By Lasanda Kurukulasuriya | The Sunday Times
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A talk held in Colombo on Thursday at the Bandaranaike Centre for International Studies as part of the India-Sri Lanka Foundation's inaugural lecture series, also dealt with related issues. On the topic of "India and Sri Lanka and the Asian resurgence," the speaker, former Indian Foreign Secretary Shyam Saran drew attention to the shift in the centre of gravity in the global economy towards India and the Pacific.
In his presentation at the Galle Dialog, the US delegate Robert M. Scher, Deputy Assistant Secretary of Defence for South and Southeast Asian Affairs, remarked on the increased importance that US policymakers assigned to the Indian Ocean.
He said it "now surpassed the Atlantic and Pacific Oceans as the "world's busiest and most critical trade corridor." Parts of the speech seemed to reflect the influence of Robert D. Kaplan's eye-opening book "Monsoon: The Indian Ocean and the Future of American Power" (Random House, 2010). He was clearly referring to Kaplan's statistics when he said that "By some measures over fifty (50) percent of the world's container traffic and seventy (70) percent of global energy trade transits through the Indian Ocean. These numbers are only expected to grow over the next decade, fuelled by the Asian economic expansion and the growing need for raw materials and energy resources from Africa and the Middle East."
Was it coincidental that just two days later US President Barack Obama announced the decision to deploy 2500 marines in northern Australia, with a view to asserting its military presence in the region? A day after announcing that agreement with Australian Prime Minister Julia Gillard, in a speech to the Australian parliament Obama asserted the US's intention to play a decisive role in shaping the future of the Asia Pacific region. The move has irked China. "It may not be quite appropriate to intensify and expand military alliances and may not be in the interest of countries within this region," Liu Weidman, a Foreign Ministry spokesman, said" the New York Time reported.
The northern tip of Australia where the new American base is to be set up would represent the eastern edge of the swathe of oceanic territory that comes within Kaplan's analysis. He defines this Greater Indian Ocean area as encompassing the Red Sea, Arabian Sea, Bay of Bengal, and Java and South China seas.
Referring to the U.S. Marine Corps "Vision and Strategy" statement covering the years to 2025 Kaplan observes that "Along with its continued dominance in the Pacific, the U.S. clearly seeks to be the preeminent South Asian power. This signals a momentous historical shift away from the North Atlantic and Europe."
It would appear that Sri Lanka is aware of the importance newly assigned to the seas around it. Defence Secretary Gotabaya Rajapaksa in his opening remarks noted that "the energy security of many nations also depends on the Indian Ocean, as the fuel requirements of many industrialising nations are met through the energy resources transported through it. For all these reasons and more, the Indian Ocean's importance in the global context is very great."
He went on to flag some of the external threats to maritime security in the region. These included piracy originating in Somalia, arms smuggling and human and drug trafficking. Rajapaksa appealed for greater international cooperation to address the threats while acknowledging the responsibility of coastal nations in particular, saying "we must not shirk our duty."
While Sri Lanka is eager to showcase the capabilities of its battle-fresh, well trained armed forces -- including the navy that played a vital role in the defeat of the LTTE -- Sri Lanka would also need to be wise to the underlying power-play amongst the big powers when it responds to overtures that may be made as a result of shifting global priorities. The new emphasis placed on the Indian Ocean region relates to the rise of two emerging economic powers, India and China, both friendly nations as far as Sri Lanka is concerned. The anxieties of the US in relation to China are not those of Sri Lanka.
It is interesting that while the US delegate's presentation, by his own admission, mainly sought to look at how the Indian Ocean region affected the US and how the US could best address its own interests, the tail end of it included a reference to human rights. "The Obama administration has made it clear that it will pursue policies that include both engagement with those with whom we share interests AND on behalf of improvements in human rights," he said, following it up with the now familiar refrain on "accountability for serious violations of human rights during the war" in Sri Lanka.
President Barack Obama in his speech to the Australian parliament also referred to China in similar manner. Asserting that the US welcomed the rise of "a peaceful and prosperous China" and sought greater cooperation, he also referred to China's "poor record on human rights," according to Doordarshan. "We will do this even as we continue to speak candidly to Beijing about the importance of upholding international norms and respecting the universal human rights of the Chinese people," he was quoted as saying.
For analysts a question of interest is whether human rights have become the west's new weapon for control and domination of regions that are of strategic importance, in their calculations. China's economic expansion and outward thrust has typically been peaceful and non-confrontational. But the same cannot be said of the US, whose record has shown it will not hesitate to launch military operations that violate sovereignty of other states in pursuit of its 'high-value targets' such as Osama bin Laden (killed in Pakistan) and the al Qaeda cleric Anwar al Awlaki, (killed in an air raid in Yemen).
Robert Kaplan in a talk on his book at the Carnegie Council last year referring to China's projects in Sri Lanka, Bangladesh, Pakistan and Burma, observed that while China provides "significant military and economic assistance" to countries where it is building or helping to build ports, China does not intend to have naval bases in these places. "To have permanent naval bases in any of these ports would be too provocative to India. China is at pains to convince people that its military and economic rise is benevolent and non-hegemonic." His reference to Sri Lanka at that talk would seem to explain the current swirl of activity and discussion relating to the Indian Ocean in general and Sri Lanka in particular:
"Why is Sri Lanka important? Because it is right at the crux of the great international sea lines of communication. It's where tens of thousands of ships and merchant vessels pass each year. In this new geographic I'm detailing, Sri Lanka is going to be a very important major player."
© The Sunday Times
Monday, November 21, 2011
The Indian Ocean, maritime security and regional undercurrents
Friday, November 18, 2011
Sri Lanka: Ex Army chief found guilty
Sri Lanka Mirror
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the court also imposed a fine of five thousand rupees or six months in jail for default.
The verdict of the Colombo high court trial-at-bar - comprising Justices Deepali Wijesundara, Z. Rasheen and W.T.M.P.B. Waraweva was divided with Justices Deepali Wijesundara and Z. Rasheen in favour of the verdict.
Justice W.T.M.P.B. Waraweva was of the view that Mr. Fonseka should be released from the charges.
The former Army Commander was the respondent in the case, in which the attorney general has filed charges against him, that he had told the newspaper that Defence Secretary Gotabhaya Rajapaksa had ordered that surrendering LTTE cadres be shot during the final stages of the war.
© Sri Lanka Mirror
Friday, November 18, 2011
Indian investment into Sri Lanka zooms
By T E Narasimhan | Business Standard
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The country has attracted FDI worth $516 million from various countries.
During January-October this year, the Sri Lankan government granted approvals to nine Indian projects with an estimated investment of $168 million (around Rs 756 crore).
Since the end of its 25-year civil war in 2009, the country has been working to improve the investment climate, including making fiscal and tax reforms under the guidance of the International Monetary Fund.
In 2005, FDI flow from India to Sri Lanka was $18 million, which peaked in 2008 at $126 million and now India stands among the top five investors in Sri Lanka, with $ 457 million on a cumulative basis.
The top investments include Cairns India - oil exploration, Bharti Airtel, Indian Oil, Piramal Glass, Tata group - Tata Communication, Taj Hotel, Ashok Leyland, Ultra Cement, Ceat, L&T and Asian Paints. Besides, four banks including State Bank of India, Indian Overseas Bank, Indian Bank and ICICI also have branches in the island nation, said Wijesekara.
During the first half of 2011, FDI inflow from India was $47 million, according to the Sri Lanka Board of Investment (BoI), which added that During January-October this year, the Sri Lankan government granted approvals to nine Indian projects with an estimated investment of $168 million. At least, eight of these have begun commercial operations. This is a big jump as last year approvals were granted for 15 projects with an estimated investment of $ 72 million.
Investments flow from India to Sri Lanka in 2009 was $77 million and increased to $110 million in 2010.
Companies, which have recently entered Sri Lanka include Shriram EPC, a renewable energy company and Marg, an infrastructure company from Chennai.
According to Wijesekara, real estate, IT/BPO, hotels, food processing are some of the key sectors driving the investments into Sri Lanka from India.
The last few years have also witnessed an increasing trend of Sri Lankan investments into India, said Wijesekara. He added, the investments in India include Carsons Brandix (around $ 1 billion to set up a garment city in Visakhapatnam), MAS holdings, John Keels, Hayleys, and Aitken Spence (Hotels). There are also investments in the freight servicing and logistics sector from services industry.
© Business Standard
Friday, November 18, 2011
Sri Lanka: Verdict due in Sarath Fonseka case
By Charles Haviland | BBC News
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He is charged with "spreading disaffection" after he gave a newspaper interview apparently giving credence to allegations that the defence secretary ordered war crimes.
Fonseka has said he was quoted out of context.
He is already serving a two-and-a-half year sentence for corruption.
Fonseka, 60, faces further charges, including one of harbouring army deserters.
An ardent nationalist of the Sinhalese ethnic majority, he fell out with his ideological soulmate, President Mahinda Rajapaksa, shortly after leading the military to victory against the Tamil Tigers in 2009.
He challenged President Rajapaksa in the presidential elections in November 2010 and suffered a defeat.
In a newspaper interview he apparently gave credence to allegations that the defence secretary ordered the killing of Tamil Tiger leaders as they tried to surrender.
On Friday (18) three judges will pronounce their verdict - if found guilty he faces a possible jail sentence of up to 20 years.
© BBC News
Thursday, November 17, 2011
661 Days: Where is Prageeth?
Sri Lanka Guardian
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It was pointed out that during the 2nd day of the 47th Session on Sri Lanka at the CAT Committee in Geneva, Sri Lanka's ex Attorney General Mr. Mohan Peiris,made some references on the issue of the forced disappearance of Pragith Ekneligoda, claiming that according to reliable information that he could vouch for, Mr. Ekneligoda has taken refuge in a foreign country and that the campaign against his disappearance is a hoax.
Mr. Peiris failed to provide detailed information on the alleged whereabouts of Mr. Ekneligoda despite claiming that he had "reliable information". He did not name the country, where he is now. So Pragith’s wife wants Mr. Mohan Peiris to disclose the details of the whereabouts of her husband. Speaking further, she said that on 23rd of Nov., the case in the magistrate courts, Homagama re’ the disappearance of Pragith is to be called and before that she needed the said information from Mr.Peiris.
Pragith Ekneligoda, a political columnist and cartoonist with Lanka-e-news website and a freelance journalist who was known for his anti-government news and cartoons went missing on January 24, 2010, just days before the presidential election and it is 661 days now for his disappearance. He was believed to be a supporter of the common opposition presidential candidate,Mr. Sarath Fonseka.
Mr.Mangala Samarawira, on behalf of United National Party told the gathering that as the opposition, they will do their best to protest for this. He said that they plan to formulate a program me for protesting Avanitiya (lawlessness) of the country during the coming months with the support of everybody. He reminded that President is only caretaker of the country but not the King of this country. Replying to a question, posed by Mr. Elmo Fernando, BBC Sandeshaya, he said that though, he admits that there are problems in the opposition party, they will forget the differences and fight for the common good.
Dr. Nimalka Fernando explained the gathering how Mr. Peiris was responding to the CAT committee about Pragith and other journalists who were attacked. Mr.Jayantha Katagoda M.P.in the National Alliance, Dr. Wickramabahu Karunaratne, Mr. Siritunga Jayasuriya, Mr. Linus Jayatilaka, and K.D.C. Kumarage, A A L also spoke.
© Sri Lanka Guardian
Thursday, November 17, 2011
Murdered Sri Lanka politician's family hail MP's arrest
BBC News
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Speaking to the BBC from an undisclosed location outside Sri Lanka, Hirunika Premachandra said that the news had restored her faith in the judiciary.
Her father Bharatha Lakshman was allegedly killed by MP Duminda Silva.
Mr Silva was injured when shooting broke out in Colombo between rival members of the governing party.
On Tuesday a court said that Mr Silva should be arrested and produced before a court even though his name is not among the list of 15 police suspects wanted in connection with the violence.
He is currently believed to be receiving medical treatment for severe injuries in a hospital in Singapore.
Gun culture
"I think this is the first time I felt happy since my father passed away," Ms Premachandra told the BBC Sinhala service.
"It is not because somebody is being sent to prison but because we can still trust the judicial system in Sri Lanka.
"I salute the judge for making us still believe in the judiciary."
Presidential adviser Mr Lakshman was among four people killed when shooting broke out within the governing United People's Front Alliance as local elections were being held in a suburb of Colombo on 8 October.
Police said on Tuesday that there was not enough evidence to arrest Mr Silva and that he was "not of sound mind".
However, considering the evidence, the magistrate ordered the MP's immediate arrest.
Police quoting Mr Lakshman's driver said that Mr Silva blocked Mr Lakshman's vehicle and shot him. But, the officer said, other eyewitnesses had contradicted this.
The BBC's Charles Haviland in Colombo says that several other people have been detained in connection with the violence, including Mr Silva's bodyguard and a man widely described as an "underworld figure" who was with Mr Silva at the time.
Defence Secretary Gotabhaya Rajapaksa countered widespread allegations against Mr Silva by saying he was "not a known underworld king pin or some drug dealer - he's an elected MP".
But Mr Rajapaksa admitted that politicians in the area where the gunfight took place had connections with the underworld and its gun culture.
© BBC News
Thursday, November 17, 2011
Child exploitation on the rise-Police
By Supun Dias | Daily Mirror
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Police spokesman Ajith Rohana said that the number is relatively high when compared with the last two years.
“Notably the children who fell prey to these suspects are ones who live alone or children who are isolated in the society,” he said.
“There is a police women and childrens bureau headed by a senior woman police officer in every police station. Priority is always given to such unfortunate incidents,” he said.
The Ministry of Justice and the Attorney Generals Department is cooperating with the police to resolve such cases.
© Daily Mirror
Thursday, November 17, 2011
More UK firms interested in Sri Lanka
The Island
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"In that context I welcome the Sri Lankan government’s efforts to improve the business environment by tackling existing barriers to trade and streamlining bureaucracy. I also appreciate recent efforts by the government to ask local business leaders what they need from government to help them succeed," he said speaking at the AGM of the Sri Lanka Apparel Exporters Association.
The High Commissioner paid a tribute to the country’s garment industry as well.
"I applaud the continued industry move away from low-value products towards high-value niche garments, using the latest high-tech fabrics, particularly in sportswear and women’s underwear," Rankin said.
He also touched on the loss of GSP+ trade concessions to the EU.
"The loss of duty concessions under the EU’s Generalised System of Preferences does not so far appear to have greatly affected the volume of Sri Lankan exports to Europe. Indeed overall exports are still on track to rise year on year. But I recognise that margins may have been tightened."
Excerpts of Rankin’s speech follows:
"With the increased investment in ports and roads that is taking place in this country, I believe that Sri Lanka is well placed to position itself as a logistics hub for clothing manufacturers across the region.
Western Economic Challenges...
The United Kingdom, and Europe as a whole, is of course the single biggest market for your exports. You will all have seen in your newspapers this morning the comments of Christine Lagarde, the Managing Director of the IMF, that Asia will not be immune from the current economic challenges facing the Euro Zone, and which also affect the UK and the USA. But I am pleased to note that so far your sector has been resilient in the face of the economic downturn in these western markets. While I will resist a prediction of the precise outcome of the current economic turbulence for your sector, I can tell you that the UK companies to whom I have spoken in my work continue to see Sri Lanka as a primary source of high quality, affordable clothing .
Having said that, there is no doubt that retailers in the UK, as elsewhere, will be keener than ever to keep a tight rein on costs. So I hope that customers and manufacturers can work together even more closely to increase productivity, shorten lead times, streamline logistics and innovate where possible.
GSP Plus...
I am aware of the controversy over the loss of GSP+, which occurred prior to my arrival in Sri Lanka. The loss of duty concessions under the EU’s Generalised System of Preferences does not so far appear to have greatly affected the volume of Sri Lankan exports to Europe. Indeed overall exports are still on track to rise year on year. But I recognise that margins may have been tightened.
Sri Lanka could still profit by regaining the GSP+ concession. But, it is for the Government of Sri Lanka to decide whether it wishes to meet the GSP requirements and re-apply for its benefits.
Sustainability...
In the nine months I have been here I have tried to develop a hands-on understanding of your industry. I have visited a number of clothing factories and would note how impressed I have been with what I have seen so far - clean, modern factories with good working conditions for their staff. And I applaud the continued industry move away from low-value products towards high-value niche garments, using the latest high-tech fabrics, particularly in sportswear and women’s underwear.
During my discussion with representatives of your industry I have also heard that the long-term sustainability of the industry is likely to depend on increased automation and increased use of Computer Aided Manufacturing and Design machines.
This new emphasis on design is an important one. The UK has long been a centre of design excellence, with our world class fashion designers. But I’ve been delighted to see the growth in Sri Lanka’s own domestic design process – creating your own unique brands.
The Sri Lanka Design Festival, in which the UK’s British Council and UK designers play a strong role, showcases the local industry, including both modern clothing and traditional hand-loom garments and craft items. Sri Lanka is also taking a regional lead in South Asia on implementing ‘green’ measures and ethical manufacturing practices which I welcome. Marks and Spencer’s first carbon neutral lingerie was produced here in Sri Lanka.
Developing the economy...
I look forward to encouraging more UK companies to consider Sri Lanka as an ethical and profitable trading partner. In that context I welcome the Sri Lankan Government’s efforts to improve the business environment by tackling existing barriers to trade and streamlining bureaucracy. I also appreciate recent efforts by the Government to ask local business leaders what they need from Government to help them succeed.
The answer that I have heard from UK companies, and more widely, is that they hope the Government will provide four things: certainty and stability; increased transparency over Government contracts; tax incentives to allow them to grow; and confidence that their investments will not be subject to arbitrary action. Above all they want more ‘room’ for businesses to simply get on with what they do best - doing business.
The UK Government has recognised this, by taking decisive action to tackle its budget deficit and by gearing its economic policies heavily in support of both foreign investment and exports. We believe this is the only way to achieve strong, sustainable and balanced growth.
Despite challenging times for Western economies, I believe that the prospects for bilateral trade between the UK and Sri Lanka remain bright. In 2010 Sri Lankan exports to the UK totalled over US$ 1 billion, and imports from the UK were worth some US$ 186 million. That made the UK Sri Lanka’s second largest trading partner by volume. And there are over 100 companies in Sri Lanka with a UK affiliation including major companies in the garment sourcing sector such as Marks and Spencer, Tesco, Triumph and Next.
This year, the UK Trade and Investment Section of the British High Commission is having a record year in terms of enquiries from British companies wishing to do business in Sri Lanka and develop trade partnerships – including in the garments industry. This reflects the continued and increasing confidence in the quality of the goods that you all, as members of this Association, produce. Long may you continue to do so."
© The Island
Thursday, November 17, 2011
Sri Lanka central bank pours oil on troubled waters
Lanka Business Online
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The central bank has given a firm signal that it will not depreciate the currency and take International Monetary Fund advice to float the rupee.
Rates are also not being allowed to go up and money is being printed to keep rates down via sterilized interventions, fuelling demand and adding to balance of payments pressure.
This is no drill
As mentioned in the last column, the developments in the monetary system in July turned out to be just a dress rehearsal. Now sustained sterilization of the balance of payments has begun.
The central bank's T-bill stock rose to 42 billion on September 20 and excess liquidity was lower than that level at 31.4 billion rupees. Put another way, all the excess liquidity can be accounted for by freshly injected rupee reserves.
This money is now being re-absorbed by the newly started repo auctions.
Reserve Outflow
Central Bank's August forex intervention data is now delayed by over two weeks. It is not unusual in Sri Lanka for data to be delayed during a balance of payments crisis.
A back-of-the-envelop calculation, working backwards from available domestic asset data can give some idea of reserve outflows.
Sri Lanka's monetary base expanded from 413.2 billion rupees in end July to 427.2 billion rupees by September 15. In the same period excess rupee liquidity in banks fell to 29.8 billion rupees from 75.3 billion rupees.
The central bank's Treasuries stock which represents fresh injections of rupees through direct bill purchases or reserve appropriations by the state, rose from 1.7 billion rupees to 33.1 billion rupees in the same period.
The sum of the net fall in excess liquidity and the net increase in domestic assets in the period is 76.9 billion rupees. Adjusted for the expansion in reserve money, the net change is 62.9 billion rupees.
It points to an approximate reserve outflow of 570 million dollars in six weeks when an average exchange rate of 110.10 rupees is applied.
Assuming no material change in the monetary base, reserve outflows to September 20 amounts to about 640 million dollars. If the monetary base contracted it is higher, or vice versa.
When added to the 416 million dollar interventions in July the total comes to about a billion dollars, over a period of some 10 weeks.
Interest Rates
Interest rates are at the moment being held back with an expansionary sterilization cycle. Rates will start to move only when sterilization becomes less than 100 percent.
The monetary authority has started cash auctions and it is for the moment withdrawing excess liquidity which was pumped by its own actions and keeping overnight rates at 7.08 percent.
There was a story where in response to a question from an LBO reporter the IMF mission chief advised against an interest rate defence of the peg. But even at the time it was probably an academic question.
Call market data show that if rates were allowed to move up in June as the system tightened it may have been possible to save the peg.
Jack
To some observers the central bank's defence of the peg by targeting both the exchange rate and interest rate seems inexplicable.
But from the point of view of a soft pegged central bank it is not that difficult to explain.
Even the IMF encourages the central bank to collect large amounts of reserves.
After being encouraged to collect reserves, which after all are supposed to be there to be spent when the need arises, everyone suddenly turns around and advises the central bank not to spend the money.
There is a pithy Sinhalese saying that captures the situation very clearly: Yuddeta nethi kaduwa kos kotannader? It means 'If the sword is not available for war, is it being kept around to cut up jack fruit?'
Unfortunately reserve collections - far above the monetary base - is a scam that only benefit the governments of reserve currency central banks, principally the US where they are invested.
It is funny that investors actually draw confidence from looking at large reserves. But large amounts of reserves actually encourage Central Banks to defend pegs and keep rates down, leading to predictable consequences.
External Anchor
There is no doubt that a peg is a useful tool. It impersonally acts as an escape valve for periodic build ups of domestic demand pressure, by dynamically adjusting the money supply to economic needs via the balance of payments.
It stops inflation to around the level generated by the anchor currency.
It stops rulers from destroying the real value of salaries of working people and lifetime financial savings of the old and the weak through currency depreciation - which is already being done to a great extent by the anchor currency central bank that is also printing fiat money.
But all this happens only if the monetary authority is prepared to drop policy rates, like in Singapore (with limited sterilization) and Hong Kong (no sterilization).
To build a peg that is sustainable we need to change our monetary laws.
A 'float' is similar to what gold exchange standard central banks used to call a 'lifting of gold convertibility'. Essentially dollar convertibility at a fixed rate is lifted by a float.
What Next?
The next step may be the start of reverse repo auctions. Some foreign banks are still liquid. They also have limits for local banks. So some amount of excess liquidity can be expected to remain even if reverse repo auctions start eventually.
If some bond holders quit, foreign banks will take paper into their balance sheets and liquidity may also gradually diminish. Bond holders however need not panic, as over the longer term, the peg is likely to brought back to near earlier levels following a float.
Instead of a reverse repo auction, the central bank could continue to buy Treasuries direct and sterilize its effect later.
In the past, the market has seen outright rejections of entire Treasuries auctions, when balance of payments pressures reached crisis territory.
As already mentioned in the last column, higher import taxes could be expected on what authorities quaintly (some would say in a fascist manner) call 'non-essential' consumer goods as if they have a divine right to decide for individual citizens what is essential or not.
Though the spot dollar rate is around 110 rupees, in the forward markets rates have moved up. The three month rate is now about 111.10/15, up about 50 to 60 cents over several weeks.
Waiting Game
Sri Lanka's IMF program is "in abeyance" to use a neutral expression. The mission who left with an "uncompleted review" expects to continue discussions.
In July the Central Bank had eight billion dollars in reserves. At the rate of 300 to 400 million dollar losses of reserves a month it will take several months for reserves to deplete to the level of the monetary base, where it can no longer meet its domestic liabilities in dollars.
In a sterilized intervention phase however, state debt repayments can also become net reserve losses.
Treasuries acquired by the monetary authority in place of reserve appropriations in the middle of an expansionary sterilization cycle cannot be sold to the market to dampen domestic demand in the economy and re-build fresh reserves.
All this can at any time be stopped by a float. Unfortunately until the imbalance is resolved market participants will stop their normal growth generating activities and instead watch the BOP.
This is costly for the economy at a time the global outlook is also far from rosy.
© LBO
Thursday, November 17, 2011
Cold war in the tropics: China, India vie for Maldives
By C. Bryson Hull | Reuters
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Stretched across 90,000 sq km (35,000 sq m) of the Indian Ocean southwest of India, the Sunni Muslim nation of 1,192 islands finds itself sandwiched between the two Asian rivals, and both flexed their muscles at a meeting of South Asian nations hosted by the Maldives last week.
China preceded the heads-of-state meeting of the eight-nation South Asian Association for Regional Cooperation (SAARC) by opening its first embassy in the Maldives, a ceremony attended by Vice Foreign Minister Zhang Zhijun.
Two Maldivian officials said China had hurriedly rented a space to open the embassy in time for the summit, while the actual embassy is being built. Officials with the Chinese delegation declined repeated requests by Reuters for comment.
"The bureaucrat in me says the timing is right. You want to open something like that when there is a big official around. But opening it right before SAARC is a way to tweak India," an Asian diplomat told Reuters on condition of anonymity.
China joins India, Sri Lanka, Pakistan and Bangladesh as the only countries with full embassies in the Maldives and, at the SAARC meeting, Beijing pushed to have its observer status raised to dialogue partner, an elevated standing it has with the Association of Southeast Asian Nations (ASEAN).
"There was no hurry or further discussion to make China a dialogue partner," Maldivian President Mohamed Nasheed told reporters after the meeting.
"INDIA'S NEIGHBOURHOOD"
India's response to China's diplomatic display included a show of military force and political largesse.
Navy frigates patrolled off the Gan atoll, where the summit was held, to protect VIP visitors including Afghan President Hamid Karzai, and Prime Minister Manmohan Singh held a one-day state visit to the capital island, Male.
"This is our extended neighbourhood. We wish to work with the Maldives and other like-minded countries to ensure peace and prosperity in the Indian Ocean region," Singh told the Maldivian parliament.
India extended a $100 million credit line, inked pacts on maritime and counterterrorism cooperation, and both nations agreed "their respective territories would not be allowed for any activity inimical to the other and by any quarter".
New Delhi has long been concerned by any moves China makes to boost its presence in neighbouring countries, and is worried about the so-called "string of pearls" ambition to expand Chinese maritime influence in the Indian Ocean and beyond.
"China has made a lot of surge in the Indian Ocean rim countries. Maldives is of particular interest because it can help China gain access to the main regional forum, SAARC," Bhaskar Roy, a strategic affairs expert at the Chennai Centre for China Studies, said.
China made its present felt throughout the SAARC summit. The post-summit giveaway bag included porcelain pens and diaries from the Chinese Foreign Affairs Ministry detailing "Five Years of China-SAARC Cooperation". A box for a new 40-inch TV in the media centre bore a sticker: "China Aid."
CHINA'S TOURIST TAP
While India may have the edge in terms of political clout and military cooperation, China has a softer but no less powerful lever over the Maldives' $1.5 billion economy.
It is the top provider of visitors to the tourism industry, which earns 28 percent of gross domestic product and 90 percent of foreign exchange, with stays costing up to $1,000 a night at paradise resorts on desert islands of pure-white beaches, palm trees and incomparably hued waters.
Chinese tourist arrivals doubled year-on-year in 2010, according to the Maldives Ministry of Tourism, Arts and Culture. By September, this year's 146,668 visitors from China were well past 2010's total of 118,961.
"The Chinese can buy their way into this country. All they have to do is put out a travel advisory saying too many people are drowning and that's it, they will turn those tourists off like a tap," a senior Maldivian official said on condition of anonymity.
The China surge has been a godsend for tourism operators who traditionally rely on Europe and other Western countries for the bulk of visitors, but have seen those numbers fall with the downturn in developed-world economies and European debt crisis.
The Maldivian government wants "to maintain an appropriate balance between Maldives and India and other investors and not have any one country dominate them and exercise inordinate influence over them", a senior U.S. administration official told Reuters on condition of anonymity.
The United States remains concerned, as does India, about China's plans in the Indian Ocean, the official said.
"I think it is important to try to continue to engage them, to stress opportunities for working together, and to stress the importance of them being as transparent as possible about what their economic and military intentions are," the official said.
The president, Nasheed, was unequivocal when asked how the Maldives would avoid becoming a pawn between Asia's giant rivals.
"We've made it very clear that India is our best friend and neighbour and we will continue along those lines," he told reporters, prompting immediate questions from journalists present from China's state media.
"There won't be any issue because of the Maldives' friendship with any other country," Nasheed said, smiling.
© Reuters
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