If China persists with its line of radically changing the way the Sri Lankan economy is run, Sri Lanka will have no option but to hitch its fortunes to India and the West rather than China.

By P.K.Balachandran

On the face of it, China appears to be shedding its aloofness and trying to create the impression that it is also helping Sri Lanka overcome the current grave economic crisis. It says that it has pumped in US$ 76 million so far.

But that sum pales into insignificance in comparison with India’s largesse of US$ 3.5 billion. What is glaring is the absence of a willingness on China’s part to restructure the repayment of its loans, and the conditions which it has attached to the use of the funds given.

Beijing’s tough stance gives the impression that it does not consider it worthwhile to put any more money into Sri Lanka or go out of the way to be considerate to it.

Apparently, China thinks that Sri Lanka has not created a climate for economic growth which will help attract Chinese and foreign investment. For Beijing, the real solution to Sri Lanka’s current crisis lies in promoting economic growth, securing FDIs, increasing trade and signing an FTA with it.

China believes that Sri Lanka’s problems are of its own making. Therefore, first and foremost task for Sri Lanka should be to set its house in order. If the Western nations want Sri Lanka to agree to the IMF’s conditions before they consider pumping in money or make investments, China wants Sri Lanka to create a suitable climate for Chinese investment and sign a Free Trade Agreement with it. Chinese Foreign Minister Wang Yi and other top officials had made this very clear to the Lankan Establishment.

However, Sri Lankans have a different way of looking at this. President Gotabaya Rajapaksa had told Bloomberg News that China is not helping because it has lost interest in South Asia as such, and that it is concentrating on South East Asia and Africa instead. Therefore, there is little chance of securing Chinese help now.

But Prime Minister Ranil Wickremesinghe has a different perception. He told WION TV that China is very much involved in South Asia through its military engagement with India on the Himalayan border and its economic stakes in Pakistan, Sri Lanka and the Maldives.

Unlike Gotabaya Rajapaksa, Wickremesinghe believes that negotiations with China on loan rescheduling will help and that he can get China to waive the conditions attached to its loans. He pointed to the difficulty created by the fact that China is not a member of the Paris Club which works out re-scheduling loan repayments.
However, if China persists with its line of seeking radical changes in the way the Sri Lankan economy is run, chances of any meaningful aid coming from it are dim. And that could mean that Sri Lanka will have no option but to hitch its fortunes to India and the West rather than China.

Wickremesinghe told WION that Sri Lanka had to rely on India during the present crisis because China remained aloof and came up with conditions, while India rushed material aid and loosened its purse strings. Naturally, Sri Lanka had to opt to go with India (and as a follow-up, go to the IMF with India’s help).

The Chinese Ambassador, Qi Zhenhong, complained about the swing towards India and suggested that China itself could have helped Sri Lanka negotiate a good deal with the IMF given its clout in that organization.

But his suggestion came too late. Taking Chinese help when India had already taken up Sri Lanka’s case with the IMF would have put off India, China’s geo-strategic rival in South Asia. Moreover, the Gotabaya Rajapaksa government had taken a decision to hitch its security wagon to New Delhi, and has been increasingly and closely working with the Indian security establishment.
However, China has, of late, expressed an interest in working with India in the Sri Lankan case. Its foreign ministry spokesman, Zhao Lijian, told the media that India has done a lot to help Sri Lanka and China is ready to work with India and the rest of the international community.

Prime Minister Wickremesinghe has a plan to put in place a multilateral aid consortium, including China and India.
But the worrying questions are: Will India accommodate China, its geopolitical rival? Will China allow repayment of its loans to be restructured as it did in the case of Pakistan? According to Lankan economist Umesh Moramudali, China has become “risk averse” and might hesitate to be very accommodative.
Chinese Foreign Ministry spokesman Zhao Lijiang said on June 8 that Sri Lanka should “boost its own effort, protect the stability and credibility of the investment and financing partners and ensure the stability and credibility of its investment and financing environment.”

On June 9, 2022, the Director-General of the Department of Asian Affairs of the Foreign Ministry Liu Jinsong told Ambassador of Sri Lanka Dr. Palitha Kohona that Sri Lanka should stick to the independent domestic and foreign policies, by which he meant that it should not fall prey the West’s machinations.

On January 9, 2022 Chinese Foreign Minister Wang Yi had told President Gotabaya Rajapaksa that Sri Lanka should “make good use of the two growth engines, the (Chinese-built) Colombo Port City and Hambantota Port projects, tap the opportunities of the enforcement of the Regional Comprehensive Economic Partnership (RCEP) and China’s vast market, and discuss the restart of talks on a free trade agreement between China and Sri Lanka to send more positive signals to the world and contribute to Sri Lanka’s economic recovery and development.” He further said that if these are done, China would encourage competent Chinese enterprises to invest and develop in Sri Lanka. But this is a tall order for Sri Lanka.

In March 2022, Chinese Ambassador Qi Zhenhong said that Beijing is considering a loan of US$ 1 billion, and a credit line of US $ 1.5 billion, in addition to the US$2.8 billion assistance that it had extended to Sri Lanka since the outbreak of the pandemic.

Asked if China had taken a decision on President Gotabaya Rajapaksa’s request to restructure Chinese loans, the Ambassador said both sides are negotiating. He further said that the two countries are negotiating a Free Trade Agreement and that its successful completion and signing will “open up” the Chinese market for Sri Lanka’s exports.

However, the promised loan and buyers credit have not come. Negotiations on loan repayment are stuck and talks on the FTA are at a standstill. FTAs are an anathema to Sri Lankans.

Role of Geopolitics

China’s reluctance to put money into Sri Lanka is partly due to its geopolitical rivalry with India. China was put off by Sri Lanka’s decision to cancel a project given to the Chinese firm Sinosoar-Etechwin to install hybrid renewable energy systems” in Nainativu, Delft or Neduntheevu and Analaitivu islands, located in the Palk Bay in North Sri Lanka, after India raised security issues.

The cancellation of the island power projects had taken place when China was showing an interest in investing in the North, if only to challenge to India’s claim to have exclusive rights in the Tamil-dominated area.

Ambassador Qi asserted that “Tamils love China”. China has established a sea cucumber farm and factory in the North. It is also interested in getting a foothold in the Tamil-speaking Eastern Province, in which India has 99 oil tanks and an interest in the Trincomalee harbor which is seen as a strategic asset.