China Power | Economy | East Asia

China’s Investment Setbacks in Panama

What can other potential recipients of Chinese investment learn from recent ups and downs in Panama and beyond?

China’s Investment Setbacks in Panama

In this Dec. 3, 2018, file photo, Chinese President Xi Jinping, left, and Panama’s then-President Juan Carlos Varela shake hands after reading a statement and meeting at the presidential palace in Panama City.

Credit: AP Photo/Arnulfo Franco, File
in recent years have included bridges, a rail line, commercial ports, and a cruise ship terminal. But one of the most significant projects proposed during Varela’s administration was the  (PCCP), a new port facility that would have been strategically located at the Panama Canal’s Caribbean entrance and promised to greatly increase transshipment capacity following a 2015 expansion of the canal’s locks. A consortium of PRC companies led by Landbridge Group – a Chinese conglomerate with equities in ports, oil and gas, real estate and other areas – .

describes itself as a “private company,” but like many ostensibly private Chinese companies, it has close ties to the Chinese Communist Party (CCP) and the People’s Liberation Army (PLA). It has a branch of CCP members embedded in the company and in 2014 it established a “” unit within the company with PLA support. Landbridge’s other noteworthy stake in a port outside of China is the 99-year lease it holds to the Port of Darwin, Australia, . Additionally, Landbridge’s chairman, Ye Cheng, is a member of the Chinese People’s Political Consultative Conference (CPPCC), a key organ that forms part of the CCP’s “,” a network of organizations and individuals under CCP direction that serves to advance the CCP’s interests outside the formal party structure.

Both Landbridge’s connections to the CCP and PLA and Ye Cheng’s CPPCC membership represented potential sources of CCP influence over the PCCP project and its future operations. The PCCP, along with other Chinese port investments in Panama, prompted U.S. concerns that Chinese companies, including Landbridge, might consolidate control over port infrastructure near the canal, and ultimately give Beijing influence over the canal’s operations. In an effort to counter China’s growing economic influence in Panama, the former Trump administration surged diplomatic outreach, with then- rushing to Panama City in October 2018 in advance of Xi’s December visit.

Events quickly shifted, however, following the election of Laurentino Cortizo as Panama’s president in early 2019. After taking office, . A , the government agency that oversees the country’s ports, of the PCCP concession found that the Landbridge-led consortium had failed to comply with numerous contractual terms, including investing only roughly one-fifth of the promised amount, failing to provide key project documentation, and employing much less local labor than promised. The review led to the PMA’s decision to revoke the PCCP concession in June 2021.

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Panama’s experience is representative of several other countries where leadership changes have resulted in increased scrutiny on BRI-related investments. Notable examples include , where in 2019 new Prime Minister Mathahir Mohamed successfully renegotiated the terms of a Chinese rail project to link Malaysia’s east and west coasts agreed to by his predecessor Najib Razak, and the , where newly elected President Ibrahim Mohamed Solih pledged in 2018 to review a free trade agreement with China and to reevaluate several Chinese infrastructure investments. In these and other cases, newly elected leaders have taken issue with the financial terms of BRI projects, cost overruns, and projects’ reliance on Chinese labor despite promises to create local jobs. Additionally, incoming leaders have recently sought to address the strategic implications of accepting BRI projects from China for defense relations with the U.S. and with regional powers such as India and Australia.

China’s recent struggles in Panama and beyond are due to multiple factors, with domestic political shifts, unfavorable investment terms, the failure of some Chinese companies to comply with the commitments they do make, and diplomatic intervention by the U.S. and regional powers all likely playing a role. However, setting aside the narrow political incentives of leaders like Varela to attract Chinese investment, the fact that China’s deal-making in Panama advanced as far as it did suggests that offers by Beijing to build infrastructure will continue to hold broad appeal to at least some governments. Indeed, officials from Latin America to the Indo-Pacific frequently reiterate to U.S. officials that they wish neither to forego all Chinese investment nor to be forced to “choose” between the U.S. and China.

The challenge these governments face, then, is to screen out projects that might seriously compromise their countries’ national security or economic wellbeing. Unfortunately, many governments lack formal committees or institutionalized procedures for reviewing investment deals on economic and national security grounds. For example, despite its recent difficulties with Chinese investments, , as do some countries like Croatia and Cyprus. In comparison, the in the United States (CFIUS), which is responsible for reviewing proposed transactions between foreign entities and U.S. companies that might affect U.S. national security. While it is not perfect and is not capable of capturing every transaction that could conceivably threaten U.S. security, the CFIUS process is nonetheless fairly comprehensive in that it involves an interagency review of proposed transactions.

It might not be appropriate for smaller governments to attempt to implement a CFIUS-like process wholesale. Nevertheless, the U.S. CFIUS experience may hold valuable lessons for countries wishing to develop their own formal investment screening mechanisms. For instance, U.S. defense and intelligence officials involved in the process have a role to play in sharing sensitive information about the risks from specific Chinese investments and in emphasizing potential effects on defense cooperation with the U.S. While national leaders’ decisions to accept or reject Chinese investment are ultimately complex political and economic calculations that only they can make, both their countries’ and U.S. interests are best served by empowering leaders to act based on the best information available.