Bangladesh bound to China by growing energy and infrastructure needs

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The Third Pole, Bangladesh

China is outstripping all other foreign investors in Bangladesh by appealing to its growing demands for energy and infrastructure. But researchers say much of that investment is going into polluting coal-fired power plants and infrastructure development that has a negative impact on the environment.

According to the Bangladesh Bank, Bangladesh has received about US$600 million from China in the first half of the current fiscal year, which runs from July 2018 to June 2019, with major investment flowing into power generation and mega infrastructure.

Wang Jianjun, president and CEO of SZSE, and Pan Xuexian, chair of the SSE Supervisory Board, flank the Managing Director of the Dhaka Stock Exchange KAM Majedur Rahman, at the signing of an agreement on May 14, 2018 / Credit: Courtesy of Dhaka Stock Exchange

The pace of Chinese investment in Bangladesh is tying the two countries more closely together than ever at the same time that it sidelines Bangladesh’s previous major development and strategic partners.

India used to be its most important, but Delhi has invested only US$65 million, or one-tenth of what China has during the same period.

India and Bangladesh have a strong historic relationship since India supported Bangladesh in its fight for independence against Pakistan in 1971. But in recent years, ties have gradually loosened as Bangladesh has moved closer to China.

There are now about 400 Chinese companies doing business in Bangladesh, including about 200 large companies and 200 other small and medium enterprises. In fiscal year 2017-18, foreign direct investment from China reached US$506 million, about one-fifth of total foreign capital inflows.

Chinese investment has also been rising rapidly in other parts of South and Southeast Asia.

According to China Global Investment Tracker, published by the American Enterprise Institute and the Heritage Foundation, between 2016 and 2018, China invested US$2.59 billion in Pakistan, US$2.55 billion in Sri Lanka, US$1.34 billion in Nepal and US$2.10 billion in Myanmar.

Dirty power

Most Chinese investment in the current fiscal year, US$407 million, went into Bangladesh’s power sector, specifically to coal-based power projects. These included the 1,300-megawatt (MW) coal power plant in Chittagong and one in Patuakhali (Payra), close to a famous Hilsa (Bangladesh’s most famous fish) sanctuary. An agreement for a third Chinese backed power plant has recently been signed for a 1,300-MW coal project in Cox’s Bazar.

The government in Bangladesh has based its energy growth on coal-based power going from 2% to over 50% of the country’s electricity supply by 2022, with 23,000 megawatts of new coal-powered plants in the pipeline.

Chinese and other foreign-backed coal plants have attracted widespread protests among people who fear the pollution will damage their livelihoods and that they will lose their land to plant construction.

Many experts question why Bangladesh is betting on coal to power the country’s fast-growing economy as other countries in Asia try to shift away from the dirty fuel amid an intensifying pollution crisis. Prices for solar, wind, and grid efficiency are also predicted to soon fall below coal, reducing the argument that it is a low-cost energy option.

Chinese financial institutions and companies have committed or proposed, to finance one-quarter of the coal plants under development outside of China – 102 gigawatts of capacity spread across 23 countries.

Bangladesh is the country with the most proposed coal-fired capacity, with China already committing US$1.9 billion toward coal plant expansion and another US$5.1 billion in funding proposed for a total of around US$7 billion for about 14 GW of capacity, according to a recent report from the Institute for Energy Economics and Financial Analysis (IEEFA). However, most of this capacity is long delayed and still in pre-construction status.

Major infrastructure

It’s not only in the energy sector that China has become a major player in Bangladesh.  China is also implementing US$10 billion worth of infrastructure projects there, according to a report in state-owned China Daily. These include the Chinese Economic and Industrial Zone, the 8th China Bangladesh Friendship Bridge, and the International Exhibition Centre.

There are similar trends in trade. China is now Bangladesh’s largest trading partner, said Osama Taseer, president of the Dhaka Chamber of Commerce and Industries. Bangladesh exports vegetables, frozen and live fish, leather and leather goods, textile fibers, paper yarn as well as woven fabrics, articles of apparel and clothing. It imports machinery, electronic equipment, fiber, fabric and cotton, among other goods.

In the 2017-18 fiscal year, bilateral trade between the two countries was worth US$12.4 billion and is expected to reach US$18 billion by 2021.

Risky business?

Sahab Enam Khan, a professor of international relations at Jahangirnagar University, said the benefits of growing bilateral trade and Chinese investment in infrastructure will have positive spillover effect in the trade relations and connectivity projects between Bangladesh and India.

Investment in capital markets and Special Economic Zones (SEZs) will also have the potential to bring long-term benefits, he added.

However, the success of China’s infrastructure investments will largely depend on the financial viability of the projects and their direct correlation with export returns.

Although Bangladesh’s economy is quite robust, with economic growth expected to be around 8% this year, the large amounts of loans pouring into the country could increase the risk of indebtedness in the long term, said Michael Kugelman, a South Asia expert at the Washington-based Woodrow Wilson Center.

“Another problem is that many of China’s investments pay little mind to issues of sustainability. While Beijing does give priority to financing the production of renewables, some of its big-ticket investment projects these days revolve around fossil fuels, including a major coal production project in Pakistan. Similarly, many of Beijing’s infrastructure investments involve heavy-duty industrial construction and production, which entails the heavy consumption of water and the use of emissions-belching technology,” Kugelman said.

“Given its immediate need for more energy to feed its growing economy, [the projects are] important enough for Dhaka that it’s willing to overlook the environmental concerns,” he added.

Building the Belt and Road

The new Bangladesh-China economic partnership has flourished since Chinese President Xi Jinping announced his flagship “Belt and Road Initiative” in 2013.

Given its location, Bangladesh is an important hub of maritime and overland connectivity between the Indian Ocean and China’s landlocked provinces. That has made it an important partner in both the 21st-Century Maritime Silk Road and the Silk Road Economic Belt.

Xi Jinping is the first Chinese President to visit Bangladesh since 1986 [file photo from APEC 2013 / Flickr]

The relationship between Bangladesh and China gained momentum during Xi Jinping’s two-day landmark visit to Bangladesh in October 2016.

During that visit, widely labelled a “historic state visit” and the beginning of a “new horizon” in China-Bangladesh relations, both countries agreed to further their cooperation in different sectors, including land and maritime connectivity, infrastructure development, energy and power, transportation, information and communication technology.

Since then, both countries have signed onto projects worth over US$9.45 billion – with cumulative investment of US$26.6 billion to date, according to China Global Investment Tracker.

That includes the US$3.3 billion bridge over the Padma River, as the Ganga is known in Bangladesh. The bridge, which is still under construction, will link north and south Bangladesh by road and rail. It’s regarded as one of the most challenging engineering projects the country has ever built.

Other initiatives in the works include a US$1 billion project to improve digital connectivity and a US$1.32 billion project to strengthen Bangladesh’s power grid network.

A version of this story originally appeared on The Third Pole on May 13, 2019. It has been edited for clarity.