Pakistan Affairs

Tag: East Asia

  • The Tale of 2 Economies: Navigating the Growth Paradox in China 

    China presents a compelling case of the growth paradox, where robust economic indicators mask underlying disparities and societal sentiments. The dichotomy between China’s impressive economic figures and the lived realities of its businesses and people indicates how these contradictions coexist. Understanding these divides and seeking solutions to bridge them can have a significant impact on the nation’s economic trajectory and its global standing.

    A Growth Paradox

    On January 17, the National Bureau of Statistics announced that China’s GDP growth for 2023 reached 5.2 percent, a growth rate that is highly commendable and ranks prominently on the global stage. That figure would suggest that the Chinese economy has achieved stable and rapid growth, again. 

    However, the reality shows clear signs of strain: Consumers are saving their shrinking disposable incomes instead of spending them, and enterprises are suspending their investments due to fear of declining profitability and company value. 

    In 2023, the total market value of A-shares in China decreased by approximately 8.5 trillion yuan, an amount equivalent to the total cost of the Belt and Road Initiative over its lifetime (estimated to be between $1.2-1.3 trillion, or about 8-9 trillion yuan). This decline occurred against the backdrop of growing capital markets in the United States, various European countries, and India. In the first trading week of 2024 alone, an additional 7 trillion yuan was lost. Stock markets mirror the collective sentiments of investors, currently indicating a loss of confidence in China’s growth prospects.

    People I talked to during my recent trip to China shared these sentiments: The rich have little confidence in growing or even sustaining their wealth; the poor have little hope of upward mobility. Two phrases, “involution” (内卷) and “lying flat” (躺平) encapsulate what happened over the past year. Involution is a sociological term describing a state of excessive and ineffective competition, leading to a zero-sum game where resources are redistributed but minimal genuine value is created. Lying flat, an internet slang term, characterizes the attitude of those who opt out of this relentless competition, choosing instead to accept their circumstances and leave their fate to time.

    In socioeconomic terms, the “growth paradox” describes a phenomenon where there is an inconsistency between the statistical data of economic growth and the actual economic welfare of the general populace. This disparity involves complex structural issues that require comprehensive policy adjustments and socioeconomic development strategies for resolution.

    Unequal Benefits of Economic Growth

    The growth paradox is primarily due to the unequal distribution of economic growth benefits. Large enterprises and the urban elite disproportionately accumulate wealth, benefiting from the country’s economic growth. Their success overshadows the slower growth and constrained opportunities for private businesses, particularly small- and medium-sized enterprises (SMEs), and rural residents. 

    Despite SMEs in China representing 99.8 percent of all business entities and employing nearly 80 percent of the workforce, they face a contraction phase marked by limited access to capital, complex regulatory hurdles and excessive competition in a shrinking market. The Purchasing Managers’ Index (PMI) data from October 2023 underscored this divide: Large enterprises posted a PMI of 50.3 percent, with state-owned enterprises at 50.0 percent and large private enterprises at 50.7 percent, all indicating expansion. In contrast, medium-sized enterprises experienced a PMI of 48.6 percent, and small enterprises were at 47.5 percent, both in the contraction zone. 

    This pattern reflects broader industrial output differences in China. State-controlled enterprises saw a 7 percent growth in 2023, compared to a modest 5 percent for private enterprises, most of which are SMEs. Given the large number of employees in the SME sector, more people felt the strain of an economic downturn.

    Overcapacity vs Lack of Capacity 

    As the world’s factory, China’s production capacity was tailored to supply the global market during the golden age of globalization, from 1999 to 2018. However, since the onset of the trade war between the United States and China, efforts to de-risk dependency on China’s supply chains have particularly impacted China’s manufacturing sector. 

    SMEs, the backbone of China’s export-oriented manufacturing sector, are encountering severe profitability challenges, with many on the brink of bankruptcy. A sharp reduction in sales for an export-oriented company can significantly affect not only its own profitability, valuation, and stock price but also the financial health of many SMEs on the entire supply chain. This situation has created a vicious cycle where reduced profits hinder investment in R&D, production growth, and job creation, while intensified price competition from an involution-style rivalry further diminishes profits and, in some instances, leads to business shutdowns. This self-reinforcing cycle underscores the difficulties of operating in an economy facing declining demand, which results in serious overcapacity and unemployment. 

    On the other hand, China’s rapid advances in manufacturing have led to a dilemma in geopolitics. The country has ascended the global value chain, modernizing its industrial sector. This rise has been accompanied by an assertive recalibration of its international standing, aiming to reflect its burgeoning economic clout, especially in negotiations with the United States. However, this upward trajectory is tempered by a vulnerability due to its dependence on imported technologies and access to an open global market for its production capacity. This leaves China susceptible to U.S. sanctions on advanced technologies and to shifts in supply chains away from China toward the nearshoring and friend-shoring partners of the United States. 

    The semiconductor sector illustrates this point vividly. China faces significant “chokepoints” imposed by the U.S. and its allies in chipmaking, leading to shortages in high-end, especially AI, chips. Concurrently, China’s substantial investments in mature-node chipmaking risk creating internal competition and overcapacity, which could potentially result in anti-dumping trade restrictions from other countries. 

    Domestic vs Geopolitical Challenges

    The disconnect between economic growth, as suggested by statistical data, and the collective sentiments arise from a misalignment between macroeconomic trends and microeconomic activities within China. Government policies might focus more on long-term structural and quality improvements of the economy rather than on short-term employment and income growth, which may not be immediately understood or accepted by the public. Policy-driven GDP growth in large projects or investments in certain areas or industries may not directly translate into job opportunities or income increases for average citizens. 

    On one hand, sectors like renewable energy, electric vehicles, and high-tech manufacturing – considered the three new engines for China’s GDP – continue to offer promising growth avenues. On the other hand, businesses face significant challenges due to unpredictable policies, contracting export markets, reduced government spending, and cautious consumption by local consumers. These challenges cascade down the economic value chain. 

    The collapse of several high-profile real estate companies last year has triggered a domino effect across supply chains, resulting in decreased production within upstream industries such as steelmaking, cement, and construction, as well as affecting downstream sectors like furnishing and furniture. A fear of widespread economic instability and loss of investor confidence may ensue. At the societal level, collective sentiments include lowered expectations for future earnings; rising unemployment, especially among the youth; growing income inequality due to the concentration of wealth in certain industries and regions; and increasing costs (visible and invisible) in education, healthcare and aged care. 

    Globally, China is facing an increasingly hostile geopolitical landscape, where, as shown in the semiconductor sector, geopolitical pressures result in critical technology shortages and push China toward developing a self-reliant ecosystem to mitigate foreign influence and secure its economic future. 

    The China-U.S. relationship is at the core of China’s geopolitical complexity. Over nearly half a century, the relationship between China and the United States has evolved from diplomatic engagement to deep economic cooperation, and now to a state of strategic competition. Since the establishment of diplomatic relations, trade between the two countries has grown more than 200-fold over 45 years, with bilateral investment exceeding $260 billion, and over 70,000 American companies investing and operating in China. 

    Recently, the economic relationship between the two countries has shifted into a new era of technology rivalry, marked by strategic competition for control over global supply chains of critical technologies and minerals. This rivalry can potentially lead to technology decoupling. Such developments have profoundly impacted China’s economy, with export-oriented SMEs being particularly affected due to U.S.-led reshuffling of the global supply chains.

    A More Reclusive China?

    Facing such challenges, China is pivoting toward an inward-looking strategy. It is cultivating a self-reliant ecosystem focused on bolstering its large domestic market and internal circulation, aimed at becoming less susceptible to foreign influences. 

    China isolated itself for three years during the COVID-19 pandemic. In the post-pandemic era, China has cautiously opened its borders. Yet, wandering through the bustling streets in China, even in large cities like Beijing and Shenzhen, one notices a curious absence: Foreign faces are markedly sparse. 

    In 2023, China reported its first negative foreign direct investment (FDI) since 1998. Inward FDI has played a significant role in China’s economic growth, employment, productivity, and technological innovation. However, foreign enterprises and their foreign employees are either rushing out of China or have not yet returned post-pandemic.

    China’s advanced digital infrastructure has become a virtual barrier for foreigners. Chinese citizens have embraced technology with fervent zeal. China has leapfrogged into a cashless society where QR codes serve as the magic wand of commerce. They enable the easy acquisition of goods and services, including public services such as those in hospitals, schools, and customs at the borders, with a simple scan. However, for outsiders, especially those without a Chinese residential permit – which is required for foreigners to open a bank account and thus set up a QR code for mobile payments – life in China can be disorienting. 

    Beyond this virtual barrier, the digital divide is perhaps the most striking for foreign visitors. The Great Firewall, now AI-enhanced, looms large, segregating the online world. Efforts to breach this digital barrier, even via VPNs, are often futile.

    The Way Forward

    China’s economic reality, through the lens of the growth paradox, reveals the disparities between economic numbers and the sentiments of the people and businesses. These disparities underscore the need for more inclusive growth strategies. As China navigates the choppy waters of domestic challenges and geopolitical uncertainty, the true measure of its economic success will be how well it bridges these divides, ensuring that the fruits of growth are more evenly distributed across all strata of society. 

    The path forward calls for a balanced approach that harmonizes state-led development with market-driven entrepreneurship, fostering an environment where foreign and private businesses and entrepreneurs regain their confidence to invest for the future, and to grow their wealth through innovation and hard work. For confidence to return, they need not just growth opportunities but also stable and predictable policies, as well as a friendlier and more open global market.

    Specifically, shifting the focus from prioritizing infrastructure investment toward increasing investment in areas that contribute to social security, healthcare, and education will foster confidence among average citizens regarding their future. This approach may boost domestic consumption.

    Expanding high-level openness to the international community and continuously creating a market-oriented, law-based, and internationalized business environment are crucial to achieve this goal. Effectively removing barriers for foreign nationals coming to China for business, study, or tourism, and enhancing the convenience of living, traveling, and working in China are essential first steps.




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  • China’s 3 Pathways to Green Steel

    China is the world\’s largest carbon emitter and the steel sector is a major contributor to this. To reduce emissions, Chinese steel producers have 3 main options: replacing traditional coal-based blast furnaces with electric arc furnaces, installing carbon-capture equipment, and adopting green hydrogen-based technologies. The latter is being explored by leading steelmakers, such as China Baowu Steel Group and Ansteel Group, with the support of the Chinese government. If successful, the Chinese steel sector could play a crucial role in the world\’s fight against climate change.



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  • Isolated Iran finds ally China reluctant to extend it a lifeline | CNN

    Editor’s Note: A version of this story appears in today’s Meanwhile in the Middle East newsletter, CNN’s three-times-a-week look inside the region’s biggest stories. Sign up here.


    Abu Dhabi, UAE
    CNN
     — 

    Shortly before leaving for his first state visit to China on Tuesday, Iranian President Ebrahim Raisi issued a thinly veiled criticism of his powerful ally, saying the two countries’ relationship has not lived up to expectations.

    The first Iranian president to arrive in China on a state visit in two decades, Raisi was keen to tell Beijing that it has not given enough support to Tehran, especially economically.

    “Unfortunately, I must say that we have seriously fallen behind in these relations,” he said, referring to trade and economic ties. Part of his mission, he said, was to implement the China-Iran Strategic Partnership Plan (CISPP), a pact that would see Beijing invest up to $400 billion in Iran’s economy over a 25-year period in exchange for a steady supply of Iranian oil.

    Raisi said that economic ties had regressed, and that the two nations needed to compensate for that.

    The public criticism on the eve of the landmark trip demonstrated the heavily-sanctioned Islamic Republic’s disappointment with an ally that has in many ways become one of its few economic lifelines.

    The speech was likely “a reflection of Tehran’s frustration with China’s hesitancies about deepening its economic ties with Iran,” Henry Rome, senior fellow at the Washington Institute for Near East Policy, told CNN. “The same issues that have constrained China-Iran relations for years appear to remain.”

    Analysts said Raisi’s speech was a clear call for China to live up to its end of the relationship, seeking economic guarantees from the Asian power so he can have something to show at home amid a wave of anti-government protests and increasing global isolation.

    “The mileage Raisi will get for having a visit is going to be very limited if that visit doesn’t produce anything,” said Trita Parsi, vice-president of the Quincy Institute in Washington, DC. “The Iranians are not in a position right now in which a visit in and of itself is sufficiently good for them…They need more.”

    Whether Iran is satisfied with what China offered it, however, is yet to be seen.

    “Though more substance may be achieved following the visit, the reality is that Raisi needs both the substance and the announcement of concrete agreements,” said Parsi. He added that China, on the other hand, appears to be inclined to “play matters down” as it balances the partnership with its ties with Gulf Arab states at odds with Iran, as well as its own fraught relations with the US.

    In a joint statement, both China and Iran said they are “willing to work together to implement” the CISPP and “continue to deepen cooperation in trade, agriculture, industry, renewable energy, infrastructure and other fields.”

    On Wednesday, Iranian Foreign Minister Hossein Amirabdollahian, who accompanied Raisi to China, said that the two countries agreed to remove obstacles in the way of implementing the CISPP, adding that Iran was “optimistic at the results of the negotiations,” according to state news agency IRNA.

    Chinese President Xi Jinping also accepted an invitation to visit Iran on a future date.

    Raisi’s trip comes as Beijing strengthens its ties with Iran’s foe Saudi Arabia, and as cheap Russian oil potentially threatens Iran’s crude exports to China.

    Less than two years after he took power, Raisi’s term has witnessed growing isolation from the West – especially after Iran supplied Russia with drones to use in its war on Ukraine – and failed efforts to revive a 2015 nuclear deal that removed some barriers to international trade with the Islamic Republic.

    As Western sanctions cripple its economy, Beijing has helped keep Tehran afloat economically. China is Iran’s biggest oil customer, buying sanctioned but cheap barrels that other nations would not touch.

    Tehran’s other ally, Russia, has however been biting into its Asian oil market as China buys more Russian barrels – also sanctioned by the West – for cheap, threatening one of Iran’s last economic lifelines.

    The visit is therefore a strategic one, analysts say, and an attempt by Iran pull itself back up from domestic instability and worsened isolation from the West.

    “(It) is an opportunity for Raisi to try to draw a line under the past five months of domestic unrest and project a sense of normalcy at home and abroad,” said Rome.

    But Jacopo Scita, a policy fellow at the Bourse & Bazaar Foundation in London, said he did not expect the visit to result in much more than a recognition of China’s partnership with Iran.

    “Raisi will hardly get much from the economic perspective, except for a new series of memoranda of understanding and some minor deals,” he told CNN.

    Iran has also been reminding its people that looking eastward is the right path toward economic revival as prospects of returning to nuclear agreement fade, said Parsi. The government has been keen to show that it has “an eastern option” that is supportive and lucrative, he said.

    Scita said that China is unlikely to live up to Iran’s expectations, however.

    “I don’t believe that Beijing can offer guarantees to Tehran except a pledge to continue importing a minimum amount of crude regardless of the global market situation and China’s domestic demand,” he told CNN.

    How Raisi’s visit will be received back at home remains unclear. If the trip yields no concrete results in the coming days, then Iran’s move eastward could prove to be “a huge strategic mistake that the Raisi government has really rushed into,” said Parsi.

    Additional reporting by Adam Pourahmadi and Simone McCarthy

    Turkey’s earthquake left 84,000 buildings either destroyed or in need of demolition after sustaining heavy damage, Turkish Urban Affairs and Environment Minister Murat Kurum said Friday, according to state media.

    The deadly earthquake – which sent shockwaves across the region – has so far killed more than 43,000 across both Turkey and Syria.

    At least 38,000 people died in Turkey, according to Turkey’s governmental disaster management agency, AFAD. The death toll in Syria remains at least 5,841, according to the latest numbers reported Tuesday by the United Nations Office for the Coordination of Humanitarian Affairs (OCHA).

    Here’s the latest:

    • Since the February 6 earthquake, a total of 143 trucks loaded with aid provided by six UN agencies have crossed from Turkey to northwest Syria through two border crossings, a OCHA statement said Friday.
    • Two men were rescued in Hatay ten days after the earthquake struck, said Turkey’s Health Minister Fahrettin Friday. And late on Thursday, a 12-year-old boy was rescued from rubble in southern Hatay 260 hours after the earthquake hit, according to CNN Turk, which reported live from the scene.
    • World Health Organization Director-General Tedros Adhanom Ghebreyesus said upon returning from Syria on Tuesday that more than a decade of war in the region has left towns destroyed, with the health system unable to cope with this scale of emergency. “Survivors are now facing freezing conditions without adequate shelter, heating, food, clean water or medical care,” he said.
    • Turkey added Elazig as the 11th province in the list of those impacted by the quake, the ruling party spokesman said.
    • A Turkish family was reunited with the ‘miracle baby’ that was found in the rubble of the quake after they had given up hope.
    • A confused woman asked her rescuers “What day is it?” when pulled alive from the rubble of last week’s earthquake after 228 hours.
    • After attending the Munich Security Conference in Germany, US Secretary of State Antony Blinken will travel on to Turkey and Greece on Sunday to see US efforts to assist with the earthquake and to meet with Turkish and Greek officials, the State Department said Wednesday.

    Palestinian activist beaten by Israeli soldier says he is scared for his life

    Palestinian activist Issa Amro, who was filmed being assaulted by an Israeli soldier on Monday, told CNN Thursday that he is physically and psychologically affected by the attack and fears for his life.

    • Background: Lawrence Wright, a writer for the New Yorker magazine, posted video of the assault on Twitter. It showed two IDF soldiers manhandling well-known activist Amro, throwing him onto the ground, and one soldier kicking him, before that soldier is pushed away by other troops. The Israeli soldier who was filmed assaulting Amro in Hebron was sentenced to 10 days in military jail. In response to CNN’s interview with Amro, Israel Defense Forces international spokesman Lt. Col. Richard Hecht said there was “no justification” for the soldier’s behavior, but suggested Amro had provoked the incident.
    • Why it matters: Amro said he is afraid for his life and for the lives of the people in the area, but added that, “unfortunately what happened to me is happening almost every day.” He said he filed many complaints to the Israeli police about soldier and settler violence, but had gotten no accountability. Amro also said he wants the Biden administration to reopen the Palestinian consulate in East Jerusalem.

    Protesters set fire to ATMs as Lebanese lira hits 80,000 against the dollar in new record low

    Lebanon’s national currency has hit a new record low of 80,000 Lebanese lira against the US dollar, according to values sold on the black market on Thursday. On Thursday, protesters blocked roads across Beirut and set fires to ATMs and bank branches, according to videos posted on social media by the organizers, United for Lebanon and the Depositors Outcry Association, who are both advocating for the release of depositor savings.

    • Background: The lira has been on an exponential fall since January 20 when the Lebanese central bank (BDL) adjusted the official exchange rate for the first time in decades, from LL1,500 to LL15,000. Lebanese banks have been closed since Tuesday due to a strike announced by the Association of Banks in Lebanon. Prime Minister Najib Mikati said in a statement Thursday that “efforts are continuing to address the financial situation.”
    • Why it matters: Lebanon has been in a deepening financial crisis since 2019. The country moved toward securing an International Monetary Fund (IMF) bailout in April 2022, but the deal is yet to be finalized.

    Iran denies links to new al-Qaeda leader, calls US claim ‘Iranophobia’

    Iranian Foreign Minister Hossein Amir Abdollahian on Thursday denied claims by the US that al-Qaeda’s new leader, Seif al-Adel, is living in his country. “I advise White House to stop the failed Iranophobia game,” wrote Abdollahian on Twitter. “Linking Al-Qaeda to Iran is patently absurd and baseless,” he said.

    • Background: US State Department spokesman Ned Price on Wednesday told reporters that the US backs a UN report linking al-Adel to Iran. “Our assessment aligns with that of the UN, the assessment that you (a reporter) referenced that Saif al-Adel is based in Iran,” said Price during a press briefing, adding that “offering safe haven to al-Qaeda is just another example of Iran’s wide-ranging support for terrorism, its destabilizing activities in the Middle East and beyond.”
    • Why it matters: Tensions between Iran and the US have only worsened in recent months, as the Islamic Republic supplies drones to Russia for use in its war on Ukraine and negotiations to revive a 2015 deal remain frozen. The US said it killed al-Qaeda’s former leader, Ayman al-Zawahiri, in a drone strike on Kabul, Afghanistan last year.
    \"The

    A Roman-era lead sarcophagus was uncovered on Tuesday at the site of a 2000-year-old Roman necropolis in the Gaza Strip. The necropolis is along the Northern Gaza coast and 500 meters (0.3 miles) from the sea.

    The sarcophagus may have belonged to a prominent individual based on where it was found, the Palestinian Ministry of Tourism and Antiquities’ director of excavation and museums, Jehad Yasin, told CNN on Thursday.

    Yasin said the ancient Roman cemetery was discovered in 2022 “as excavations were carried out at the site in cooperation with Premiere Urgence Internationale and funded by the British Council.”

    Premiere Urgence Internationale, a French humanitarian organization, has collaborated on “Palestinian cultural heritage preservation” projects in Gaza under a program called INTIQAL.

    The coffin was exhumed from the site to perform archaeological analysis for bone identification, which will take around two months, according to Yasin.

    A team of experts in ancient funerary will unseal the coffin in the coming weeks.

    While Gaza is a site of frequent aerial bombardment and a land, air, and sea blockade imposed by Israeli and Egyptian officials, the sarcophagus remains intact.

    “The state of preservation of the sarcophagus is exceptional, as it remained sealed and closed,” read a press release from the Ministry of Tourism and Antiquities.

    French and Palestinian archaeologists have uncovered eighty-five individual and collective tombs in the 3,500-square-meter Roman acropolis since its discovery last year, while ten of them have been opened for excavation.

    Beyond the rubble of the coastal enclave lay dozens of artifacts and burial sites from the Roman, Byzantine and Canaanite eras.

    Last year a Palestinian farmer discovered the head of a 4,500-year-old statue of Canaanite goddess Anat while another Palestinian farmer discovered a Byzantine-era mosaic in his orchard.

    In 2022 the Ministry of Tourism and Antiquities released their first Arabic archaeological guide titled “Gaza, the Gateway to the Levant.” The guide charts 39 archaeological sites in Gaza, including churches, mosques and ancient houses that date back to 6,000 years.

    The ministry expects more archaeological findings at the necropolis.

    Further sarcophagi are likely to be uncovered in the following months, said Director Yasin.

    By Dalya Al Masri

    \"A





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  • The US Indo-Pacific Strategy’s Weakest Link

    In May 2022, with the launch of the “Indo-Pacific Economic Framework for Prosperity,” the Biden administration sought to rebuild the U.S. footprint across the Asia-Pacific region. The Framework, both rhetorically and materially, seeks to counter the growing Chinese economic and military presence across the region by re-emphasizing liberal democratic values, a rule-based international order, the challenges of climate change, and economic development.

    Nevertheless, the renewed U.S. geostrategic interest in the region has placed smaller states and long-standing U.S. allies in the uncomfortable position of having to rebalance their relationships with China and the United States in a way that entangles them in the Sino-American strategic competition and does not address their particular concerns. As Fiji’s then-Prime Minister Frank Bainimarama noted on the eve of Chinese Foreign Minister Wang Yi’s 2022 visit to the Pacific Island state, “Geopolitical point-scoring means less than little to anyone whose community is slipping beneath the rising seas.”

    Moreover, it is evident that the new U.S. outreach to the Asia-Pacific failed to include a robust economic and trade dimension. As newly appointed Australian Ambassador to the United States Kevin Rudd observed, American involvement in the Asia Pacific needs to have a larger economic component. “For the future, what is the missing element in U.S. grand strategy?” Rudd asked. “It’s called the economy, stupid,” he continued, echoing a nugget of political wisdom from the Clinton administration in the 1990s.

    Rudd further argued that current U.S. trade and economic policy was detrimental to curbing Chinese influence in the region because Washington is “happy to throw some of its allies under a bus.”

    Rudd was subsequently criticized for using undiplomatic language that was unbecoming for an incoming ambassador. Yet putting aside the question of Rudd’s tact, it is problematic that the current U.S. strategy toward the Asia-Pacific decidedly privileges hard military power, security cooperation, and blunt trade-distorting economic tools such as tariffs and export controls. This reliance on military instruments, “managed trade,” or poorly designed trade and investment sanctions (exemplified by the Trump administration, when it unilaterally imposed tariffs on various industries, such as aluminum, without exemptions for allied states) rather than showcasing a free trade and investment policy and access to the U.S. market undermines U.S. objectives.

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    Without granting Asia-Pacific states market access and lower trade and investment barriers, the United States will be unable to provide a viable alternative to Chinese economic and investment activities in the region. It will also inhibit the exercise of U.S. soft power as China continues its attempts to delegitimize the interests, presence, and actions of the United States and provide an alternative narrative of Western engagement in the Asia-Pacific as racist, colonialist, and exploitative.

    Previous U.S. Asia-Pacific Policy

    The United States and the Asia-Pacific have had a complex history that encompasses the contradictions of capitalist exploitation, humanitarianism, racism, liberal trade, and imperialism. American clipper ships and whalers roamed the Pacific in search of whales, trade, and leisure, seeking to pry open European colonial controls on trade and influence. Chinese immigrant workers helped build the United States’ intercontinental railways before being excluded by racist state and federal legislation. Idyllic islands were commandeered by the U.S. Navy as coaling stations. Hawaiian sovereignty was overthrown and replaced by an American sugar and pineapple planter elite. Philippine soldiers, labeled rebels and terrorists in the early part of the 20th century as the United States sought to pacify the country, became American comrades-in-arms against the Japanese in 1941.

    For the most part, U.S. policy in the region has been pitched toward preventing hegemony that could threaten U.S. territories or adversely affect trade and the growth of liberal values. Throughout the 19th century, the American “Open Door” policy played a prominent role in efforts to undermine European efforts to create exclusive spheres of influence throughout the region. At the same time, the occupation of the Pacific Coast and the underlying ethos of “Manifest Destiny,” which assumed the inevitability of the United States’ continued territorial expansion, set the stage for imperialist expansion into Samoa, Guam, Hawaii, and the Philippines.

    In the United States, this westward Pacific expansion was seen as moving away from the seeming decadence and machinations of the imperialist European world, not as a re-enactment of European colonialism. Indeed, President Theodore Roosevelt noted that the American future “will be more determined by our position on the Pacific facing China than by our position on the Atlantic facing Europe.”

    After World War II, the policy became enmeshed in the global Cold War and the anti-colonialism movement. The United States supported Indian and Indonesian independence but also supported the British in Malaya and the French in Indochina as they sought to re-establish colonial rule. The U.S. military fought in Korea and Vietnam, and the United States established numerous military bases throughout the Pacific and Indian Oceans. The military and ideological aspects of these policies were controversial and alienated many across the Asia-Pacific, while being less than effective at achieving U.S. objectives.

    Moreover, in the Pacific Island states, the United States did little to deepen the goodwill engendered by World War II alliances with continued infrastructure, education, and health initiatives across the decades. This neglect was encouraged by the monopoly status of U.S. power across the Pacific after the war.

    Yet for all the military focus, U.S. policy provided collective goods for the region and had a decidedly economic component as part of its geostrategic calculus. U.S. policy sought to lower tariffs, overlooked mercantilist or protectionist practices by Asia-Pacific allies, and promoted export-led development that relied on the U.S. market to encourage post-war economic growth and stability in Japan and the “Asian tigers” (South Korea, Singapore, Taiwan, and Hong Kong) while pushing a rule-based economic order through GATT and the WTO. The United States also funded organizations such as the Asian Development Bank to assist in capital formation and USAID to provide humanitarian assistance.

    These efforts were premised on the notion that free markets and the accompanying economic development would lead to liberal democratic societies and the entrenchment of a liberal world order. Over the decades, Washington has provided humanitarian assistance, disaster relief, and assistance against HIV as well as assisting Pacific states in policing their fisheries.

    This economic aspect was an important part of the Obama administration’s “pivot to Asia” and the negotiations that led to the 12-country Trans-Pacific Partnership Agreement (TPP). The TPP, which did not include China, was expected to contribute positively to U.S. growth and would likely have enhanced U.S. influence in the region. It also was envisioned as providing a template for countering China’s increasingly dominant trade relationships across the region.

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    Nevertheless, then-President Donald Trump, following up on his populist notion that foreign industry had been favored by the Washington elite “at the expense of American industry,” removed the United States from the pact on his first day in office. The 11 remaining countries, after amending certain provisions of the TPP that were particularly desirable to the United States, entered into the rebranded Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The combined economies in this agreement represent approximately 13.4 percent of the global gross domestic product.

    The Biden Administration Approach

    The Biden administration rolled out its economic offering to the region, the Indo-Pacific Economic Framework (IPEF), in October 2021. IPEF focuses on high labor and environmental standards, open digital data flows, free fair open trade and investment standards, and resilient supply chains. This proffered “fair and resilient trade” policy is not envisioned to be in the form of a traditional trade agreement and, importantly, does not include market access commitments. The IPEF thus provides a relatively thin gruel for those states seeking to lessen their economic dependence on China or transform the political economy of the region. These trade objectives have been coupled with additional aid initiatives, i.e., the Partners in the Blue Pacific Initiative, targeting infrastructure, health and climate change, but the monies allocated are less than the rhetoric might suggest.

    The lack of sufficient funding and failure to provide a mechanism for Asia-Pacific economies to gain access to the U.S. market is a major oversight. The absence of any demonstrated interest within the Biden administration about joining CPTPP, or provi
    ding market access under IPEF, simply reinforces the perception that the United States has not dispensed with the unilateralist and insular “America First” trade-distorting practices carried out by the Trump Administration, despite the change in rhetoric.

    As Sandra Tarte, the head of the government and international affairs department at the University of the South Pacific in Suva, Fiji, noted in analyzing U.S. policy toward the Pacific Island states, “There’s a lot of talk… And not much real substance.”

    Meanwhile, China has entered into the Regional Comprehensive Economic Partnership, which includes many U.S. allies and covers approximately 30 percent of the world’s population. While not as comprehensive as the CPTPP, the pact sets the stage for a China-led economic bloc in the Asia-Pacific. At the same time, China’s Belt and Road Initiative has channeled billions of dollars into development projects – for example, it is the biggest provider of investment in the Pacific Island region, which has generated significant goodwill.

    The result of these developments is that the United States has done little to prevent China from becoming an even more dominant center of investment and trade. This, in turn, would give the country additional leverage over the geopolitical choices that states in the region must make.

    Time to Bring U.S. Economic Power Back

    The United States should change course and encourage additional trade and investment throughout the region. In many countries, the United States is seen for the most part as simply a security partner; it lags behind China as the major trading and investment partner to states in the region. The Biden administration must avoid the political temptation to genuflect to the isolationist “America First” populism and the Democratic Party’s historical political base. It must reinvent its economic dynamism and connections in the region at a time when the Asia-Pacific economies are becoming more integrated with minimal U.S. involvement.

    While it is correct that globalization has had a negative impact on American workers in some industries, and created economic and social disruptions that have changed the American political landscape, a free trade and investment regime underpins the Western commitment to liberal democracy and economic dynamism. U.S. policy has prevented Washington from significantly engaging economically in the region, and its actions directed against China have had significant collateral damage to its traditional allies and potential security partners.

    Without an economic component, it will be difficult for the United States to compete with China to offer an alternative liberal, rule-based model of economic development and shape Beijing’s behavior in a way that would socialize it more into the international community. First and foremost, the United States should join CPTPP. This would fundamentally alter the geostrategic environment and individual state decision-making throughout the region. It would also provide economic benefits to American workers and businesses, that have been shut out of markets.



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  • China Slaps Export Bans on Taiwanese Goods – Again

    China has again hit Taiwanese products with export bans – this time, on fishery products such as squid, fourfinger threadfin, Pacific saury, and skipjack tuna, as well as a number of beverages including Taiwan’s most recognizable alcohol brands, Taiwan Beer and Kinmen Kaoliang.

    The fishery product bans were first announced on December 8, with a press conference held by Taiwan’s Council of Agriculture. The press conference came after news of the ban had already begun to spread in the industry. Earlier that day, the Taiwan Squid and Saury Fisheries Association had held a press conference stating that China had suspended the registration of any new businesses. The market for Taiwanese squid, fourfinger threadfin, and Pacific saury exports to China was $166.5 million in 2021.

    In the next few days, more bans on Taiwanese products came to light. 123 out of 354 beverage items registered for export from Taiwan to China were suspended, while 11 out of 28 beer and distillery items were suspended. Affected goods included Taiwan Beer, which is produced by the state-run Taiwan Tobacco & Liquor Corporation; Kinmen Kaoliang, the distinctive sorghum liquor from the outlying island of Kinmen; and craft beer brand Taihu, which had been expanding its Chinese market in recent years. King Car, which produces international award-winning Kavalan Whiskey, and the Uni-President Corporation, one of Taiwan’s largest conglomerates and the operator of dominant convenience store chain 7/11, were also affected.

    Overall, 2,409 companies were hit with import suspensions. By December 10, the number of Taiwanese companies whose export permits were “approved by recommendation” declined to 42 from 266 in September and the number of companies whose permits were “approved by self-application” declined to 750 from 846.

    This is one of a series of bans that China has announced on Taiwanese goods in past years, starting from a ban on Taiwanese pineapples announced in February 2021. China was previously a major market of pineapple exports for Taiwan, with 95.2 percent of pineapple exports worth $155.23 million going to China between 2018 and 2020.

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    This was followed by bans on wax apples and custard apples in September 2021 and on grouper in June 2022. In August 2022, shortly before U.S. Speaker of the House Nancy Pelosi’s visit to Taiwan, China announced bans on 100 products including snacks, honey, pastries, and seafood.

    The common feature in such bans is that the impacted goods were highly reliant on the Chinese market when it came to exports. In 2021, 91 percent of Taiwan’s grouper exports went to China, among the world’s largest consumer markets for grouper. As a result, high hopes had been placed on the Chinese market for grouper farming in Taiwan during periods of strengthening economic ties under the Ma Ying-jeou administration from 2008 to 2016. Similarly, the Chinese market accounts for up to 90 percent of Taiwanese wax and custard apple exports.

    These were often high-end products. Taiwan has sought to tout its pineapples as a luxury product in recent years, for example. Some grouper breeds are among the more highly-priced varieties of fish in Taiwan, reserved for important occasions.

    Otherwise, many of the targeted products have strong symbolic value. Among the snacks banned in August 2022 was iconic Taiwanese snack Kuai Kuai, a favorite of engineers because of a superstition that stacking bags of green Kuai Kuai near machines will keep them operating smoothly. In the most recent series of bans, Taiwan Beer is Taiwan’s national beer brand, while Kinmen Kaoliang is culturally significant – it is served at state dinners, used in religious ceremonies, and prisoners are traditionally given a glass of kaoliang before executions.

    China justified the bans by claiming Taiwanese pineapples, wax and custard apples, and grouper violated food safety standards. The Chinese government claimed to find mealybugs in shipments of pineapple from Taiwan between March and May 2020, as a result of which new controls were implemented in October 2020 to deal with the issue. Overall, according to customs data, China only found 13 instances of mealybugs in pineapple export batches, with 99.79 percent of pineapple exports passing inspections.

    Similarly, the Chinese government’s decision to suddenly ban pineapples from Taiwan in early 2021 was thought to be aimed at impacting Taiwanese farmers. The announcement of the ban was timed right before the harvest season for pineapples in March, so that harvested pineapples would have nowhere else to go.

    With the latest round of export bans, the claim from the Chinese government is that registration information for the banned goods did not conform with new documentation requirements. Among affected companies, 621 companies were told that documents did not meet specifications, 499 companies were told that their manufacturing did not meet specifications, and 396 companies were told that their company application did not meet specifications. This claim was also used by the Chinese government regarding the goods whose bans were announced in August.

    178 affected fisheries companies stated that they had submitted follow-up documentation requested by China in August of this year but did not receive any response. The Taiwanese Food and Drug Administration (FDA) later stated that 346 of 465 items had their applications rejected on the basis of follow-up documents. Forms publicized by the FDA of what was required by China’s General Administration of Customs later suggested that the Chinese government required Taiwanese companies to reveal trade secrets in export applications. For the most part, however, the FDA has sought to avoid commenting on whether the bans were politically motivated, perhaps hoping to avoid the perception that it is deliberately picking a fight with China.

    The Tsai administration has mostly responded to the bans by announcing that it will take steps to help Taiwanese companies develop new markets, providing training or launching advertising campaigns to assist with this. After the pineapple, wax apple, and custard apple bans, the Tsai administration began advertising campaigns targeting markets such as Japan, spending 1 billion Taiwanese dollars on advertising pineapple, while after the grouper ban, the Council of Agriculture set aside 800 million dollars to assist grouper farmers, while also starting to use grouper in school lunches.

    Amid the latest bans, the Tsai administration has called on to take similar measures for affected companies. It has been suggested that the Tsai administration may seek to develop Southeast Asia as a market for Taiwanese fisheries products, or that processing Pacific saury bones can make them more suitable for European markets.

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    Otherwise, a past strategy adopted by the Tsai administration has been to rally up domestic and international support for Taiwanese goods. The “Freedom Pineapple” campaign called on Taiwanese consumers and allies of Taiwan abroad to purchase domestically grown pineapples as a show of support, to aid Taiwanese farmers. Among those to participate in the campaign was former Japanese Prime Minister Abe Shinzo, who posted a photo of himself with Taiwanese pineapples on Twitter, as did other diplomats and politicians. The “Democracy Fish” campaign aimed to do the same with grouper, finding similar success among some Japanese public figures. This time around, the framing has primarily been around “Freedom Beer,” reflecting China’s ban on Taiwan Beer.

    The “Freedom Pineapple” campaign proved highly successful, with more pineapples sold in four days than would have been sold to the Chinese market in 2021, when the ban took place. Yet exports to China only constituted 10 percent of Taiwan’s domestic pineapple produce, so this was an easy target to reach in making up for the shortfall. And there have been warnings that the government may not always be able to successfully drive up consumption of banned products, and that this may lead to increasing overreliance by industry on the government to bail them out in the event of Chinese bans.

    It is unclear what China intends to accomplish through the bans. Beijing may simply hope to further constrain Taiwan’s market opportunities internationally, as a means of pressuring Taiwan. In particular, the politically influential demographic of farmers and fishermen have historically voted for the KMT due to hoping for access to the Chinese market, as well as historical reasons linked to the use of irrigation associations for watering fields and farmers’ associations for distributing produce.

    Such associations were used as a means of political patronage and control during the authoritarian era, with farmers fearing being cut off from access to water for their fields or the networks used to distribute produce for sale if they voted for the DPP. The DPP remains concerned about undue pan-Blue influence over farmers, which is why the Taiwanese government has made moves to nationalize irrigation associations in past years – a move that the KMT has hotly contested but which was upheld in an August 2022 ruling by the Constitutional Court.

    The Chinese government, then, may be hoping to pressure farmers and fishermen to throw their support behind the KMT. This may take place as part of a velvet glove and iron fist approach – the Chinese government announced 22 incentives for Taiwanese farmers in a similar timeframe to the initial pineapple ban.

    Or the Chinese government may be hoping to prop up the KMT through engendering the perception that it is the only political party in Taiwan able to avoid retaliation from China. The KMT has historically leveraged this claim in campaigning, and KMT politicians state that they intend to meet with Chinese officials to conduct dialogue on the matter, while lashing out at the Tsai administration for worsening cross-strait relations.

    By contrast, the DPP has suggested that it may take the matter to the World Trade Organization (WTO). The DPP has made similar comments in the past, and it remains to be seen whether it finally follows through with this claim. There are some risks to seeking WTO arbitration, as China might use influence within the organization to apply further pressure to Taiwan.

    Otherwise, there have even been suggestions that Taiwan should cut off Chinese access to Taiwanese semiconductors as retaliation, though this is an extreme step that is not likely to take place in the immediate future short of conflict breaking out in the Taiwan Strait. In the export bans, China has primarily targeted substitutable goods that it can source elsewhere, rather than intermediate goods it is reliant on for its own supply chains.

    In the future, it is also possible that China will be increasingly seen as a risky market for Taiwanese companies, incentivizing companies to reduce reliance on the Chinese market and instead develop politically safer markets elsewhere. In this way, China may unwittingly remove one of its own crucial levers for influencing Taiwan politically: Taiwanese companies’ substantial investment in the Chinese market. Indeed, 1,800 of the firms whose products were affected state that they do not intend to reapply for export licenses.

    Likewise, Taiwanese companies might decide there is something to be gained from capitalizing on trends in Taiwan that favor Taiwanese rather than Chinese identity, or anger against China’s actions targeting Taiwan.

    For example, after the recent ban, pineapple cake chain Chia Te Bakery won public accolades after announcing that it refused to hand over its trade secrets to China and would be withdrawing from the Chinese market. Subsequently, a wave of Taiwanese netizens began leaving positive reviews for the bakery’s locations online, though they came into conflict with Chinese netizens or bots that began leaving negative reviews on Chia Te Bakery locations and flooding its Instagram account with negative comments.

    Following the ban on Kuai Kuai and other Taiwanese products in August after the Pelosi visit, and in the wake of the grouper ban that had taken place in June, Kuai Kuai announced that it would be introducing a grouper-flavored variety. Pingtung county magistrate Pan Meng-an of the DPP was among those to tout the new flavor, with the Pingtung county government praising Kuai Kuai’s efforts to “bring grouper to the masses” even if that meant “breaking with tradition.” It is possible that some brands will actively position themselves as hitting back against China in advertising or developing new products.





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  • Demystifying China’s Role in Sri Lanka’s Debt Restructuring

    Currently, Sri Lanka is in the process of restructuring its foreign debt after announcing the country’s first sovereign default on April 12. As the largest bilateral creditor, China is playing a key role in Sri Lanka’s debt restructuring process.

    The topic is not merely a domestic and bilateral matter. Sri Lanka’s debt restructuring, and China’s engagement within it, is receiving global attention given the debt distress across emerging markets and the significant lending China has done to such countries over the past decade or so. During her recent visit to China, International Monetary Fund (IMF) Managing Director Kristalina Georgieva discussed China’s role in addressing the emerging market debt crisis, with special reference to Sri Lanka and Zambia. According to the IMF, discussions with Chinese authorities were fruitful and the IMF sees space for a platform for more systematic engagement on debt issues, where China can play an active role.

    On Sri Lanka specifically, the island-nation is expecting China’s assurance regarding debt restructuring in the coming months, which will pave the way to obtain IMF board approval for the $2.9 billion, four-year Extended Fund Facility (EFF) program. The initial expectation was that Sri Lanka would reach an agreement on financing assurances with its major bilateral creditors (China, India, and the Paris Club, led by Japan) by November or early December and get the IMF Executive Board’s approval in December. China’s approach and assurances are vital in this process, because the other creditors are waiting on China to confirm its own offers. However, no firm financing assurances have been reached with the bilateral creditors so far. The IMF Executive Board’s meeting schedule indicates that it will not discuss Sri Lanka’s EFF in December. Thus, the IMF program can only commence in early 2023.

    China’s response to Sri Lanka’s debt crisis has not been proactive, but neither has it been negative. During a Chinese Foreign Ministry Press briefing on December 5, the spokesperson noted that “China attaches high importance to Sri Lanka’s difficulties and challenges,” and said that it supports relevant financial institutions in discussing with Sri Lanka and properly resolving them.

    How Much Does Sri Lanka Actually Owe to Chinese Creditors? 

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    Understanding China’s role in Sri Lanka’s debt restructuring process requires a complete picture of 1) how much Sri Lanka actually owes to Chinese creditors and 2) the composition of those loans. While the often-cited number is that Sri Lanka’s debt to China is approximately 10 to 15 percent of its total public external debt, its debt to Chinese creditors amounted to approximately $7.3 billion, or 19.6 percent, of the country’s total outstanding foreign debt as of the end of 2021, as detailed in our briefing paper published by China Africa Research Initiative (SAIS-CARI) at Johns Hopkins University’s School of Advanced International Studies. The largest share of Sri Lanka’s foreign debt consists of Eurobonds (international sovereign bonds), which accounted for 36 percent of the country’s public and publicly guaranteed foreign debt  by the end of May 2022.

    While the often-quoted numbers are lower than our calculations, it is important to emphasize that there was no “hidden debt.” Our numbers are in line with both the World Bank’s International Debt Statistics and the Sri Lankan Ministry of Finance’s figures provided in creditor presentations in November.

    Then where does the often-quoted figure that China accounts for a 10-15 percent share of Sri Lanka’s external debt originate from? There are two reasons for this underestimation of Sri Lanka’s Chinese debt stock: First, the exclusion of debt recorded under state-owned enterprises (SOEs) from the easily referred to central government debt in Sri Lanka, and, second, Foreign Currency Term Financing Facility or term loans obtained from China Development Bank (CDB) being classified as market borrowings instead of bilateral debt within the central government debt figures. The Sri Lankan Ministry of Finance’s External Resources Department, while reporting bilateral debt from China as 10 percent of the total as per their classification, had made it very clear that these calculations exclude SOE loans, while term loans from CDB were categorized as market borrowings (as they were first obtained through a commercial bidding process in 2018) obtained at commercial interest rates – albeit below the cost of international sovereign bonds (ISBs).

    The exclusion of a significant part of SOE debt from the topline figure is an interesting story. During 2005-2010, most of the Chinese lending provided to Sri Lanka went to project financing. Of the debt outstanding at the end of 2010, 90 percent was from China Exim Bank. Three of the largest projects financed by China Exim Bank in Sri Lanka were the Norochcholai Puttalam Coal Power Plant, Hambantota Port, and Mattala Airport. Each of these assets are owned by the respective SOEs, which are the largest service providers in each sector. For example, Norochcholai Puttalam Coal Power Plant is an asset of the Ceylon Electricity Board, which provides around 40 percent of the country’s electricity generation. Sri Lanka Port Authority (SLPA) owns Hambantota Port, while the Airport and Aviation Services Limited owns the Mattala Airport.

    However, loans to construct these infrastructure project were obtained by the Sri Lankan government as a borrower, not by these SOEs. Since it was the government that obtained these loans, there was no need of a public guarantee. These loans therefore were recorded as central government debt until 2013.

    In 2013-14, the loans obtained to construct these infrastructure projects were transferred to the respective SOEs under a directive from the cabinet of ministers. At the end of 2015, these loans amounted to approximately to $2.4 billion, or 3.1 percent of GDP. Therefore, recording these loans under SOEs allowed the government to show a lower central government debt-to-GDP ratio of 78.5 percent for 2015, instead of 81.6 percent.

    However, public debt as recorded by the Central Bank of Sri Lanka continued to report these SOE loans as a separate category alongside publicly guaranteed SOE debt, leading to public debt ratio of 85.3 percent at the end of 2015. So, Sri Lanka’s public institutions did not “hide” these loans; they were just more complicated to pinpoint through casual observation due to the complicated classification system.

    Sri Lanka’s Previous Debt Restructuring Efforts With China 

    Although Sri Lanka has not defaulted on its debt before, the country has grappled with severe external debt and balance of payment (BOP) issues for decades. These issues became more severe after 2010 as a result of the significant increase in the country’s foreign debt burden with its rising reliance on commercial borrowings, including ISBs or Eurobonds, raised largely from institutional investors based in the West) and export credit to finance projects (with China’s policy banks being the largest source). The repayments on these loans increased significantly from 2014 onward. To tackle these debt repayment and BOP challenges, Sri Lanka used various methods, including obtaining a EFF program from the IMF in 2016.

    Sri Lanka also sought to increase FDI and restructure loans obtained from China. In 2014, then-Treasury Secretary P.B. Jayasundara requested that China Exim Bank restructure loans obtained to construct the Hambantota Port. There was no request for principal haircuts. Instead, Sri Lanka’s request was to reduce interest rates and extend payback periods, making it viable to operate as a joint venture with two Chinese SOEs.

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    It is important to note that this request came in September 2014, just before Chinese President Xi Jinping visited Sri Lanka. This visit in turn took place just four months before Sri Lanka’s presidential election, in which Mahinda Rajapaksa, who had been in power since 2005, was defeated.

    During Xi’s visit, Sri Lanka signed a Supply Operate Transfer agreement to further develop Hambantota Port terminals as a joint venture with China Harbor Engineering and China Merchant Port (CM Port). Therefore, the major aim of this debt restructuring request was to help further develop the port and reduce losses incurred by the SLPA. Further development of Hambantota, while retaining overall state ownership, was politically important for Rajapaksa.

    Regardless of the motive, this proposed loan restructuring did not happen. Rajapaksa lost the 2015 presidential election and the plans for the port changed, with the new government agreeing to lease Hambantota to CM Port in late 2016.

    Sri Lanka’s second effort to seek debt relief from China was in 2017, when then Prime Minister (and current President) Ranil Wickremasinghe visited China and met with Chinese leaders. At the time, Sri Lanka had requested debt relief from China, but the request was dismissed the Chinese. This was according to former Minister for Special Projects Sarath Amunugama, who told the Sri Lankan Parliament on August 10, 2017 that China turned down Sri Lanka’s request for debt relief. Amunugama summarized China’s attitude as follows: “We had lent to many countries in the world. If we give debt relief to Sri Lanka, 30-40 will ask for same treatment.”

    His statement clearly echoes China’s sentiment regarding debt restructuring. Chinese financial institutions do not like principal haircuts and are afraid to set a precedent by extending such an offer to one country.
    According to Kanyi Lui, head of China practice at the law firm Pinsent Masons, principal haircuts on loans might require approval from China’s State Council – the highest political authority – and due to bank officers taking personal accountability for loans they handle there is a reluctance to restructure loans at the bank level.

    Historically, China has a history of principal haircuts with regards to the interest-free loans provided as official development assistance via the Ministry of Commerce since the 1960s, as highlighted by Professor Deborah Brautigam in her book “The Dragon’s Gift.” But this is not the case with regards to lending by China’s financial institutions, especially the two major policy banks relevant to Sri Lanka, China Exim Bank and CDB, which have only existed since the mid-1990s. In the most recent example, both banks provided an interest rate moratorium and maturity extensions, without principal haircuts, to Ecuador in September of this year.

    Sri Lanka’s Future Debt Restructuring With China

    Given that China is Sri Lanka’s largest bilateral creditor, finalization or even basic agreements pertaining to debt restructuring require its involvement and support. But we are not talking about dealing with one entity. There are a few Chinese financial institutions that have provided loans to Sri Lanka. Based on relevant studies and scholars who follow Chinese financial institutions, it is clear that these banks make their own decisions. Sri Lanka has borrowed heavily from both China Exim and CDB, which operate in separate ways, so they cannot be expected to act in concert in the debt restructuring negotiations.

    Even within China Exim Bank, there are different departments that provide different kinds of lending. Our briefing paper showed that Sri Lanka had both commercial and concessional loans from the bank, with the concessional ones having their lower interest rates being subsidized by the Chinese government. Therefore, a great deal of consensus within and between policy banks is required for China to formulate its approach to debt restructuring.

    The complexities of debt restructuring don’t end there. Both China Exim and CDB lending are attached to activities of Chinese SOEs. While the loans were provided by CDB and Exim, the benefits were received by the SOEs that implemented the projects. That is the basis of export credit lending: A significant portion of the inputs for the projects are exported from China and the projects involve Chinese construction firms. This means, in the debt restructuring process, banks become the risk bearers while the SOEs have already gained the rewards. While banks can’t retroactively share the current risk with SOEs, the state-owned firms face the risk of reduced export credit financed projects to handle if the banks become more risk averse as a result of losses sustained by debt restructuring.

    Jin Zhongxia, the director general of the People’s Bank of China’s department of international affairs, recently provided some insights into the complexities of debt restructuring. Addressing the China Finance 40 Forum held in Beijing, Jin noted that it is essential for China to coordinate all its involved creditor organizations (such as CDB and Exim Bank), which independently select most of their lending projects and follow a more or less commercial logic.

    “If now the government is to tell them what to do, it is a complicated process as the government did not participate in most of the project-level decisions in the first place,” Jin said. He added that Chinese creditor organizations have relatively little experience dealing with large-scale debt restructures and need to learn by doing.

    Chinese banks’ inexperience with overseas lending is a matter constantly highlighted by Michael Pettis, who has pointed out that most of China’s development finance in the Global South was driven by inexperience and very poor assessments both of the risks involved and of their own capabilities. Jin’s statement reflects a realization among Chinese banks regarding the consequences of inexperienced lending and the complexities of handling those consequences.

    This means that, amid Sri Lanka’s debt restructuring process, there might be a need to gain consensus among a wide array of Chinese state-linked entities, not simply the policy banks and the political leadership. The political leadership also faces a constraint with regards to offering debt relief to foreign countries: a potential perception among Chinese citizens that their government is subsidizing other countries in crisis at a time they themselves have been struggling through the COVID-19 pandemic and an overall economic slowdown.

    Therefore, Sri Lanka’s debt restructuring cannot be looked at in isolation as a domestic crisis, which Sri Lanka has to handle on its own. It is deeply embedded both within a global emerging market debt crisis and a moment of rethinking within China about its global role as a creditor. What happens in countries like Suriname, Zambia, Ghana, Ecuador, and Pakistan has a bearing on what happens in Sri Lanka, and vice versa. These are all co-evolving crises, to which the global and domestic responses need to happen in coordination. But in doing so, neither can one forget the domestic complexities that must be overcome. The nuances of Sri Lanka’s situation carry lessons for both the ongoing processes on debt restructuring and for other countries facing debt distress.

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    This article contains a summary of our recent briefing paper, “Evolution of Chinese Lending to Sri Lanka Since the mid-2000s – Separating Myth from Reality,” published by SAIS-CARI. The full paper provides a detailed analysis about Sri Lanka’s Chinese loans.





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