China’s Investment Spurs Bangladesh Development

15 June 2011 FDI Team

Background

On 9 June 2011, Bangladesh signed a loan agreement worth US$211 million ($198 million) with the Export-Import Bank of China to upgrade the country’s telecommunications network. Such initiatives by China to develop critical infrastructure are illustrative of the central role it has played in strengthening Bangladesh’s economy and connectivity to the region.

Comment

Bangladesh established formal relations with China in 1975 and thereafter bilateral relations were steadily enhanced by frequent diplomatic visits to both countries. Subsequently, in 1986, the Bangladesh-China People’s Friendship Association was formed, which helped set the pattern in two-way trade and investment, especially throughout the 1990s, fostering China’s emergence as a vitally important partner and ally.

Indeed, from the time relations were first established until October 2000, China provided cumulative assistance worth US$217 million ($205.6 million) to Bangladesh. In the same year, bilateral trade reached an unprecedented high at US$715 million ($677.6 million).

Later, in 2002, on a visit to Bangladesh, Chinese Premier Wen Jiabao signed nine bilateral agreements to enhance co-operation in a variety of fields. Among the crucial agreements signed was a defence
co-operation accord, which strengthened China’s position as a key supplier of weapons, equipment and ammunition to the Bangladeshi military. ‘Bangladesh wanted time-befitting armed forces for the country. China will co-operate with Bangladesh for this purpose,’ stated Morshed Khan, the former Bangladeshi Foreign Minister. He added: ‘[The] intention is there to co-operate in defence sector; now the two sides will co-operate with each other. This umbrella agreement is not directed against any country and would not affect Bangladesh’s relations with India.’

Such measures by China provided the foundation to further enhance bilateral relations and encourage greater Chinese investment in Bangladesh. According to the China Daily, by 2006, Bangladesh ranked as China’s third-largest trade partner in South Asia, and China had emerged as Bangladesh’s most significant trading partner.

In fact, from the time that the “Bangladesh-China Friendship Year” was declared in 2005 through to 2008, salient examples of Chinese investment included: the commencement of direct air links between Dhaka and Beijing; an agreement on nuclear co-operation; the construction of a di-aluminium phosphate fertiliser factory; the signing of a joint venture agreement for mining coal, between Bangladesh’s state owned Petrochemical company, Petrobangla, and two Chinese companies, China National Machinery Export Import Corporation and Xushou Coal Mining Group; the creation of the US$25 million ($23.6 million), Chinese-funded, Dhaka-based Bangladesh-China Friendship Exhibition Centre; and capacity-building and training assistance programmes for Bangladeshi public servants and security forces personnel.

Evidence of sustained growth in relations was also demonstrated from 2007 onwards, when China’s Ministry of Commerce claimed that two-way trade had reached a record US$3.4 billion ($3.2 billion). In 2008, the Chinese newspaper, People’s Daily, reported that bilateral trade had increased to US$4.7 billion ($4.4 billion).

In March 2010, both countries celebrated 35 years of diplomatic ties, which culminated in the signing of four bilateral agreements. Following the June 2010 visit of the Chinese Vice-President to Bangladesh, more agreements were signed, pledging financial assistance and expertise to: launch Bangladesh’s first space satellite; upgrade the Pagla water treatment plant and the Shahjalal fertiliser factory; reduce tariffs on 4,721 Bangladeshi products being exported to China; co-operate in building a conference centre and seven bridges; build the 600-1000 MW Pabna nuclear power plant, with a US$1.5 billion ($1.4 billion) Chinese concessional loan; build a 900 kilometre highway linking Chittagong to Kunming via Burma; and engage in joint-venture oil and gas exploration. Similarly, by late 2010, and according to Bangladesh’s Board of Investment, up to 55 Chinese businesses had submitted 186 investment proposals in the infrastructure, trade and business sectors that were worth US$320 million ($303 million). Furthermore, in May this year, the Financial Express reported that the Chinese energy consortium, Sinopec Shengli Oilfield Services, had won its bid to partner with state-owned Bangladeshi firm Bapex, to explore four gas fields in the Chittagong Hill Tracts.

However, the centrepiece of China’s growing influence in Bangladesh is symbolised by its interest in modernising the Chittagong port, which handles around 92 per cent of the country’s import-export trade, and in building a new deep-water port facility from scratch at Sonadia, located near Cox’s Bazaar. Chittagong’s  strategic location serves as an important access point for Chinese commerce, as recently confirmed by Shanghai Institute for International Studies’ South Asia director, Zhao Gancheng, who stated: ‘Developing the port is a very important part of China’s co-operation with Bangladesh, and China is aware of its strategic significance.’ He added: ‘While there is currently no oil pipeline running to Bangladesh, access to Chittagong will be of greater importance in the future when this infrastructure is put in place. With the development of China’s transportation of goods and energy in the Indian Ocean, China will certainly continue to attach more importance to this port.’

Similarly, in 2010 Bangladesh announced its plans to begin construction on the new Sonadia port facility, which is also Chinese-funded. ‘We sought support from China to build Sonadia deep-sea port and construct Chittagong-Kunming Highway via Myanmar [sic]. Beijing has assured us of support in this regard,’ stated Dr. Hasan Mahmud, the State Minister for Environment and Forests.

Upon completion, Bangladesh has stated its intention to offer its ports as regional access points to service north-eastern India, Nepal, Bhutan, Burma and southern China. For trade with these countries the road and rail link to China via Burma, which is currently being developed, is of the most critical economic and strategic importance. In 2010, Bangladesh started construction on the 128km railway linking the border town of Gundum to the Burmese and Chinese railway systems.

Unsurprisingly, neighbouring India – which also has aspirations in the region – has grown increasingly anxious at China’s inroads into Bangladesh, which is strategically located astride its restive and vulnerable north-eastern borders.

For instance, as exemplified by one Indian defence analyst, Anand Kumar, who is affiliated with the New Delhi-based Institute of Defence Studies and Analyses: ‘A Chinese role in the development of Chittagong is particularly worrisome to India, since it would be similar to China’s involvement in the development of Hambantota in southern Sri Lanka and Gwadar in Baluchistan,’ he said. ‘China reportedly has access to the Burmese naval base in Hanggyi Island and has established a monitoring station at Coco Island, north of India’s Andaman and Nicobar Islands,’ he added. ‘Through these ports, China is trying to fulfil two objectives – encircle India as part of its “string of pearls”, and gain other openings to sea.’

Nevertheless, in the meantime, India has little choice but to contend with the rise of China’s influence in Bangladesh, which is further complicated by history and tensions that have long characterised bilateral relations between the two countries.   

Sergei DeSilva-Ranasinghe

 

FDI Senior Analyst 

sdesilva@futuredirections.org.au

 

 

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

Published by Future Directions International Pty Ltd.
80 Birdwood Parade, Dalkeith WA 6009, Australia.