Wang Yi’s Meeting With Sri Lankan President Gotabaya Rajapaksa

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China is becoming frustrated with autocratic Governments who are not delivering cash flow returns on BRI project investments

On the surface, China has stated it is ready to take its relations with Sri Lanka to a “new level” and deepen a strategic partnership seeking out common development paths, Foreign Minister Wang Yi had said after returning from a two day visit to Colombo.“China is ready to join hands with Sri Lanka to push bilateral relations to a new level,” Wang Yi said, continuing with “We should seek further synergy between our development strategies. China will firmly promote high-quality Belt and Road cooperation and help Sri Lanka realize its “Vision of Prosperity and Glory”.

In 2013 Sri Lanka and China formally set up a “strategic cooperative partnership”. During the visit Wang Yi discussed with Sri Lanka leaders the resumption of talks on a free trade deal, meanwhile, China has helped finance the Colombo Port City, as well as national highways and a second Port at Hambantota on the South-East coast. Yet all are awaiting completion.

“Sri Lanka is an important part of China’s Belt and Road cooperation in South Asia,” Wang said. “The first phase of the Colombo Port City has been successfully completed, and new projects are ready to be launched. Achievements have been made in our cooperative operation of the Colombo Port time and again, bringing important benefits to Sri Lanka. The cargo throughput of the Hambantota Port has reached record highs, and the industrial park has been developing in full swing. China has a container terminal in Colombo Port and operates Hambantota Port as the senior partner in a joint venture.”

That all sounds good, but the reality is different. The Colombo Port Cty has been completed in terms of the China financed land reclamation, but the vertical build – and with it returns on investment – has yet to begin. Hambantota Port may be operational, but the railway line to connect it to Sri Lanka’s national rail system has yet to be finished. The only companies in the Hambantota Industrial Park are Chinese.

Rajapaksa has been presiding over an economy badly damaged by an over-reliance on an under-invested tourism industry as well as Government inefficiences and corruption. Some of that corruption is alleged to have been orchestrated by the Rajapaksa famly themselves – with five members of the family currently holding ministerial positions and the Rajapaksa’s effectively in power for 15 of the past 18 years. Yet they are not delivering returns on China’s investments, and that is now becoming a problem.

With rumours of billions of dollars marked for Sri Lankan investment allegedly ending up being parked in offshore bank accounts, China, as financier, has a pretty good idea of where some of this money has gone. While Beijing may turn a blind eye while projects are met and completed, it is also prepared to put the pressure on when they are not. China wants cash flow deliverables from its BRI investments, and Sri Lanka is not delivering.
Sri Lanka is also close to a default with just a billion dollars or so of reserves left in its capital account – barely enough to last it another month. Gotabaya Rajapaksa, the President, supposedly asked China for a loan of several billion dollars to tide the country over – what he allegedly received was an apparent ticking off, $125 million and a suggestion that the family returns money to the Sri Lankan economy instead of constantly asking Beijing for handouts.

It remains to be seen what will happen, but when your principal financier determines that enough is enough, the only likely route for Sri Lanka will be default and a bail out by the IMF – who will scrutinize every element of Sri Lankan finances – any money that has gone missing will create serious political repercssions. China may well prefer to deal with, and extend assistance to a more fiscally prudent, professional and less family run Sri Lanka as a result. For now, the immediate future does not look good – China, and its SOEs expect returns on investment coming onto their balance sheets and if they are not, the lesson is that change, and the development of alternative political relationships can then be anticipated.

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Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. The firm assists British and Foreign Investment into Asia and has 28 offices throughout China, India, the ASEAN nations and Russia. For strategic and business intelligence concerning China’s Belt & Road Initiative please email or visit us at