Colombo Telegraph

Sri Lanka’s China Equation: Time New Government Handled Diplomatically

By Bandu de Silva

Bandu de Silva

I have subscribed a number of articles to the media on Sino-Sri Lankan relations since my retirement from the Sri Lankan Foreign Service near 22 years ago.

My association with the Peoples’ Republic of China which commenced 58 year back which also singles me out as the only surviving Sri Lankan diplomat around from the pioneering diplomatic mission to Beijing which was led by Ambassador Wilmot A. Perera has naturally retained in me a close interest in developments in China over all these years. In fact, what transformation has taken place now to make China an industrial giant transforming her to a leading world economic power, is amazing indeed. That is when I remember that five decades back the Chinese were struggling, against many odds, on one hand, to overcome abject all round poverty through grass-root level initiatives including some which seemed to be bordering on insanity were undertaken, and, on the other hand, ambitious grand development projects were at hand, like the San-man gorge multi- purpose project on the upper reaches of the Yangtze river.

To quote a few examples of situations I observed, deep furrowing of soil to increase yields, sometimes, to a metre’s depth or over, was resorted to, at times using even dynamite, advanced by over-enthusiastic cadres. That project which saw yields improving in the first season so much so that the area under grain cultivation was drastically cut down to find China facing a serious grain shortage the very next season as the turned up soil could not repeat the high performance thereafter resulting in abandoning the idea completely.

The slogan of ‘eliminating Four Pests’ including sparrows was another such initiative which led to massive scale of poisoning to eliminate this bird species, bordering on insanity which had to be revised on finding that fruit production went down as there were no common birds to destroy fruit pests. Sparrows were then taken out of the list of pests and substituted with “bed-bugs” in order to maintain the facade of the “Four Pests” slogan. The original rationale for destroying sparrows was that, on calculation they destroyed million tons of grain in a year. Such was the nature of contradiction introduced by some of these initiatives.

In another direction, the ambitious Five Year Industrialisation plan which had to be relegated to the backstage when the expected Soviet financial and technological support was not forthcoming, not only had to be revised but also led to another project bordering on insanity, i.e., the backyard iron smelting campaign using scrap including pots and pans in every kitchen.

From these small experimental beginnings made during the Maoist phase, some often full of errors, through revolutionary reforms made by Den Xiao- ping in the 1970s which brought in a far reaching economic ideological transformation based on western market economy model, China has advanced today to be the most powerful economy in Asia surpassing even Japan which had an early lead, and demonstrating prospects of surpassing the U.S as the economic super power.

Chinese Foreign Investment

China’s outward foreign direct investment (OFDI) expanded significantly in the past decade, but the majority of investment projects has concentrated in countries in the developing world. However, in recent years the focus of Chinese investors has started to shift to North America and Europe. The key impediments Chinese firms are seen to face when setting up US shops, as seen from Western sources, are “inexperience and lack of capabilities to handle sophisticated market situations rather than political shenanigans”. For American businesses, the growth of Chinese investment is seen to pose certain risks, most importantly relating to new competition at home and abroad, but it also bringing prospects of invaluable new opportunities, such as divestment of assets, co-investment, and new business opportunities in China. Investment flows destined for developed economies expected to continue to grow strongly in the years ahead with developed economies expecting to receive a substantial share of the $1 to 2 trillion in direct investment that China is expected to make around the world over the coming decade, now that OFDI from other countries like Japan have come to a standstill. US and Western firms are equally enthusiastic to benefit from Chinese investment for the chance it will provide well-positioned foreign firms by way of access to China’s huge market.
Investments in developing countries

Sri Lanka is among large scale beneficiaries of OFDI from China in the post-war period in the island. These include the Hambantota harbor project, Hambantota Cricket Stadium project, Mattala international airport, Norochcholai Coal Power project, a part of Northern Railway, Katunayake –Colombo Express way, and several other road development projects, and above all, the near 20 US $ billion mega Colombo Port City project.

One significant feature about Chinese OFDI projects in Sri Lanka was the presence of a very favourable investment climate with the government of Sri Lanka’s former President, Mahinda Rajapaksa, being keen on developing infrastructural projects, partly, for self-boosting rather than on serious considerations of cost effectiveness. Good examples of ego-seeking projects are the Mattala international airport which has proved a failure so far, and the stadium in a god-forsaken place, where reportedly, farmers have to be brought in bus-loads with free lunch provided to fill the stadium on playing days.

These projects were also not without their attraction for the former President’s immediate family members and other cohorts who were in charge to make a quick buck in the form of inducement for contract approval, [which was a familiar feature under Suharto regime in Indonesia]. This is the opportunity for corruption which is attractive to many foreign investors.

From the Chinese point of view, the opportunity provided for avoiding the rigour of pre-investment screening except superficial feasibility and impact investigations conducted by the host government, which is in contrast to the environment prevailing in developed countries such as US where Chinese OFDI has found rigorous challenges of pre-investigation screening involving national security, and having to comply with local laws and regulations, and being subject to US courts and litigation, giving their competitors a greater arsenal of legal options in the case of improper behavior, was a great encouragement for investment in Sri Lanka. .

Sri Lanka, with a government in a hurry to develop infrastructure for whatever reasons, then offered an easy overall target for large scale infrastructure development investment. There was no questioning by China if the projects were feasible, or environmentally acceptable, or not, what political, social economic impact the projects would have. Those aspects were left to the Sri Lankan government to decide.

Another writer, Neville Ladduwaheety, put it conversely as the Chinese offers of ODFI , unlike those from India and the West, having the advantage of ‘absence of lost-time factor’. For a Sri Lankan government in a hurry, nothing better, could have appealed.

Yet, there was a serious risk factor if the political circumstances in Sri Lanka were to change, as has happened now which consideration seems to have escaped the Chinese mind. Perhaps, the Chinese expected to complete the projects including the mega Colombo Port City project within the pendency of the Rajapaksa government applying their usual speed. Or else, they were ensconced in the comfort that legal provision would safeguard their interests.

Changed Circumstances?

The situation under the new government of Sri Lanka presented a challenge to Chinese OFDI especially on the mega Colombo Port City Development Project to which international attention has been turned especially because of the real state acquisition permitted to China in the form of a 99 year lease and more so in perpetuity over an area comprising of around 89 hectares out of the total area of 230 hectares of land to be reclaimed. This is now seen as a serious incursion on Sri Lanka’s sovereignty over the land to be developed which also brings about an unexplored security consideration placing the island nation’s dealing with the Chinese vulnerable to the sensitivities of her immediate big neighbour’s security interests in the area.

Need for diplomatic handling

China is obviously upset by the way the new government has responded to the Port City Project to which she attached great importance so much so that the project was inaugurated by president Xi Jinping during his first official visit to Sri Lanka in September 2014. Regrettably, right or wrong, the leaders of the present government including President Maithripala Sirisena and Prime Minister Ranail Wickremesinghe used the Chinese investment issue during the Presidential election campaign, to gain political mileage against the then incumbent government by vowing to cancel Chinese investment projects which they claimed, had given rise to allegation of serious corruption. Such bold assertions which placed a country which has been a close ally of Sri Lanka – an all weather friend, as the saying goes – in poor light in the eyes of the international community was a serious affront to the rising economic giant in Asia. Would anyone have placed our close big neighbor in such a position, one may ask?

This was then can be seen as a serious blunder on the part of political leaders who were contending for power at that time who were destined to form the next government. Not stopping at that the new government began to question Chinese investments and even suspended operations of the mega Chinese investment project of the Colombo Port City Project. Wasn’t there a more diplomatic way of keeping its word on the election promise since relations with a close ally who was the major source of supply of arms on credit during Sri Lanka’s war against LTTE terrorism and stood in defence of Sri Lanka in the UN Security Council and at UNHRC sessions in Geneva even bringing her diplomatic leverage in many countries to gain support to oppose US, E/U sponsored and Indian supported resolution in Geneva?

The Chinese resentment was visible though not challengingly expressed. President Sirisena was seen in a damage controlling exercise when he accepted the Chinese government’s invitation to attend the Boao Forum held in Hainan where like in previous sessions, promotion of regional economic integration of Asian- Pacific countries, including China’s Maritime Silk Route Project were explained. That the Sri Lankan President was one of the few heads of state who participated was very conspicuous. Perhaps, attending this event gave the opportunity to play down the significance of the President’s three day state visit to China which may be seen important to impress our close neighbor India that relations with her by the new government remain steadfast and no balancing act with China was in sight.

The opportunity of the official part of the visit of Sri Lankan President, was, however, used by the Chinese leader to draw attention to the importance China attached to the Colombo Port City Project while according to Sri Lankan side’s version of the talks in Beijing, the visiting President made no commitments as the Chinese version claimed. The seeming divergence in reporting the proceedings and that there was no joint communique issued or joint press conference addressed by the two sides point to the continuing presence of the disturbed atmosphere over the Port City Project affair.

China has been emphasizing the fact the Company had signed a legally binding agreement in terms of Sri Lankan and international law accompanied by ague suggestions of prospects of going for arbitration. If this happens it could be disturbing to Sri Lanka’s overall prospect of attracting Foreign Development Aid and investment resulting from the domino effect, not to speak of disturbing the long standing friendship between the two countries.

Sri Lanka is but a minor partner in the overall Chinese OFDI context which has a projected potential estimate of rising to three Trillion US Dollars in the coming decade. The US as well as other developed countries are equally anxious to benefit from this Chinese investment boom despite high screening applied. For Sri Lanka, sustaining the foreign investment programme is equally important as much as for China which considers the island as forming an important link in her security related network in the Indian Ocean area as much as in her projected Silk Route of the Sea programme.

It cannot also be forgotten that China was the major arms supplier when Sri Lanka was fighting LTTE terrorism when other countries were fighting shy of supplying them. It in future interest of Sri Lanka to keep this avenue open for her defence needs. Equally important it is to ensure that China remains a steadfast supporter and defender of Sri Lanka in international fora where she has been hauled up on alleged grounds of violation of human rights and exceeding international norms in the war against terrorism.

Against the back ground of overall considerations discussed above, it is time the new government handled the situation of Chinese investment diplomatically. The Port City Project which involves a colossal expenditure estimated to be around US $ 28 million for reclaiming an acre of land alone, would not appear to be a priority even though it is true that the present city has no space to expand. But there are alternate possibilities in designing city architectural planning like development of satellite towns, a good example of which is France’s Cinq –ville (Five Town ) projects. It was a team from this French project I sent to Sri Lanka at the request of the former President, JR Jayewardene, and who advised him on the Kotte site to build the new Parliament of the country in preference to the restricted space of the former Army ground at Galle Face which was the popular site.

Since fair amount of progress has been made on the reclaiming the land on the project which is not a great priority item, how the tension could be diffused is a moot question.

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