A container ship is pictured docked at the Colombo South Harbor during its opening ceremony in Colombo August 5, 2013.
Reuters

Last month, Sri Lanka officially lifted a hold on the Colombo Port City project, a $1.4 billion Chinese initiative to construct a “mini-city” atop reclaimed land at the country’s capital. The project is the largest in Sri Lanka’s history and falls under Beijing’s One Belt, One Road and New Silk Road initiatives, which are designed in part to expand and secure China’s trade routes throughout Asia.

The controversy over the port city offers a taste of the potential consequences the One Belt initiative could bring: it has plunged Sri Lanka into debt, rekindled the Chinese-Indian rivalry, and raised questions about Beijing’s use of economic statecraft to advance its strategic objectives.

A FRIEND IN NEED

China’s friendly relationship with Sri Lanka began in earnest after the election of Sri Lankan President Mahinda Rajapaksa in 2005. Colombo had spent over two decades fighting a costly war against the separatist Tamil Tigers, a conflict Rajapaksa was determined to end. With its own politically influential Tamil minority to contend with, India declined Rajapaksa’s appeals for large-scale military support, while the United States suspended military aid in 2007, citing government human rights violations in the country’s civil war.

Beijing, however, was happy to fill the void. The same year that Washington suspended arms sales, China provided Sri Lanka $37 million in ammunition and ordnance to aid Rajapaksa’s war against the Tamil Tigers. In 2008, it gave Sri Lanka six F-7 jet fighters, scores of antiaircraft guns, and a JY-11 radar system. China’s nonmilitary aid surged as well, jumping from only a few million dollars in 2005 to $1 billion in 2008.

With China’s backing, Rajapaksa launched a scorched-earth offensive in 2008 that crushed the Tamil Tigers, though not before claiming up to 20,000 civilian lives in the process. When the UN Security Council sought to investigate the humanitarian crisis prompted by Rajapaksa’s offensive, China helped put a stop to the inquiry.  

In return for Beijing’s generosity, Sri Lanka pledged respect for China’s “core interests” and was among the first to support Chinese President Xi Jinping’s One Belt program. Yet for Beijing, Sri Lanka’s greatest attraction was its ports, positioned as they are along the trading lanes that connect China to its energy suppliers in the Middle East and Africa.

In 2007, months before Beijing China and Sri Lanka signed their first arms deal, Rajapaksa signed a $1 billion deal with a Chinese consortium to construct and operate a new port at Hambantota. He later granted China an exclusive investment zone near the country’s main port in Colombo. And in 2010, the Sri Lankan government contracted a Chinese-led consortium to construct and operate Colombo's South Container Terminal. But the biggest project came in 2013, when China unveiled plans for the $1.4 billion Colombo Port City. The China Harbour Engineering Company won a 99-year lease to construct the “mini-city,” which included a provision granting the company outright ownership of roughly 50 acres.

TOO CLOSE FOR COMFORT

Rajapaksa’s embrace of China was deeply unsettling to India. China’s growing involvement in sensitive ports so close to India’s shores fed New Delhi’s long-standing concerns about Chinese encirclement. The Indian defense analyst Nitin A. Gokhale warned that Sri Lanka’s growing indebtedness to China would give Beijing “an opportunity to turn part of the loan into equity, making them part owners of vital projects” and granting China a new strategic outpost in the India Ocean.  

And that’s exactly what happened. By late 2014, the Chinese-built Hambantota Port was hemorrhaging money: fewer than 100 vessels berthed at the port in 2013, and Sri Lanka was paying China $30 million per year in interest alone. During a trip to Colombo in September 2014, Xi agreed to ease loan conditions, while a Chinese consortium was quietly granted a 35-year lease to operate four of the port’s seven container berths. 

To add further intrigue, a few days before Xi arrived in Colombo, a Chinese submarine surfaced at the Chinese-operated South Container Terminal in the Colombo port. It was the first port call by a conventional Chinese submarine in the Indian Ocean. Peculiarly, Japanese Prime Minister Shinzo Abe was visiting Colombo at the time, and the Sri Lankan press speculated that Rajapaksa was not notified of the submarine’s port call beforehand.

For India, the sudden appearance of a Chinese submarine in Sri Lanka was too much to bear. Seventy percent of Colombo’s transshipment traffic comes from India, and New Delhi has long been concerned over China’s efforts to expand its presence in the island nation. When Indian Prime Minister Narendra Modi met Rajapaksa a few weeks later, he reminded him that Colombo “was obliged to inform its neighbors about such port calls under a maritime pact.” But the same submarine surfaced again in November 2014, catching New Delhi by surprise once more.

UNFRIENDING CHINA

A container ship is pictured docked at the Colombo South Harbor funded by China in Sri Lanka January 21, 2016.
A container ship is pictured docked at the Colombo South Harbor funded by China in Sri Lanka January 21, 2016.
Dinuka Liyanawatte / Reuters
Sri Lanka held presidential elections two months after the second submarine incident, and the nation’s relationship with China became a political football. Maithripala Sirisena, Rajapaksa’s former ally and cabinet minister, won a narrow victory after criticizing the president’s embrace of Beijing on the campaign trail. Once in office, Sirisena insisted that Sri Lanka “would not offer preferential economic or security access to any one country,” while placing several Chinese infrastructure projects under review. Sri Lankan Foreign Minister Mangala Samaraweera questioned the circumstances surrounding the visit of China’s submarines to Colombo and pledged such “incidents” would “not happen during our tenure.” At the same time, Sirisena tried to repair ties with India by making New Delhi the site of his first official visit in February 2015. Sirisena welcomed Modi to Colombo a month later—the first visit to Sri Lanka by an Indian prime minister in 28 years.

A week before Modi’s arrival, Sirisena suspended the Colombo Port City project on allegations of corruption during the bidding process. The China Harbour Engineering Company was separately accused of offering bribes to facilitate Rajapaksa’s reelection. In January 2016, Colombo signaled it was scrapping a $400 million deal to buy 12 Chinese JF-17 fighter jets. According to the Indian Express, New Delhi had sent Colombo an unsigned white paper weeks earlier suggesting that fighter aircraft were not needed to meet Sri Lanka’s defense requirements. In 2007, Arvind Gupta, India’s national security adviser, warned, “It is high time that Sri Lanka understood that India is the big power in the region and ought to refrain from going to Pakistan or China for weapons.” 

Yet, Sirisena soon realized that Beijing would not be turned away so easily. Of the $5 billion China issued to the country between 2005 and 2012, only two percent came in the form of outright grants. The rest of Beijing’s aid comprised loans at interest rates higher than those offered by the World Bank. As a result, Sri Lanka’s foreign debt exploded from 36 percent of GDP in 2010 to 94 percent in 2015. Today, more than a third of Sri Lanka's revenue goes toward servicing $8 billion in Chinese debt. Moreover, as Sri Lankan financial analyst Asantha Sirimanne notes, loans from China’s Ex-Im Bank are “mainly offered to buy Chinese products and services” while the laborers and subcontractors are Chinese and “all raw material is imported from China.” 

By October 2015, Colombo asked Beijing to adjust the terms of its loans to make them more viable for repayment. And instead of scrapping the Colombo Port City project, Sirisena opted to downsize it, keeping China involved in its financing and construction.

When Sri Lankan Prime Minister Ranil Wickremesinghe visited Colombo in April 2016, the two sides announced the contract for the port city had been successfully renegotiated. Furthermore, he requested an “equity swap” in which Beijing would accept equity in Sri Lankan companies and infrastructure projects to reduce Colombo’s debt bill. Malik Samarawickrema, Sri Lanka’s International Trade Minister explained that shrinking the debt would “open up the opportunity for us to take more funds from Chinese Banks.”

A senior Sri Lankan diplomat serving in Washington recently explained to this writer how Colombo’s foreign policy has always been guided by a “delicate balancing act” and the imperative to get a “wider area of maneuverability with India.” Flirtations with China, he said, gave Sri Lanka more leverage in its relationship with New Delhi. He cautioned, however, that Rajapaksa had “gone too far” and “ignored certain geopolitical compulsions” in his engagement with Beijing. Now, the official feared that Sri Lanka was caught in the “China [debt] trap.”

“And once you are in the ‘China trap,’” he said, “it is very difficult to get out.”