China and Sri Lanka Part Three

by Michael Patrick O'Leary

This article appeared in Ceylon Today on Thursday February 23 2017.

http://epaper.ceylontoday.lk/TodayEpaper.php?id=2017-02-23

It was very entertaining to watch the new Sri Lankan government putting on its big-boy pants to pick a fight with China and then realizing how deep in the doo-doo they were. Eran Wickramaratne, Deputy Minister of State Enterprise Development, tried to put a brave face on the ensuing grovel: “The issue is many of the Chinese contractors were overpaid, for lots of projects. We have been in discussions with them, and almost all of them have been restarted, some under new terms.”

Cunning Plan

The cunning plan was to turn debts into “investments” and pretend Sri Lanka was doing China a favour. International Trade and Development Strategies Minister Malik Samarawickrama said that Sri Lanka is eager to “reduce the current debt by inviting Chinese companies, Chinese investors, to look at some of the enterprises in Sri Lanka, the state-owned enterprises, with a view to taking at least part of that equity over.” Wickremesinghe himself said in Beijing that Sri Lanka had been “talking with some companies and also the government of China about the possibility of some infrastructure projects becoming public-private partnerships, in which part of the debt will become equity held by the Chinese companies’’.

Former ambassador Dayan Jayatilleka commented: “Having spurned and insulted China — as External Affairs Minister Mangala Samaraweera did in his media conference in Beijing itself — Prime Minister Wickremesinghe’s administration now wants China to subsidize Colombo’s ‘pivot’ to the US and India in their joint and separate efforts to compete with and contain China!”
Won’t Get Fooled

The Chinese may be endlessly patient and forgiving and they do want to keep a stake in Sri Lanka. However, they are not stupid and they smelt a rat. Zhuang Rui, deputy dean of the Institute of International Economy at the University of International Business and Economics, said that Sri Lanka’s request was, “a kind of move to repudiate a debt”. A commentary in the Global Times warned: “It would be meaningless if China only swaps some bad debts for nonperforming assets in Sri Lanka’s enterprises. The two countries may need to set up mechanisms to ensure China has sufficient bargaining power in negotiations with Sri Lanka to obtain high quality assets’’.

Hu Weijia wrote in Global Times: “As for China, the country not only needs to act prudently to protect its interests from Sri Lanka’s debt woes, but also should treat the economic ties between the two countries from strategic and long-term perspectives…China may need to invest more in local industries which could create stable jobs for local communities to promote regional economic prosperity and social stability, ensuring that the country becomes more capable of repaying the loans offered by China.”

The government in April 2016 did manage to secure some Chinese investment.  Minister of International Trade Malik Samarawickrema announced that Chinese investors were keen on investing in Mattala Airport, Hambantota Economic and Industrial zone and the government was accelerating the implementation of ongoing Chinese projects valued at US$ 6 billion including the Economic Zone, and a ship repair project.  New infrastructure projects discussed included the extension of the Southern Highway, Kandy and Ratnapura Expressways, and potable and waste water projects.

Port City Project

According to former Defence Secretary, Gotabhaya Rajapaksa, India had warned the Rajapaksa government not to go ahead with the $1.4 billion Chinese-funded Colombo Port City Project, because it would be a security threat to India. The construction of the Port City on 450 acres of land reclaimed from the sea adjoining Colombo Harbour began during President Mahinda Rajapaksa’s second term. The project would have been the biggest single foreign investment in Sri Lanka and would add 233 hectares (575 acres) of real estate in the congested capital. The original project plan included roads, water, electricity, shopping malls, water sports facilities and marinas, a mini golf course, hotels and apartments.

President Sirisena suspended the plan shortly after taking power in January 2015, on the grounds that it would adversely affect the environment. A Chinese firm engaged in the project sought $125 million in compensation for delays caused by the new government. Dayan Jayatilleka commented: “The Port City Project was opened by China’s President himself. So the manner in which some elements of Sri Lanka’s new administration and the overarching National Executive Council have behaved has been profoundly insulting to China. This is no way to treat our country’s best friend!” Diplomatic sources said that China had been willing to build many more port Cities around Sri Lanka. “They were agreeable to construct as many as 28 such cities if only we had asked.”

The government did a U-turn and recommended that the project be resumed.  Chinese foreign ministry official Xiao Qian told reporters after a meeting between Wickremesinghe and China’s Premier Li Keqiang that both sides agreed to “speed up” the project.

Conclusion

Sri Lanka’s former ambassador to the PRC, Nihal Rodrigo, prefers to focus on the “rivalry” rather than the “conflict” between China and India: “Sri Lanka is also anxious to ensure that the ‘rivalry’, often also misunderstanding, even confusion twixt India and China, does not adversely impact on national interests of Sri Lanka and China and India.”

Nihal Rodrigo writes: “The naval traditions of what is now popularized by the Chinese as the Silk Road of the Seas extend deep into the past. Now it is very much adapted to be a vital integral part of contemporary Chinese economic, political and cultural policies. Zhen He is said to have been also engaged deeply in SL’s domestic, political, defence and other aspects at the time when SL consisted of three political entities: Kotte, Jaffna and Kandy.”

Beijing needs Sri Lanka because of its geographical location close to the sea lanes that carry supplies essential to the Chinese economy. However, China is unlikely to try to challenge the US and India directly in the Indian Ocean. Jabin T Jacobs, Assistant Director at the Delhi-based Institute of Chinese Studies, believes that China’s strategy is smarter than just establishing a military base in Sri Lanka. China, he says, “is cultivating influence not by overt military presence but by encouraging people-to-people contacts, offering scholarships, sponsoring conference trips, and boosting Chinese tourism in India’s neighboring countries. This softly, softly, approach is more effective and far more difficult for India to counter.”

Dayan Jayatilleka has been criticized in the past for pushing Sri Lanka towards India. Now he believes the government is making a mistake by disrespecting China: “The current Colombo model is one in which China is the preponderant financial contributor but is relegated to a subordinate role and status in the political, diplomatic and strategic spheres. China builds the economic foundation and is accommodated in the basement, while the US and India own the building and occupy the penthouse apartments.”

Although it may have made sense for the Rajapaksa government to seek help from China, contracts were too often granted without going through a normal tendering process. Economist Deshal de Mel accepts the current and future governments will also need China. He writes: “It is up to Sri Lanka to prudently take advantage of the economic opportunities that may arise out of China’s interests in the region, whilst being mindful of China’s strategic and security interests….Working within such a transparent, rules-based framework would enable Sri Lanka to benefit through partnership with China, but also ensure that India and the US are not threatened by its legitimate developmental objectives.”