Sri Lanka’s Growing Links with China

Trade, investment and a strategic Indian Ocean location bring the two countries closer together.

By Jack Goodman

March 06, 2014

“We love this country,” declared a Chinese Foreign Minister on a state visit to Sri Lanka in 1971, China “was ready to give its fullest co-operation to speed up the socialist march of Ceylon.”

Sri Lanka’s socialist “march” didn’t ever quite catch up with China’s, but since the first Rubber-Rice pact was signed in 1952 China-Sri Lankan relations have been a source of unity and continue on an upward trajectory today.

As China’s economic power has grown, investing overseas has been a tactic used across the world by China to help bolster the national interest. Its financial foreign policy rests on two strategies: “accumulating foreign currency reserves and sending money abroad in the form of FDI, aid, assistance and loans,” wrote U.S. economic advisor Ken Miller in Foreign Affairs. Sri Lanka is a model for the latter part of this strategy.

The statistics alone indicate the inexorable rise of China’s financial stake in Sri Lanka.

Impending confirmation of a free trade agreement (FTA) between the two countries is symbolic of the tight-knit relations between Beijing and Colombo in 2014. Bilateral trade exceeded $3 billion for 2013 and China is Sri Lanka’s second largest source of imports behind India.

Despite the symbolism, China will profit more from the generous new tariffs of the FTA. Sri Lanka has a growing trade deficit with China that stood at approximately $2.4 billion in 2012. China is the destination for less than 2 percent of total Sri Lankan exports.

However, concerns over trade deficits for South Asian nations like Sri Lanka are “outweighed by overall economic benefits and political support,” wrote India’s former Special Envoy to Southeast Asian countries on UN Security Council Reforms, Professor S D. Muni.

China is Sri Lanka’s biggest source of foreign direct investment (FDI) as well as providing development loans for projects such as the $500 million new Colombo Port Terminal, Hambantota Port, Sri Lanka’s first four-lane expressway, and a new National Theatre, among others. These lucrative benefits for Sri Lanka have played a pivotal role in building the current relationship.

The recent commitment from Sri Lanka to join the Maritime Silk Road (MSR) indicates the proximity of the two states’ strategic aspirations and is a reflection of the assimilation of national interests. The Indian Ocean ports ofGwadar in Pakistan, Hambantota in Sri Lanka and Chittagong in Bangladesh have all benefited from Chinese investment and account for 30 percent of global trade, according to Indian Ocean Rim Association.

The MSR is a vital strategic project for China in the Indian Ocean, and will increase China’s presence in South Asian shipping routes. Sri Lanka can be seen as a gateway port up the western coast of India and further west to Iran, a vital exporter of oil to China. The brand new port of Hambantota, 85 percent of it paid for with a Chinese loan, is located on the south of the island, historically not a traditional shipping route. However, it is the perfect location to meet the strategic objectives of the MSR.

Supplementing the impact of economic relations, the political consequences of this month’s United Nations Human Rights Council (UNHRC) decision over the U.S.-led resolution that calls for an independent investigation into the end of the Sri Lankan civil war could be significant. The Indian External Affairs Minister Salman Kurshid delivered a warning to Sri Lanka, calling on it to find “possible ways to avoid an hostile attitude towards people and countries that matter.”

In face of these Western-led accusations, Sri Lanka have found a political ally in China through a shared policy of non-interference in internal affairs. This translates as China’s view that issues in relation to human rights are the prerogative of the sovereign state to deal with internally. China’s soft power in Sri Lanka will grow, almost unintentionally, if Colombo’s disenfranchisement with the West continues over the matter of an independent investigation. Despite a recent “curveball” in the form of a comment from the Chinese Foreign Ministry, China has always pledged support for Sri Lanka:

“China opposes some countries’ interference in the internal affairs of Sri Lanka under the pretext of human rights issues,” Foreign Minister Wang Yi told his Sri Lankan counterpart G. L. Peiris in Beijing recently.

Chinese influence in Sri Lanka is clearly growing, but the possibility that Colombo is driving this relationship can’t be overlooked. Noises from Sri Lankan government and other figures suggest that they are fully in control of what is officially known as a “Strategic Cooperative Partnership.” In this context China is playing a pivotal role in Sri Lanka’s regional development in South Asia.

At the heart of this is Sri Lanka’s objective to fulfill its commercial potential as the country at the geographic center of the Indian Ocean. Former Sri Lankan Ambassador to China Nihal Rodrigo, speaking at a South Asian Association for Regional Cooperation (SAARC) event last year, didn’t express concern over China’s naval expansion and development of South Asian ports, but rather claimed that it “provides it (China) easier connectivity across the Indian Ocean which benefits South Asia.” Both governments therefore have something to gain from Hamantota Port, described as one aspect of Sri Lanka’s “five-hub” growth strategy, which aims to position and build the island as a global naval, aviation, commercial, energy and knowledge center.

Hamantota Port was “commercial in nature” and not to be “misconstrued as fitting the string of pearls paradigm,” said Defence Secretary Gotabaya Rajapaksa at the 2012 Galle Dialogue. This countered accusationsfrom some American scholars that China had intentions to encircle India beyond innocently increasing trade links.

The Maritime Silk Road is therefore perceived as critical for Sri Lanka to become a leading player in the development of Indian Ocean trading ports, which China has more or less augmented itself. Sri Lanka also has an opportunity to build favorable ties with both the region’s superpowers, India and China, as well as the emerging Southeast Asian nations.

There is evidence to suggest that Colombo and Beijing now share policies on a whole range of issues, political and economic. This is in part a reflection of Chinese influence, but it is also attributable to Sri Lanka’s ability to manipulate the relationship in its favor.

China’s role in Sri Lanka should be viewed within a regional South Asian context and not just unilaterally. For now at least, Indian and American fears appear to have little credence.

Jack Goodman is a visiting researcher at the Regional Centre for Strategic Studies, Colombo, Sri Lanka.

http://thediplomat.com/2014/03/sri-lankas-growing-links-with-china/