China

Assessing China’s Presence and Power in the Caribbean

By Rasheed Griffith
Thursday, June 17, 2021, 3:20 PM

Foreign policy discussions around China-Caribbean engagement have been uniformly skewed toward speculation on China’s intentions in the Caribbean. It is not too late for the U.S. to arrest the deepening of China-Caribbean engagement that could result in policies that are contrary to U.S. strategic interests. But assessing U.S. interests in this area requires wrestling with the facts on the ground and countering Chinese influence with realistic and robust alternatives. 

U.S. policymakers have devoted little time and effort to gaining a nuanced understanding of what the Caribbean has gained and hopes to gain from its engagement with China. The Caribbean is not an idle player. Regional governments actively seek deals from Chinese firms and government organizations—often with significant success. In addition to asking why China is engaging in the Caribbean, one needs to ask why do Caribbean countries so readily seek out deals with Chinese firms? 

One problem that prevents this question from being posed is that the U.S. (from think tanks to policy staff) tends to treat the Caribbean as a foreign policy Rorschach test—these people simply look through the island chain and see what they want, instead of what is actually there. This imprinting leads to policy miscalculation with consequences. A robust U.S. foreign policy must consider that the Caribbean region is heterogeneous and has its own agency. To fully examine the Caribbean’s agency and its interests, it will be useful to examine a few case studies, including Taiwan-Caribbean relations, offshore financial centers, Chinese construction in the Caribbean and citizenship by investment programs (CIPs). 

Taiwan-Caribbean Relations 

Latin America and the Caribbean account for nine of Taiwan’s remaining 14 formal diplomatic allies. Within the Caribbean specifically, five of the 15 members of the Caribbean Community (CARICOM) formally recognize Taiwan. This feature of policy heterogeneity in the Caribbean often leads U.S. foreign policy in the region astray. A striking feature of the oft-repeated “debt trap” narrative is that, in the Caribbean, that narrative is linked with Taiwan and not China. If the U.S. persists in leveraging debt trapping as an argument to counter China in the region, it is likely to have the opposite effect. 

After Grenada was virtually decimated by Hurricane Ivan in 2005, the country’s leaders decided to switch Grenada’s recognition to China, which came to the nation’s aid in rebuilding key infrastructure. China was not the first choice for Grenada, but it was the only country willing to provide the necessary assistance. At that time, Taiwan was Grenada’s largest bilateral lender. Understandably, Taiwan did not take news of the switch well. The Taiwanese foreign ministry reportedly accused Grenada’s leaders of “extortion-like behaviour,” because Grenada allegedly demanded $245 million in exchange for not recognizing China. Grenada eventually defaulted on its debt owed, as Taiwan refused to participate in the debt restructuring program initiated by Grenada. 

Following the diplomatic switch, Taiwan sued Grenada in the U.S. In 2011, Taiwan went further and served restraining notices on Grenada’s assets in the U.S. In effect, Taiwan attempted to obtain any assets owned by or owed to Grenada from entities based in the U.S. This pushed Grenada to file a series of appeals in the U.S. to remove the restraining notices. After a decade-long legal battle, both sides agreed to settle out of court. Taiwan eventually agreed to join the restructuring program and allowed Grenada to reprofile its external debt. 

If the U.S insists on pursuing the rhetorically powerful but empirically baseless Chinese debt trap narrative in the Caribbean, then the U.S will continue to lose strategic policy engagement ground in the region. This was highlighted in 2020 when some Caribbean leaders boycotted a summit with U.S. Secretary of State Mike Pompeo because they disagreed “on principle” with particular U.S policy (and rhetoric) in the Caribbean. A better calibrated policy on Chinese infrastructure and loans in the Caribbean would be based on competition and not contention.

Offshore Financial Centers

The Caribbean is well known for its offshore financial centers. Foreign policy discussions usually do not mention how important the Caribbean is for China-U.S. relations given that capital markets are often relegated to financial policy debates. Chinese firms regularly use offshore financial centers of places like the Cayman Islands and the British Virgin Islands to access global financial markets. They use that foothold primarily to gain access to U.S. markets.

Caribbean offshore is typically used because of its speciality in flexible yet robust commercial law and regulatory frameworks. Somewhat ironically, Caribbean offshore in some ways enabled China to maintain rigid domestic regulations over the market while not materially impeding the growth of business capital. The flexibility was “offshored” in a similar way that China’s special economic zones gave flexibility without total reform.

To overcome the prohibition on foreign ownership in certain Chinese firms, lawyers and accountants in the U.S. created a new and special type of legal structure for two Chinese companies to have an initial public offering (IPO) on Nasdaq. They decided it would be effective to parse the restricted business from the part of the business that can be owned by foreign investors (the wholly foreign-owned entity, or WFOE). The WFOE is then owned by (usually) a Cayman Islands holding company, and the restricted business is owned by Chinese individuals—which can be called the variable interest entity (VIE). The lawyers then created a complex network of contracts and operating agreements to bind the VIE and the WFOE together without representing ownership via equity—a kind of “synthetic ownership.” This structure enabled Chinese firms to consolidate financial statements for a group of entities even though not all of the entities were directly owned by the parent company. 

Around 217 China-based companies are listed on major U.S. exchanges, as noted in a recent U.S.-China Economic and Security Review Commission (USCC) report. Another study calculates that 69 percent of these China-based companies use the VIE structure to list on U.S. exchanges. Although the USCC report noted the number of Chinese companies and mentions the total market capitalization, it did not mention the equities exposure of U.S. investors to Chinese firms. Official U.S. Treasury data indicates that U.S investors hold $154 billion in Chinese equities, but a study published in April showed that U.S investors have an exposure of closer to $700 billion in Chinese equities. Chinese equities exposure is underreported so dramatically because a large part of the official capital flow is from the U.S to the Cayman Islands. The researchers were able to analyze and cross-reference thousands of data points to remap the capital from a “residency-statistic” to a “nationality-statistic” to get a better picture of where the capital is flowing. 

Caribbean offshore (particularly the British Overseas Territories) acts as a link between China and the U.S. in terms of capital flow. Were it not for Caribbean offshore, there would likely not be as many Chinese firms on U.S. exchanges and on exchanges in Toronto and London. Given the enormity of the more accurate equities exposure, it is shocking that U.S capital flows to China are hardly talked about in foreign policy work.

Chinese Construction Across the Caribbean

Chinese international construction and engineering contractors operate across the Caribbean, but U.S. policymakers have two blindspots regarding their operations. First, U.S. policy work is usually unaware of the extent to which Chinese contractors are engaged in the region. Second, projects are too often viewed in a negative light because of superficially obtained information. 

Between 2011 and 2013, China used more cement than the U.S used in the entire 20th century. It should not be surprising, then, that Chinese firms have become globally well-established as engineering contractors. China’s built-up capacity needs a global market to sustain its growth. In doing so, China’s international construction and engineering contractors (ICECs) have entered the Latin America and Caribbean market. 

While Chinese ICECs are mostly state-owned enterprises (SOEs), they are not necessarily state directed. That is, these SOEs go into the world to find projects to build for their self-interested profit motives. SOEs compete against each other to win contracts. The tidy rhetoric of the “Belt and Road Initiative” has obscured the fact that the initiative is just a branding campaign, organized haphazardly with little centralization. 

China Harbour Engineering Company (CHEC) has active projects in almost every major Caribbean country and has a regional headquarters in Kingston, Jamaica. CHEC was the contractor for the $400 million Jamaica Infrastructure Development Project between 2010 and 2015. Subsequently, CHEC was engaged in 2013 for the $350 million Major Infrastructure Development Program (MIDP), again in Jamaica. The Jamaican government published a report containing the details of the entire MIDP on the website of the National Works Agency, which included all budgets and all subcontracting arrangements for each project. CHEC is also the main contractor for the construction of the North-South highway project in Jamaica. Without equivocation, CHEC is the single most important infrastructure contractor in Jamaica’s history (and, plausibly, the Caribbean’s). 

The North-South Highway, which would lead to an economic boost for Jamaicans, was started in 1999 with initial work by French contractor Bouygues Travaux. But the project was abandoned because of financial difficulties. In 2009, the Jamaican government approached Chinese contractors and policy banks to restart the highway project. They wanted to finance the project without increasing the country’s debt burden. The Chinese parties agreed to Jamaica’s unorthodox request. China Development Bank loaned $700 million to Jamaica for the highway project to be completed by CHEC. 

To repay the loan, Jamaica transferred 500 hectares of land adjacent to the new Chinese-built North-South Highway for a 50-year concessionary period. The land transfer includes coastal areas on which CHEC has agreed to build more than 2,000 hotel rooms—further boosting Jamaica’s economy. As the leader of Jamaica’s opposition party noted: “This highway cannot leave Jamaica. This highway, at the end of the concession period, reverts to the ownership of the people of Jamaica, and the hotels and other entities that are built will always be there for the people of Jamaica.”

Jamaica’s total debt outstanding to China is less than 4 percent of gross domestic product. At the same time, Jamaica has been engaged in the lion’s share of major Chinese-led construction projects in the Caribbean. One common refrain is that Chinese ICECs primarily used Chinese labor, but CHEC has reported that 90 percent of its workforce in Jamaica are locals.

Moreover, the recently established Antigua and Barbuda Special Economic Zone (ABSEZ) is not well known in discussions of China’s engagement in the Caribbean, despite its reputation as being exceedingly ambitious. ABSEZ was created primarily for the development of a series of massive projects led by a Chinese investor—Yida Zhang (who recently became an Antiguan citizen). In 2015, the Antiguan parliament approved the allocation of 1,600 acres of land in northern Antigua, consisting of three islands and one large peninsula. This land was then purchased by the Yida Group for $60 million. Yida Group was then licensed by the Antigua government to develop the special economic zone. As chairman of the ABSEZ Administrative Committee, Yida Zhang is also responsible for oversight of the zone. The 20-year “master plan” for the ABSEZ approved by the government includes a “7-star hotel,” cliff villas, an international finance center, an international education zone, a casino zone and more. The cabinet of Antigua also approved an environmental impact assessment of the proposed projects. In March, the Yida Group signed a multimillion-dollar deal, witnessed by the Antiguan prime minister, with an investment partner to open an international medical school within the ABSEZ. 

Citizenship by Investment Programs

Caribbean citizenship by investment programs (CIPs) are another area often overlooked in the Caribbean’s foreign policy. Under CIPs, nationals of other countries are able to purchase citizenship in Caribbean countries by investing in approved assets or financial instruments. CIPs are a core source of Chinese direct investment in the Caribbean, and a robust framing of China-Caribbean relations should reflect this fact. 

Five Caribbean countries currently have CIPs: St. Kitts and Nevis (which in 1984 was the first country to invent this product), Antigua and Barbuda, St. Lucia, Dominica and Grenada. Across the five islands, Chinese nationals are the single largest source of applicants/new citizens. Given the trends of similar Caribbean CIP metrics, it would be reasonable to assume that the Chinese prominence trend tracks across countries (such as the U.S EB-5 visa program). 

Dominica started its CIP in 1993. Since then, the country has raised more than $300 million via the program. Several paths to investment qualify for purchasing citizenship. In St. Lucia, the lowest investment option is a contribution of $100,000 to the National Economic Fund. Due to the coronavirus pandemic, the Lucian government initiated a temporary investment option: investment in a “COVID-19 Relief Bond,” requiring a minimum investment of $250,000. 

These programs provide substantial benefits to the countries that have them. In St. Kitts and Nevis, revenue from the CIP is estimated to be valued at 25 percent of gross domestic product (GDP). According to an International Monetary Fund paper, the St. Kitts CIP supported a sustained “economic recovery, improved key macroeconomic balances and boosted bank liquidity.” Further, the CIP revenue has “benefited real estate and tourism developments, and fueled a pickup in construction. The fiscal balance has substantially improved to a surplus of about 12 percent of GDP.” CIPs are clearly a net positive for the small islands of the Caribbean. 

Even so, these programs are constantly threatened by foreign governments (usually the U.S. and the EU). Recently, the prime minister of Antigua and Barbuda, Gaston Browne, accused the U.S. of trying to “kill” the CIPs in Antigua and the rest of the Caribbean. He went on to say that “the U.S. attacked St. Kitts and Dominica too. And they do that so often I don’t even know what to say. But anytime they kill it, countries like Dominica and St Kitts, their economies will be decimated and they will plunge tens of thousands of people [into] poverty and then you end up with so many social ills.” As Browne makes clear, the implications of abolishing CIPs are stark. 

CIPs are the economic lifeblood of some Caribbean countries, and Chinese citizens are the main target audience. U.S. policy in the region should avoid casting these programs in a negative light because it will cause resentment in many Caribbean countries toward the U.S. 

Conclusion

The cases highlighted above should add nuance to the conversations around China-Caribbean engagement. The U.S should calibrate its foreign policy toward the region to optimize the interests not only of the U.S. but also of the Caribbean. It is from this perspective that the U.S can alleviate the growing concern that Caribbean leaders have of zero-sum competition intensified by the protracted acrimony between China and the U.S. By geographic, historical and cultural fact, the Caribbean is tethered to the U.S.—not China. The U.S. has to be a reliable partner in sustaining that link.

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