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China’s Stake in Bangladesh Is Overplayed

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China’s Stake in Bangladesh Is Overplayed

The China-India conflict has inspired more paternalism against Bangladesh’s rapidly developing economy.

China’s Stake in Bangladesh Is Overplayed

Chinese Commerce Minister Zhong Shan, right, shakes hands with a Bangladeshi delegate as Bangladesh’s Prime Minister Sheikh Hasina, left rear, and Chinese Premier Li Keqiang applaud during a signing ceremony at the Great Hall of the People in Beijing, Thursday, July 4, 2019.

Credit: AP Photo/Mark Schiefelbein, Pool

Bangladesh’s relationship with China is in the headlines again.

As China-India relations deteriorated following their border skirmishes, journalists and think tanks zeroed-in on a new trade agreement between China and Bangladesh. Some called it “charity,” a “dual deficit and debt trap,” or a “diplomatic victory for China.”

Unfortunately, this is nothing new.

China hawks, particularly in South Asia, routinely malign Bangladesh for trade and investment from China. The problem is that critics overlook the relationship’s limits and, ultimately, Bangladesh’s capacity. These paternalistic narratives are steeped in an outdated view of Bangladesh, which threatens to alienate a country that has become a model for economic development.

The recent trade agreement is a good example of how this commentary warps reality.

On July 1, China increased the number of products Bangladesh could export tariff free to China, from 60 percent to 97 percent of their tariff line. China’s concession falls under its preferential tariff program for least developed countries (LDCs), which was unveiled in 2002 and applies to 40 other countries.

The primary reason these products weren’t zero-rated to date was that Bangladesh opted for tariff reductions under the Asia Pacific Trade Agreement (APTA), which offered less stringent rules of origin in comparison to the LDC program.

Rather than charity, a trap, or one-sided victory, Bangladesh’s decision to migrate to the LDC program reflects its interest in diversifying exports. It is unlikely to put a major dent in Bangladesh’s trade deficit with China, but it can’t hurt, and it could inspire investment from companies that want to shift supply chains away from China, while retaining market access.

But Bangladesh also gets singled out for the investments it receives from China.

The Chinese investment plans announced in October 2016 are illustrative. China and Bangladesh signed 27 memoranda of understanding (MoUs), valued at $24 billion for Bangladesh; Chinese and Bangladeshi companies on the sidelines entered 13 joint ventures (JVs), valued at $13.6 billion.

China had been busy in the neighborhood around this time, promising Pakistan $46 billion in April 2015, and India $22 billion in May 2015. Still, many foreign observers came to view Bangladesh’s deals within the context of a potential debt trap, or China’s tightening grip on Bangladesh.

While deals under China’s Belt and Road Initiative – of which Bangladesh is a member – are opaque, only five of the MoUs from 2016 were implemented by the end of 2019.

Bangladesh scrapped one project – the $1.6 billion Dhaka-Sylhet highway – after blacklisting the contractor, China Harbor and Engineering Company (CHEC), for attempting to bribe officials. Incidentally, CHEC constructed Hambantota Port in Sri Lanka, which analysts often cite as an example of China’s debt traps: Sri Lanka leased the port to China for 99 years to manage its debt servicing costs.

Meanwhile, by July 2019, China had disbursed only $981 million of the promised $24 billion. A Bangladesh finance official told the media the loans were delayed by negotiations, the Exim Bank of China’s limited capacity, and lobbying by Chinese firms. The total financing floated in 2016 appears unlikely to materialize if the projects are not renegotiated – the original agreements expire in 2020.

This isn’t Bangladesh’s first rodeo.

Bangladesh has decades of experience managing international aid and loans, working with a variety of bilateral and multilateral funders. The country’s history of financial prudence – and careful borrowing – is partly why, for example, the Economist Intelligence Unit accurately predicted four years ago that it was likely only a fraction of the deals signed in 2016 would be implemented.

In this context, it’s difficult to imagine Bangladesh realizing a projected $50 billion in Chinese investments by 2035, let alone becoming trapped by debt, or leasing infrastructure to China.

The majority of the country’s debt is held by multilateral creditors. Even after the economic blow of COVID-19, the International Monetary Fund (IMF) described Bangladesh’s debt as “sustainable,” while the country’s external debt remained a manageable 14.7 percent of the GDP.

Perhaps, then, it is most appropriate to focus on how Chinese investment may affect Bangladesh’s business environment, rather than the degree of Bangladesh’s bondage.

Bangladesh is a difficult and roily place to do business. Businesses in the country cite access to finance, corruption, and political stability as among their top challenges. Meanwhile, Chinese companies are some of the least transparent in the world, and are not bound by extraterritorial anti-corruption laws in the same way as many Western companies.

That is a toxic mix for other foreign investors, who fear Chinese companies may box them out of lucrative contracts, or drive them out of the market, using unfair business practices.

Some allege Chinese companies submit low bids, only to increase costs or change credit terms later. One survey found that a quarter of Chinese outbound investments fail partly for these reasons: 40 percent of respondents said pricing disagreements contributed; 27 percent cited a fear of regulatory investigations.

Both of those issues led to CHEC’s blacklisting in Bangladesh. Regulators had been watching CHEC after 2007, when a CHEC and Siemens tie-up provided kickbacks to the son of former Prime Minister Khaleda Zia. The alleged bribe that led the CHEC’s blacklisting in 2018 reportedly occurred at a time when the firm tried to double the cost of its initial estimate, and Chinese officials backed away from bilateral talks.

The next flashpoints in the relationship may come in the power and financial service sectors, which along with textiles are top destinations for Chinese investment.

Last year, the power regulator recommended that Bangladesh suspend approvals for new plants. Existing plants are expected to meet demand until 2030, and any overcapacity payments appeared unreasonable. That could be a problem for Chinese investors, who have made equity investments into 15 projects76 percent of which were in the planning phase as of 2019.

Bangladesh recently dropped one project: the $430 million 350 MW coal-fired thermal plant in Gazaria, another casualty from the 2016 MoUs. It followed reports that Bangladesh would make $19 million a month capacity payments for the 1,320 MW coal-fired thermal plant in Payra, a project marred by a deadly brawl between the JV’s Chinese and Bangladeshi workers last year.

Increasing competition in financial services may become another source of friction – China is by far its largest foreign investor. The domestic fintech industry fully arrived in 2018, when China-based Alipay, now Ant Financial, acquired a 20 percent stake in bKash, a mobile money system also backed by the International Finance Corporation (IFC) and the Bill & Melinda Gates Foundation.

However, concerns have grown over an uneven playing field for fintech players backed by the state, and others that have received foreign financing. For example, bKash must keep lower transaction limits, higher cash-out charges, and more Know Your Customer (KYC) compliances than Nagad, a mobile money system backed by the postal service.

The two companies are classified differently: bKash is regulated by the central bank as a “digital financial service,” while Nagad is regulated by the postal service as a “mobile financial service.” The post and telecommunications minister partly explained the difference by stating that, in contrast to others, Nagad prioritized financial inclusion for the masses.

That must sound familiar to Chinese fintech players, who enjoyed similar protection back in China. Yet it remains to be seen how their lobbyists will negotiate Bangladesh’s regulations in the future.

Still, these cases, among others, show that Bangladesh makes economic decisions independent of China’s financial influence. Anything less would overlook the power of Bangladesh’s growth story.

Bangladesh has had one of the fastest growing economies in Asia for years. The country averaged close to 7 percent growth over the past decade, achieving a 8.1 percent growth rate in 2019. Per capita income reached nearly $2,000 last year, growing more than three-fold since 2006.

While the COVID-19 slowdown has threatened some of the country’s progress, the Asian Development Bank (ADB) forecast Bangladesh to be one of the fastest growing economies in Asia in 2020, before making a V-shaped recovery in 2021. That forecast sits somewhere above projections from other multilaterals and below a more ambitious growth target set by the government.

Foreign aid, trade, and investment have contributed, but the resilience of Bangladesh’s economy is partly based on social development. Bangladesh has sought to reduce poverty, lower gender disparity in schools, increase the number of women in the workforce, and make its economy more inclusive. Its why the country leads South Asia in many social development indices year after year.

Bangladesh has a far way to go. But it is closer to becoming a middle-income country than it is to the day U. Alexis Johnson, and Henry Kissinger, called it a “basket case.”

It’s time for a more balanced view of Bangladesh. While there remain important questions about Chinese trade, investment, and influence, the harshest criticism ignores the ability of Bangladesh to act in its own self-interest.

Worse, that criticism plays into paternalistic tropes that bear little resemblance to reality. When observers see all Chinese actions as a threat, and Bangladesh stuck in a state of victimhood, they fail to grasp the full range of interests that inform the relationship.

A different reading of China-Bangladesh relations suggests that Bangladesh took a calculated risk to fuel its next phase of growth. And that reading deserves more attention: Bangladesh, if successful, may offer developing countries a model for responsible engagement with China.

Adam Pitman is an analyst and editor based in South Asia. Follow him on Twitter @ar_pitman.