Dhaka courts Chinese investment in Bangladeshi infrastructure

Prime Minister of Bangladesh, Sheikh Hasina, visited China from July 1 to July 5 in a bid to further bolster relations between the two countries. At first glance, the trip was a stunning success, with PM Hasina signing “two deals to provide loans to the Bangladeshi power sector worth $1.7 billion.” China also pledged to provide 2,500 tons of rice for displaced Rohingya refugees in Bangladesh. Yet, despite the improvement of relations between the two countries and the provision of energy financing, Bangladesh should tread carefully in aligning itself economically and diplomatically with China.

With the rollout of China’s Belt and Road Initiative (BRI), Dhaka has seen a substantial increase in bilateral development funding. Having “turned their relationship into a strategic partnership in 2016,” China and Bangladesh have signed power and infrastructure deals worth $21.5 billion, with BRI pledged investments totaling around $38 billion. Additionally, Bangladesh has seen “record inflow of foreign direct investment (FDI) in 2018,” at around $3.6 billion. Despite Dhaka’s goal to produce 24,000 MW of power by 2022, it should be wary of taking on significant Chinese debt, which may grant Beijing economic clout over Bangladesh. 

Known as “debt diplomacy,” China has recently been heavily extending loans to developing countries, with Djibouti’s public debt equaling “roughly 80% of the country’s GPD (and China owns the lion’s share).” Djibouti now hosts China’s only overseas military base, and in other cases of debt-distressed investments, such as in Sri Lanka, China has been able to acquire infrastructure and ports outright (such as Sri Lanka’s Hambantota port that China financed). 

 The nine instruments PM Hasina signed include a pledge that Bangladesh “firmly supports the one-China policy” and that “the country is willing to actively take part” in China’s Belt and Road Initiative, which is seen as a means to extend China’s sphere of influence. China is already heavily integrated with Bangladesh’s economy, with imports from China representing 34% of Bangladesh’s total in 2015, overcoming India as the country’s top trading partner. With Bangladesh facing continual energy crises, Chinese foreign direct investment (FDI) and infrastructure financing is welcomed as a means of achieving their energy needs quickly. So far, China seems to be the winner in the global competition to develop Bangladesh’s energy infrastructure, with Beijing now beating India as “Bangladesh’s largest partner in energy development in 2015.” These trends have continued to the present, with Indian investments totaling around $65 million in the first half of FY 2019, just 10% of the $600 million in Chinese investments made during the same time period.

As China wins big in Bangladesh’s development market, Dhaka risks alienating India, one of Bangladesh’s closest neighbors with friendly relations. India’s rivalry with China means that it will perceive the increased Chinese investment in Bangladesh as not only impeding on its economic interests, but also creating a threat to its national security. With Bangladesh sharing a 4096-km land border, New Delhi is likely to feel encroached upon as Bangladesh increases both its economic and its military relations with China. “China is now Bangladesh’s top source for arms imports,” with Dhaka representing 20% of all Chinese arms sales. As of 2017, the Bangladesh Navy purchased two Chinese submarines, causing New Delhi to extend an offer of submarine training to Bangladesh to counter Chinese influence. Similarly, in response to China’s extension of loans to Bangladesh, India provided $5 billion in loans to Bangladesh in 2017.

This competition for regional dominance provides both an opportunity and a risk to Dhaka. Maintaining a good relationship with India, Bangladesh’s closest neighbor, remains crucial, and according to Michael Kugelman, senior associate for South Asia at the Wilson Center, Chinese investments may “cause some troubles for Dhaka’s important relationship with new Delhi.” As China and India compete for dominance in the Bay of Bengal, they may extend further economic benefits to Bangladesh, in the form of sorely needed foreign direct investment. On the other hand, the risk of debt-trap diplomacy also applies to Indian investments, with both sides acting self-serving in their investments.” Avoiding this trap will require Dhaka to strategically balance development investments from both countries, “without showing a preference between” either one.

Thus far, it seems Bangladesh has done just that, with PM Hasina expressing “disinterest bordering on indifference toward the ‘great game’ in the Indian Ocean.” For instance, in 2016, Dhaka quietly scrapped a port project that China proposed to build in Sonadia, after New Delhi voiced concerns about proximity of Chinese presence to the Andaman and Nicobar islands under the proposed project. By striking this delicate balance, Hasina has positioned herself as being both “‘pro-India,’” yet “out of the Indian orbit and receptive to forging close ties with China.” 

Bangladesh should be excited at the prospect of developing its infrastructure and increasing its power generation capabilities. However, if it wants to avoid the pitfalls of debt diplomacy, it should aim to draw on foreign direct investment as opposed to debt financing. Furthermore, Dhaka should be wary of aligning itself too closely with China so as not to upset India. If it can walk the fine line between these two powers, it has the potential to continue courting significant FDI and maintain its rapid development.

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