Be ‘independent’, get aid: China’s message to Sri Lanka amid economic crisis

While India rushed to pull Sri Lanka out of the woods, giving more than $3.5 billion in loans and material aid to date, China has doggedly held back, despite being Sri Lanka’s single biggest bilateral investor and a consistent and unreserved supporter in the UN Human Rights Council.

China’s humanitarian aid of $76 million during the current crisis pales into insignificance in comparison with India’s.

Sri Lanka urgently needs foreign exchange support and material aid, but China has been advising Sri Lanka to follow an “independent” foreign policy, by which it means that it should break off from India, the IMF and the West, and hitch its wagon to China.

The Chinese have also been insisting that Sri Lanka should set its economic house in order and make it more hospitable to Chinese investments. Sri Lanka should also use the infrastructure built with Chinese loans and enter into a Free Trade Agreement with China. In his letter wishing President Gotabaya Rajapaksa on his birthday (falling on June 20), Chinese President Xi Jinping made no mention of aid, but drew attention to the 1952 Sino-Lanka Rubber-Rice barter which, he said, was marked by a “spirit of independence, self-reliance, unity and mutual support.”

The Rubber-Rice barter deal was entered into by Sri Lanka braving US commercial opposition and by China defying US sanctions. Xi was hinting that the current Lankan President should also not submit to Western dictates but opt for Chinese help.

On June 9, 2022, the Director-General of the Department of Asian Affairs of the Chinese Foreign Ministry, Liu Jinsong, told Sri Lanka’s Ambassador Palitha Kohona that Sri Lanka should stick to “independent” domestic and foreign policies. Earlier, the Chinese Ambassador in Colombo, Qi Zhenhong, had complained about Sri Lanka’s lurch towards the IMF with India’s help, and said that if China was approached first, it could have helped Lanka negotiate a good deal using its heft in the IMF.

China has been consistently advising Sri Lanka to set its house in order instead of seeking loans and repayment waivers.

On January 9, when President Gotabaya asked visiting Foreign Minister Wang Yi to reschedule debt repayments, Wang advised him to “make good use of the two growth engines: the (Chinese-built) Colombo Port City and Hambantota Port projects”. He also told Gotabaya to “tap the opportunities provided by the Regional Comprehensive Economic Partnership (RCEP), 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”.

In March 2022, Chinese Ambassador Qi Zhenhong said that Beijing is considering a fresh loan of $1 billion and a credit line of $1.5 billion in lieu of rescheduling repayment of the existing loans.

However, the promised loan and buyers’ credit did not materialise. They are apparently tied to the signing of the FTA which has been pending since 2015. But FTAs have been anathema for Sri Lankan governments.

Reflecting Wang Yi’s view, the 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”.

Sri Lanka needs forex

But what Sri Lanka urgently needs is not advice on how to run the economy, but financial and material aid to meet the basic needs of the people. But this has not been forthcoming. President Gotabaya says China has lost interest in South Asia and is concentrating on South East Asia and Africa. But Prime Minister Ranil Wickremesinghe differs and says that Beijing has significant stakes in Lanka and that efforts are being made to make China amend the conditions attached to its loans.

Meanwhile, the IMF is expecting Beijing to join in its efforts to get Lanka’s loan repayment schedule restructured because China is a major lender. According to economist Umesh Moramudali (DailyFT June 17, 2022) China’s Public and Publicly Guaranteed (PPG) loans to Sri Lanka at the end of 2021 constituted 19.9% of the total PPG loans. And the debt service on that debt stock was 20% of the total PPG debt service.

Moramudali further says that when Sri Lanka suspended the repayment of foreign loans totalling $26.4 billion on April 12 this year, the Chinese component amounted to $7.1 billion.

Rivalry with India

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 the Palk Bay islands of Nainativu, Delft or Neduntheevu and Analaitivu. India said that the islands were too near India and had asked Sri Lanka to hand over the projects to it for security reasons.

The cancellation of the project had taken place when China was showing an interest in investing in the Tamil-dominated North Sri Lanka. China is keen on challenging India’s claim to have exclusive rights there. China has already set up an export-oriented sea cucumber farm and factory there. Ambassador Qi Zhenhong even said that the “Tamils love China”.

China has turned its attention to Tamil-speaking eastern province too, where India also has vital strategic interests. Besides the 99 giant oil tanks in China Bay in Trincomalee, India also has a plan to build a floating dockyard in Trincomalee port.