When the then seemingly invincible Sri Lankan President Mahinda Rajapaksa suffered a shock election defeat in 2015, the ousting of the China friendly leader was widely seen as the beginning of the end for Chinese influence in the nation.

Four years on, that assessment has proved to be premature. The government in Colombo under President Maithripala Sirisena, faced with both a financial crisis at home and few credible financing alternatives abroad, has found it has had little choice but to deepen the country’s economic reliance on China, as underlined by two recent events.

Sri Lankan Pedestrians walk.
Photo: Pedestrians walk past hoardings advertising the Colombo International Financial City Project.

First, China’s once-controversial port project in Colombo – which made headlines during Sri Lanka’s elections in 2015 over environmental concerns as well as the opaque terms of the deal – took a major step towards fruition last week with the completion of 269 hectares of land reclamation. Two-thirds of this land will go to China on a 99-year lease, rather than in perpetuity as Rajapaksa had reportedly initially said, much to India’s concern.

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Second, the Sri Lankan government revealed it was considering approaching the Bank of China for a US$300 million loan that could be further raised to US$1 billion. (Colombo is also negotiating a currency swap deal with India for up to US$1 billion.)

This follows a worsening financial crisis which many analysts see as a result of the excesses of the Rajapaksa years – marred as they were by widespread allegations of financial mismanagement and even corruption.

Sri Lanka faces repayments of US$5.9 billion this year, according to domestic media, with a little under half of that amount due in the first three months. From China alone, Sri Lanka has received some US$8 billion in financing for various projects, and Beijing accounts for around a quarter of its total foreign debt. Unlike financing from Japan – Sri Lanka’s biggest donor before the emergence of China – which was at near-zero interest rates, China’s comes in the form of commercial loans at varying near-market rates. Hence the crisis.

That hasn’t, however, stopped Colombo from returning to Beijing. The reason? “It’s extremely difficult to tap the international market due to tight conditions and rating downgrades,” said state finance minister Eran Wickramaratne. In short, there are a lack of alternatives.

Sri Lanka’s experience holds two lessons for other countries – including fellow South Asian nations Nepal and the Maldives – where Chinese financing is becoming increasingly intertwined with domestic politics.

Chinese Premier Li Keqiang welcomes Nepalese Prime Minister Khadga Prasad Sharma Oli
Photo: Chinese Premier Li Keqiang welcomes Nepalese Prime Minister Khadga Prasad Sharma Oli at the Great Hall of the People in Beijing.

In both countries, the perception of the government being too close to China has emerged as a heated domestic political issue. In Nepal in 2016, when Pushpa Kamal Dahal took over from the “China-friendly” Khadga Prasad Sharma Oli, the change was once again seen as a course correction – only for Oli to return for a second stint last year and resume some of his ambitious projects with China, starting with the Tibet-Nepal railway link. In the Maldives, the surprise defeat last year of Abdulla Yameen’s China-friendly government has led to a similar debate on the future of Chinese influence.

Sri Lanka’s experience serves as a reminder that when the political dust settles, governments already under pressure economically find few alternatives to China’s financial muscle. The reality is that regardless of political changes, Beijing is here to stay in South Asia.

Yet this should not be seen by China as an excuse to do as it pleases in smaller countries. On the contrary, the experience of Sri Lanka and the Maldives should serve as a lesson in the importance of bringing communities along in development efforts. It was only because of the failure to do so that China found itself in the cross hairs of domestic politics, even if the hard reality of financial pressures means Beijing’s influence will remain.

Consider the example of China’s other big Sri Lankan enterprise – the US$1.3 billion Port Hambantota, which is also on a 99-year lease. The opening of the industrial zone there in January 2017 was met with violent protests by local communities, so much so that Port Hambantota has come to symbolise the problems of China’s financing model under its “Belt & Road Initiative”.

Port Hambantota - Sri Lanka
Photo: View of Port Hambantota – Sri Lanka.

A more consultative approach by China would also be welcomed by the likes of India, which has led the criticism of the belt and road plan’s opacity and its associated debt burdens since the scheme’s inception.

This, in turn, could pave the way for closer cooperation between China and India in a region that has long suffered from the two neighbours working at cross purposes and jockeying for influence. If China’s recent projects suffer from a lack of transparency, India is grappling with its own delivery problems. Marrying their different strengths could benefit both.

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At their Wuhan summit in April, Xi Jinping and Narendra Modi agreed to move forward with a “China India Plus One” approach to projects in third countries. The first initiative, to train Afghan diplomats, was launched last year. The hope is that this model will be applied in South Asia and possibly Africa as well.

Concerns over China’s long-term goals for the region are an obstacle, however. Just last week, Indian Navy chief Admiral Sunil Lanba highlighted the growing Chinese military presence in the region, declaring that the Chinese navy was “here to stay”. He said that at any given time, there were six to eight Chinese naval ships deployed in the northern Indian Ocean. India, for its part, has deepened its cooperation with other maritime powers such as the United States, Japan and France to help it more closely track Chinese naval deployments.

China’s pursuit of port projects has also led to doubts about whether its motivations are economic or strategic. The Chinese navy’s efforts “to obtain access to commercial ports in Africa, the Middle East and South Asia would align with its future overseas logistic needs and meet its evolving naval requirements”, said a report released by the US Department of Defence this week.

“China is expanding its access to foreign ports, such as in Gwadar, Pakistan, to pre-position the logistic framework necessary to support the PLA’s growing presence abroad, including normalising and sustaining deployments into and beyond the Indian Ocean,” the Pentagon said.

Can economic cooperation coexist with strategic competition? Look no further than the India-China bilateral relationship, to see perhaps the most forceful argument that suggests yes, it can.