature BRI projects.