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22 November 2018, Gateway House

China is here to stay

China’s large investments in Sri Lanka, Pakistan and the Maldives and the economic dependence this creates make it impervious to the internal political upheavals in these countries. This blog explores how it will retain its influence in Sri Lanka regardless of how the turmoil is resolved

Director, Gateway House

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The crisis in Sri Lanka continues to fester as the parliament readies to hold a third no-confidence vote against Prime Minister Mahinda Rajapaksa. President Sirisena precipitated this state of affairs, first dismissing the incumbent Prime Minister Ranil Wickremesinghe and appointing Rajapaksa in his place. When Rajapaksa was unable to prove a majority, President Sirisena dissolved parliament, a decision overturned by the Supreme Court of Sri Lanka.

Mahinda Rajapaksa’s return is a matter of concern for India because as president (2005-2015) he was responsible for concluding numerous agreements for large Chinese infrastructure projects, which pushed the island nation into a debt trap.

The overarching influence of China became an issue in the 2015 general election too. President Sirisena and (sacked) Prime Minister Ranil Wickremesinghe were initially allies who had contested the 2015 election together on this issue. The present crisis has been brought about by a falling out between the two erstwhile allies and President Sirisena’s own political ambitions.

Who gains the upper hand in Sri Lanka is irrelevant as China’s sphere of influence is unlikely to waver. Sri Lanka will remain economically dependent on China – for debt and for investments. It is already highly indebted to China due to high-value projects built with expensive loans. It was the Sirisena-Wickremesinghe government which had to hand over the Hambantota Port on a 99-year lease to a Chinese government-owned company in lieu of its inability to make interest payments on time. In the absence of other options, Sri Lanka continues to borrow more from China to repay past loans[1] while China presses on with the mega Colombo Port City project and others.

China is also a major supplier of arms to Sri Lanka, the single largest source of FDI[2], the largest provider of developmental assistance[3] and the second largest source of tourists in Sri Lanka’s tourism-dependent economy[4]. (India’s footprint in terms of FDI and aid is smaller.) Near total dependence means that the government that wrests power in Colombo will need China’s financial support; it cannot afford to assume a hostile stance.

The same scenario is likely to unfold in the Maldives, another of India’s neighbours, which has elected a new president, Ibrahim Solih. It has accepted expensive loans from China for infrastructure projects and is now deeply in debt. The new president has warned that many of these projects are running into losses and that the country’s finances are in a ‘precarious condition’[5].

The Maldives may now even scrap a free trade agreement with China: India had opposed this agreement as it already has a free trade area with Maldives that could serve as a potential conduit for goods from other countries as well.

Such measures may confer a degree of autonomy, but cannot obliterate the Chinese footprint in the Maldives, which owes its investor large sums of money. It will not scrap any of the ongoing Chinese projects either. The arbitration courts for resolving BRI disputes are based in China and the Chinese judicial system is not known for transparency or adherence to law.

China has also been unwilling to scale down the scope of the BRI projects even when they hurt the host economy. A case in point is Pakistan, which faces a balance of payments crisis and is desperately seeking a bailout. The leaders are likely to have discussed these issues during Prime Minister Imran Khan’s visit to China, but instead of scaling it down, they proposed further expansion of the China-Pakistan Economic Corridor.

The Maldivian economy depends entirely on tourism – and the largest inflow of tourists into the coral islands comes from China, accounting for over 25% of all tourist arrivals.[6] The past few years have seen China weaponise tourism: Philippines, South Korea and Palau have seen tourist arrivals from China plummet in wake of disagreements with the Chinese government. Maldives cannot afford to take such a risk.

India has neither the funds nor the execution capability to provide an alternative to China’s investments in the region. China is here to stay – in the foreseeable future.

Neelam Deo is Director, Gateway House.

Amit Bhandari is Fellow, Energy and Environment Studies, Gateway House.

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