Dr. Dinusha Panditaratne on China’s Commercial and Military Presence in the Indian Ocean: A Perspective from Sri Lanka

July 25, 2019   Reading Time: 8 minutes

Reading Time: 8 min read

Dr. Dinusha Panditaratne, Nonresident Fellow, Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI), spoke on China’s commercial and military presence in the Indian Ocean at a conference on ‘Views of China’s Presence in the Indian Ocean,’ organised by CNA. The conference was held on 17 June 2019, in Washington DC.

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Thank you. It is a pleasure to speak here today. I want to thank Nilanthi Samaranayake and the CNA team for inviting me to share perspectives on the topic of China’s commercial and military presence in the Indian Ocean.

I will begin by explaining why the topic of China’s presence in the Indian Ocean is important to Sri Lanka, before progressing to answer the question of how Sri Lanka views that presence.

I. Sri Lanka in the Indian Ocean

There are two reasons why China’s presence in the Indian Ocean is an important topic for Sri Lanka. First, Sri Lanka is unquestionably an Indian Ocean country, perhaps even more than it is a “South Asian” country. The government of Sri Lanka has increasingly emphasised Sri Lanka’s Indian Ocean identity, and is working to develop Sri Lanka as an economic and maritime center of the Indian Ocean, between the two existing hubs of Dubai and Singapore. It is doing this (i) partly because of geography – Sri Lanka has a center stage location in the Indian Ocean, unlike being at the tail end of South Asia; (ii) partly because of politics – there is an obvious stalemate in South Asian politics and by extension in SAARC; and (iii) partly because of economics – the Indian Ocean shows economic promise that Sri Lanka naturally wants to tap into. The Indian Ocean region’s share of world trade is expected to almost double from the year 2000 to 2025, while average GDP per capita across the 28 states of the Indian Ocean should increase five-fold in the same time frame.

So that is the first reason why the topic of China’s presence in the Indian Ocean is important to Sri Lanka: Sri Lanka sees the Indian Ocean as central to its identity and prosperity, so it naturally needs to track who is in the Indian Ocean and what they are doing in it. The second reason why the topic of China’s presence in the Indian Ocean is important to Sri Lanka is that various narratives have emerged about China’s presence in the Indian Ocean, in which Sri Lanka is frequently mentioned, and often in a negative way. The port of Hambantota is a staple feature of these narratives, while Sri Lanka is also a site of intersecting strategic interests. So it is important for Sri Lanka to take an honest and hard look at those narratives and have its own perspectives of China’s presence in the Indian Ocean and especially, its presence in Sri Lanka. That is what I will try to do here, as a Sri Lankan researcher, and not of course as a representative of the Sri Lankan government.

II. Harnessing China’s Commercial Presence in the Indian Ocean

On China’s commercial presence throughout the Indian Ocean, we can see upward trends in three areas; investment, trade and tourism. China is investing more in Indian Ocean states, it is trading more with them, and is sending more tourists to the Indian Ocean. My remarks today will focus on Chinese investment in Sri Lanka – because of the attention that area has received – before briefly addressing trade and tourism from China, and China’s emerging military presence in the Indian Ocean.

IIA. Investment: Strong Growth in Sri Lanka and Some Concerns 

Sri Lanka has received close to USD 4 billion of Chinese investment from 2005 to 2018, which amounts to a little under 5% of its 2018 GDP. In those terms, Sri Lanka ranks in the mid-range of Indian Ocean countries, behind Cambodia, Singapore, Myanmar, Australia and Malaysia – where cumulative Chinese investment represents a higher percentage of those countries’ GDP. This data indicates Chinese investment is significant for Sri Lanka, but Sri Lanka is not highly dependent on it. On the other hand, however, much of that Chinese investment has come in the past two years, with a large share in 2017 and 2018. The high numbers of Chinese investment shown for these two years includes foreign direct investment (FDI) in the Hambantota port.

This brings us to the positives and possible concerns about Chinese investment in Sri Lanka. Chinese investment has always been infrastructure-driven in Sri Lanka. Besides the Hambantota port, other Chinese-funded infrastructure projects include a power plant, a regional airport, a successful terminal of the Colombo port, and the Colombo Port City (which is separate to the port and is a huge mixed-use project being built on Colombo’s shores). I have included a picture of this planned project because I think it captures why Sri Lankans value Chinese investment; which is that it offers Sri Lanka a chance for a type of modern urban future that was unthinkable ten years ago. Chinese funds enable infrastructure that Sri Lanka needs to grow, and for which other financing options are limited – especially as Sri Lanka is now a middle-income country with less access to concessionary funds. So Chinese investment is here to stay, and the relevant question for Sri Lanka is not how it can limit or preclude Chinese investment but rather, how can it improve the net impact of that investment?

I would like to suggest four ways in which Sri Lanka can improve the impact of Chinese investment, which is to address four valid concerns about Chinese investment and indeed, about all foreign investment in Sri Lanka. First, to avoid ad hoc and inefficient projects, Sri Lanka needs a transparent, long-term infrastructure plan – similar to New Zealand’s 30-year infrastructure plan – which prioritises projects and integrates them with each other. Second, Sri Lanka must also boost its negotiating capacity, to secure the best terms and if necessary, to revise those terms – as Malaysia reportedly did recently in respect to a Chinese-funded railway link. Third, given signs of a slowing Chinese economy, it would be prudent for Sri Lanka to diversify its sources of investment. This requires moving more quickly to an investor-friendly climate, a climate that would in turn address the fourth and stubborn challenge of corruption. All these concerns need better national policymaking but can also be addressed multilaterally. For example, the Indian Ocean Rim Association (IORA) could host a legal mechanism akin to the African Legal Support Facility (ALSF) to strengthen the negotiating capacity of Indian Ocean states, while the Indian Ocean Development Fund proposed by the Sri Lankan government can help diversify sources of financing.

Concerns have also been raised about the environmental effects and impact on Sri Lankan labor and other local stakeholders. These concerns need detailed further study, linked to better long-term national policymaking. There are two other concerns that are frequently voiced, especially in the international media, which I believe are only weakly supported by the evidence in Sri Lanka. Those are claims that (i) Chinese investment, particularly in the Hambantota port, are for dual military and commercial uses, and (ii) that Chinese investment comes with a debt trap. Let me address the concern about Chinese debt first. While the situation must continue to be closely watched, the current numbers do not show a trap. Half of Sri Lanka’s central government debt is owed domestically, and of its external debt, 9% is owed to China – mostly as concessionary loans – compared to 10% that is owed to Japan and about a quarter to international financial institutions including the World Bank.

On the concern about dual use ports, with regard to Hambantota, the evidence indicates that the port is and will be used for commercial and not military purposes. The investment and lease agreements prohibit the port being used for non-commercial purposes and they confirm that the Sri Lankan government has sole control over military purposes. Of the seven naval ships that Sri Lanka has permitted to visit Hambantota since 2016, there have been US and Japanese naval ships but no Chinese ships. There is an active Sri Lankan naval base at Hambantota that is being further expanded. Military use of ports is something that Sri Lanka must continue to be vigilant about, though it has exercised vigilance to date.

IIB. Trade and Tourism: Potential for Sustained Growth in Sri Lanka

Those are perspectives with regard to investment. The picture of Chinese trade and tourism in Sri Lanka is rather different because Sri Lanka has not seen the same growth in trade and tourism as it has in investment from China. In regard to imports, trends in Sri Lanka are quite similar to elsewhere in the Indian Ocean. That is, the share of imports from China and other Indian Ocean states is increasing and the share of imports from the EU, US and Japan are decreasing. In regard to exports, Indian Ocean states are exporting more to each other and more to China, and relatively less to the EU, US and Japan. But the trend in Sri Lanka has been very different to other Indian Ocean states. The bulk of its exports continue to go to the EU and US, a bit more to other Indian Ocean states, with hardly any growth in the share of exports to China. So there is work to be done in Sri Lanka to tap into the Chinese markets and related value chains.

Similarly, Chinese tourism to Sri Lanka is relatively unimpressive compared to other Indian Ocean states like the Maldives. This seems to be another untapped commercial opportunity of China’s presence in the Indian Ocean. It is particularly odd that Chinese tourism to Sri Lanka has flattened since 2016 while tourism from elsewhere has surged. This is something that Sri Lanka needs to study and address.

III. Navigating Military Trends in the Indian Ocean

On China’s military presence in the Indian Ocean, it is difficult to point to established regional trends to the same extent as for Chinese investment, trade and tourism. China is clearly increasing its overall military expenditure and naval capacity, while keeping that expenditure at a consistent and relatively constrained share of its GDP. At the same time, India has leapfrogged into 4th place among the world’s top defense spending countries in the past couple of years, while the US remains the clear leader in that ranking. We are also seeing China just starting to expand its military aid. Sri Lanka is about to receive its first gift of a vessel from China, having received several vessels in recent years from other countries. For Sri Lanka, these are all signs of the main concern, which is the overall militarisation of the Indian Ocean, and resulting strategic tensions that could derail the economic potential of the Indian Ocean for littoral states.

Sri Lanka’s response to these concerning dynamics has been similar to that of many smaller countries in the region and in keeping with its non-aligned heritage. It is welcoming visits by naval ships from all nations (from 2008 to June 2019, Sri Lanka hosted 472 naval visits from over 25 nations: 96 from India, 74 from Japan and 39 from China). Sri Lanka is developing its commercial ports and engaging in military exercises with a range of strategic partners, including with India, Japan and the United States. At the same time, it is facilitating a collective understanding of the increasing challenges in the Indian Ocean and ways to address these challenges within a rules-based framework. This is why Sri Lanka hosted a major conference on the future of the Indian Ocean in late 2018. These various steps, of engaging with several partners and promoting dialogue, mirrors the approach of Singapore in many ways, that Prime Minister Lee detailed at the 2019 Shangri-La Dialogue.

Having raced through different points in this presentation, I will end with a recap, which is that:

• Sri Lanka increasingly views the Indian Ocean as critical to its own future;
• China’s commercial presence in the Indian Ocean has brought high investment from China, raising some valid concerns in Sri Lanka that should be addressed by both national and multilateral policy measures;
• By contrast, there is significant potential to grow Sri Lanka’s trade and tourism from China;
• Sri Lanka’s main concern as to military presence is the overall militarisation of the Indian Ocean; and
• To contain risks of that militarisation, Sri Lanka is engaging with various strategic partners and encouraging regional dialogue, in line with its non-aligned heritage.

I look forward to your questions and feedback and thank you for listening.

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*Text as prepared; not checked against delivery. The opinions expressed in this lecture are the presenter’s own and not the institutional views of LKI, and do not necessarily reflect the position of any other institution or individual with which the presenter is affiliated.