Xi Jinping may not have been familiar with the English saying that ‘two’s company but three’s a crowd’ when he suggested that China, India and Sri Lanka should work together to promote growth.
He floated the idea during a state visit from Sri Lanka’s new president Maithripala Sirisena in late March, also pledging $1 billion in financial aid for the South Asian island nation.
Many believe that China’s newfound enthusiasm for working more closely with India is a direct outcome of the change of mood it has encountered in Sri Lanka – after Sirisena defeated his former colleague Mahinda Rajapaksa in national elections in January.
Nor was China Sirisena’s first overseas port of call after taking office. That was India, and in February Narendra Modi responded in kind with the first state visit by an Indian prime minister to Sri Lanka in more than three decades (a legacy of the country’s bitter civil war between the Sinhalese and its Tamil minority).
Modi’s visit coincided with an announcement that China’s flagship port city project in Colombo was being suspended while the new government examined the first phase of the deal for suspected environmental breaches and illegal payments.
Sirisena told reporters that Xi didn’t mention the project during their discussions, although the same cannot be said for the Global Times, a Chinese state newspaper.
In an editorial it warned that, “Colombo knows this project is crucial to the development of the capital” and that Sri Lanka “needs foreign investment more than ever”.
Ren Faqiang, deputy head of the Chinese embassy in Sri Lanka went one step further this month, telling Sri Lanka’s Sunday Leader newspaper that construction at the port should continue while the government reconsiders its options.
“If one side suspends the project, they will have to face the legal consequences,” he warned. “China has come to assist you and yet you pour dirty water over China’s face. That isn’t fair.”
Former president Rajapaksa agrees. “I wanted development for Sri Lanka and China was the only one which had the resources and inclination to help me,” he told Hong Kong’s South China Morning Post recently.
“They should be thankful to China for the help they extended. Instead these people are treating China like a criminal.”
Just before Easter, Reuters reported that the Sri Lankan government is reviewing 35 other infrastructure projects, 28 of which had been awarded to Chinese firms. They include the Lotus Tower in central Colombo, potentially South Asia’s tallest building.
India’s Tata Group has also had a $400 million housing project put on hold and Australia’s Kerry Packer failed to win a licence for a proposed $300 million casino resort project.
But it is China that appears to be most firmly on the back foot, partly because of its perceived closeness to the former regime and partly because of the sheer scale of its lending to Sri Lanka since the end of the civil war in 2009.
Reportedly, Beijing has advanced over $5 billion in loans, but the new government believes large sums were either earmarked for the former president’s vanity projects, or used corruptly. Local newspapers allege that figures close to the former administration may have misappropriated up to $10 billion after the government tracked down $1 billion to a single account in Dubai (Mahinda Rajapaksa has been summoned to appear before the nation’s anti-graft body).
Another allegation is that many of the new infrastructure projects may never pay their way. Chief among them is an international airport close to the former president’s hometown in Hambantota. It cost $210 million to build, but welcomes only a handful of passengers a day. Even the domestic flag carrier stopped flying there shortly after the presidential election, saying it was losing too much money.
The new government is also unhappy about interest rates on Chinese loans of up to 6%, when it believes the country would have been better served with concessional loans charging interest of less than 1%. In February, Colombo was unsuccessful in persuading the IMF to extend a $4 billion loan so that it could retire some of the Chinese debt. It now hopes to renegotiate its borrowings on a bilateral basis.
The Sirisena government thinks that it holds a trump card, however. China’s desire to create a 21st Century Maritime Silk Road incorporating ports in Sri Lanka is running up against India’s desire to contain Chinese expansion in the region. In fact, India has a competing plan to revive its historical trading routes called Project Mausam (named after the monsoon winds that once propelled ships across the Indian Ocean).
Chinese tourists, meanwhile, seem undeterred by the geopolitical manoeuvring. Over Chinese New Year, they were the second largest visitor group to Sri Lanka, topping the British for the first time. By the end of the year, they are likely to have cemented that position on an annual basis.
Nonetheless, it is India that holds the number one spot, with 242,734 visitors in 2014. Of course, India has deeper cultural and ethnic connections to the countries bordering the Indian Ocean than the Chinese, and New Delhi has been working to tighten its ties in the region. In Sri Lanka it has been helping with the reconstruction of the Tamil-dominated north, for instance: putting up 27,000 new homes, dredging Kankesanthurai port and rebuilding the Northern Railway line. Prime Minister Modi has also suggested that New Delhi could help the eastern port of Trincomalee become a regional petroleum hub by installing oil tanker facilities there.
Naturally, Sri Lanka wants to be on good terms with both of its larger partners. But it will be a difficult balancing act – managing its own expectations against those of Asia’s two emergent superpowers.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.