It’s Wait and See for the Mooted China-India-Sri Lanka Partnership

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Hambantota Port, Sri Lanka. Commissioned by the ex-President, being constructed by the Chinese with costs running into billions. Serious doubts remain over its viability.

Hambantota Port, Sri Lanka. Commissioned by the ex-President, being constructed by the Chinese with costs running into billions. Serious doubts remain over its viability.

By Chris Devonshire Ellis
Dezan Shira & Associates 

Tiny Sri Lanka found itself in the faintly odd position of being feted by two superpowers last week, as new Sri Lankan Foreign Minister Mangala Samaraweera met with Chinese Foreign Minister Wang Yi in Beijing. Coming on the back of last month’s Sri Lankan Presidential elections, which turfed out long-term China ally Mahinda Rajapaksa,  the meeting gained significance due to China’s interest of Sri Lanka as part of its “String of Pearls”  policy – wanting to have the island on friendly terms and able to use it as a naval base.  Not surprisingly, that does not sit especially well with India, just an hour away from Sri Lanka’s west coast.

The seduction of Sri Lanka by China has been an on-going process for much of the past ten years, and all of it under ex-President Rajapaksa’s reign. There have been significant infrastructure developments in Sri Lanka during this period, and especially over the past five years; a Southern Expressway has been built, reducing the time from the capital Colombo to the tourist areas of Galle and the sun-drenched south-east coast from five hours to just 90 minutes. The main Port of Colombo has been refurbished at huge cost and paid for by China, although the Chinese do now consequently own a large majority stake in its operations.

Sri Lanka chart

On similar grounds, China has built an entirely new Port and Airport at Hambantota, the area where Rajapaksa originates from. These efforts have been controversial; The Hambantota Port is strongly rumored to be unworkable, with the Chinese stating marine obstacles could be removed that Japanese geologists had previously claimed in an earlier study were insurmountable. Construction has continued regardless. The new airport – which would, if operational, reduce flying times to Sri Lanka from numerous Asian countries by 30 minutes and bring tourism into that lucrative south-east part of the country – has so far been a white elephant, an international airport whose only visitor so far was the ex-President, flying in to open it. Thus far, infrastructure problems have stymied any commercial use.  This does not in fact bode well for China, the new President Maithripala Sirisena, and his New Democratic Front party, which won these elections on the back of a turning of tides against Rajapaksa; and rumors of corrupt deals. Unfortunately for Beijing, some of those are said to be linked to Chinese investment in the country. 

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However, new President Sirisena has a way to go before claiming an outright victory over his predecessor. These elections were for the appointing of the President only and full Parliamentary elections are to be held within the next 12 months – during which time Rajapaksa could make a political comeback. 

This all means China will be holding its breath for a while. Incoming President Sirisena has postponed further investment projects with China while he looks into allegations of corruption by his predecessor. Public and media disquiet about Sri Lanka having sold what are perceived as national assets to China – port facilities and land – are growing.   

Consequently, China’s calls in Beijing last week for a ‘trilateral’ relationship between itself, Sri Lanka and India seem rather optimistic. The development of a “Maritime Silk Road” to include all three nations has been cold shouldered by India, waiting to see how Sri Lanka deals with Beijing, and especially in light of corruption allegations surfacing. If these do surface and are proven to have involved the Chinese when it comes to some of the deals that were done with Rajapaksa, India may well find Sri Lanka more than pliable in coming back into Delhi’s orbit rather than the current China adventures Sri Lanka has been having. President Sirisena seems not to want any nonsense on his watch and has a vested interest in damaging his opponent.  If allegations of state level corruption come out of Sri Lanka and implicate China, then the whole of the Indian Ocean can fall back into Indian protection.  The country has its own nuclear submarines and a navy that wishes to reassert itself. 

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Meanwhile, the country may hold more cards to play as concerns China’s credibility over bilateral investment dealings and reputation than Beijing realizes.  There is already an undercurrent of political unhappiness against China, if the country is shown to have been complicit in arranging financial transactions. Paying off individuals for assets belonging to the nation could therefore become quite a problem for China. 

Sri Lanka is somewhat uniquely positioned in Asia to be able to make a choice, if pushed, between China and India, and it may just wish to exercise that. The country is also strategically located with direct access to the entire Indian Ocean as well as on towards the Arabian Gulf. Alternatively, Sri Lanka may wish to quietly move away from what are increasingly being perceived as non-benign and corrupt influences upon its own economic and democratic institutions. For its part, China, given its own longevity of the one party state, seems to have forgotten that allies can be voted out of or removed from office.

China’s relationship with Sri Lanka and what it does to now protect it has become a strategically important issue. It may take rather more than statements about a “maritime silk road” to get it back on track, and especially with India waiting patiently in the wings.   


Chris Devonshire-Ellis
 is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email asia@dezshira.com or visit www.dezshira.com.

Chris can be followed on Twitter at @CDE_Asia.

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4 responses to “It’s Wait and See for the Mooted China-India-Sri Lanka Partnership”

  1. The Sri Lankan Government have called in the World Bank’s “Stolen Asset Recovery Initiative” (StAR) who have arrived in Colombo today. They are looking into large scale financial frauds and assets stashed away in foreign countries. It’ll be very interesting to see if they name not just the Sri Lankan beneficiaries but also any foreign Governments or Foreign State Owned Companies that were complicit in making payments – as well as any international banks that were involved. StAR is a joint programme between the World Bank and the UN office of drugs and crime (UNODC). The new President is saying billions of dollars have been misappropriated and some of the Chinese “investments” in Colombo and Hambantota (where the ex-President came from) are known to be targeted for investigation. If China is seen to have agreed to dodgy deals this could become highly problematic for Beijing, including how it offers aid and infrastructure “assistance” in other parts of Asia as well as Africa, the Middle East and South America.

  2. Jagath Wijeratne says:

    A hugely insightful article. Your predictions are coming true, China seems worried. An article in the Colombo Gazette yesterday about “China wanting respect from Sri Lanka” including over signed contracts. The SL Govt have already suspended some of the Chinese work under allegations of massive fraud: http://colombogazette.com/2015/03/08/china-wants-respect-from-sri-lanka/

  3. Rahul Nehra says:

    Chris..Nice analysis but for few figurative corrections required. A larger picture is – how India can keep itself disengaged in any perceived war theatre in Indian Ocean or in vicinity. Since 2005, China has been engaged with poorer economies to lend them huge debts beyond their balance sheet requirements to gain a piece of landing facilities for strategic purposes. It happened in Gwadar, Pakistan & in Maldives too.

    As for Sri Lanka is concerned, huge issue is to service the debt of USD5 billion – which has been used to create unproductive fixed assets. Now regime is changed but all future generations of tiny nations are tied to repay those debts.

    India, at present is on designed higher growth trajectory and would like a peaceful vicinity that the reason New Silk Route and String of Pearls are wasted investments for atleast a long period to come.

  4. @Rahul: Nice additional analysis as well, thanks. China is certainly making a bit of a nuisance of itself by creating national debt in smaller nations by doing deals with dodgy politicians. We’ll see how that strategy manifests itself in the longer term. This appears to have been going on in Asia, Africa and South America. However any regime change and move to more transparent governance (as appears to be happening now in Sri Lanka) puts a bit of a spanner in those ideals. As for the String of Pearls, that strategy also appears to be flawed. India, by and large, seems to regard China’s regional dealing with common sense about of patience and an acknowledgement that Chinese policy is these situations may be a nuisance, but is ultimately flawed. Meanwhile you’re right, Indian relations with Sri Lanka now seem to be on the rise at China’s expense: http://www.dailymirror.lk/65895/a-new-era-for-india-sri-lanka-relations
    The relationships between China and India and the on-going developments of both can curiously be rather well understood by looking at the Sri Lankan experience.
    Thanks – Chris

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