China and Sri Lanka flags

China’s Changing Geoeconomics In An Unstable Sri Lanka – Analysis

 December 9, 2022 

By Observer Research Foundation

By Asanga Abeyagoonasekera

The US-China Economic and Security Review Commission’s annual report was released on 15 November 2022. One of the key findings of the report was that ‘China’s efforts to secure its interests in the Indian Ocean region have included significant development financing in Sri Lanka,’ a ‘strategically located island near India’.

Further assessing that, ‘the turbulence in Sri Lanka that has occurred throughout 2022 is exacerbated by the hazards of accepting significant Chinese lending.’ While the report aptly analysed the underlying factor of China in the Sri Lankan crisis, it makes no mention of the strategic threat it poses to Sri Lanka itself. The report explains, ‘Despite these efforts, China has yet to convert its economic ties into significant political or security gains.’ 

China has already used its geoeconomics toolkit to achieve its geopolitical objectives in Sri Lanka. China’s use of this toolkit resulted in strategic land acquisitions, which could easily transform into a civil-military operation. China also enjoys significant domestic political influence amongst the political parties in Sri Lanka. The recent Chinese spy ship visit to the port of Hambantota—a port built and leased by China for 99 years—is a perfect example of how China uses its economic clout to achieve a security objective while simultaneously winning over the local politicians.

Sri Lanka has been a powder keg ever since the people’s uprising in July this year. With the Chinese delay in debt restructuring, things have gotten worse. India and Japan have already initiated dialogue with Colombo on debt restructuring while waiting for China to engage as well. According to Sri Lankan President, Ranil Wickremasinghe, the hope that there would be some agreement from China by December seems to be fading as there was no decision on Sri Lanka’s bilateral and commercial debt restructuring modalities even by mid-November to go up to the International Monetary Fund (IMF) Board in December. There has been rhetorical commitment from China as the Chinese Foreign Ministry Spokesperson Mao Ning stated that, ‘We stand ready to work with relevant countries and financial institutions to continue to play a constructive role in easing Sri Lanka’s debt burden and realising sustainable development.’ However, China’s delay will further burden the ailing economy, and the delay could trigger another public uprising due to economic hardship.

The Sri Lankan crisis is an eye-opener for many nations in the Global South that have embraced China’s Belt and Road Initiative (BRI). BRI has two fundamental setbacks: It has triggered financial challenges in managing Chinese debt; second, it poses a significant environmental threat, as  most pre-environmental impact assessment (EIA) processes were ignored. The twin challenges have caused considerable reputational damage to China.

With the slowdown in China’s domestic economy, its geoeconomics ambitions could shift. The geopolitical realties have changed since the initial years of BRI. China’s foreign policy apparatus exercised a brand of economic statecraft that contained a coercive overhang, which pushed BRI nations to alter their foreign policy to achieve China’s geopolitical ambitions. The geoeconomic tactics used to pull the BRI nations towards Beijing usually involved a large volume of opaque loans, but most of these projects have failed to deliver the expected socio-economic returns. China’s National Development and Reform Commission (NDRC) was responsible for BRI implementation, where the design framework intentionally hid the strategic intent and promoted geoeconomics with a ‘collaborative design’.

According to Matthew A. Castle from CIPSS, ‘the NDRC outline notes explained BRI is in line with the purpose and principles of the UN Charter and with the ‘Five Principles of Peaceful Coexistence’ evoking Confucian tenets, which is ‘he who wants success should enable others to succeed’. Years after BRI’s commencement, the sincerity of the ‘common design’ and the soft power agenda became a concern to many nations due to China’s strategic manoeuvres using geoeconomics as a tool to achieve its geopolitical ambitions.

From BRI to GDI

Almost a decade after China’s launch of the BRI, another global initiative, the Global Development Initiative (GDI), was unveiled by Chinese President Xi Jinping at the United Nations General Assembly (UNGA) in September 2021. This was followed by a UN high-level meeting in May 2022 with the Group of Friends of GDI to accelerate the 2030 agenda. Sri Lanka’s permanent representative to the UN, Mohan Peiris, welcomed the GDI, commenting, “We cannot build back better if we are not helped in a substantive manner now. We [Sri Lanka] are managing to keep our heads above the water,” highlighting the crisis and requesting China and other nations’ assistance at this crucial juncture.

In September, a GDI ministerial meeting with participation of 60 countries took place, chaired by Chinese Foreign Minister Wang Yi. Sri Lankan foreign minister, Ali Sabry, joined the forum as a founding member supporting the GDI. However, Sri Lanka was excluded from the first GDI list of projects; perhaps China decided to take a slower pace due to the enhanced level of global attention on failed Chinese projects post the Sri Lankan crisis. In a bid to save its reputation, China never fulfilled the expected support to previous President Gotabaya Rajapaksa, nor did China rescue the Rajapaksa family when their rule abruptly ended post a popular uprising. The same strategy will be used by the Chinese for the current Rajapaksa-backed President Wickremasinghe.

China wishes to portray itself as the leading financier of the Global South, which often finds itself being dictated to by Northern donors. China aims to end this power imbalance by leading the Global South with the GDI. According to Samantha Custerfrom AidData, ‘China is the single largest bilateral creditor to lower-middle developing countries with risk. However, politically, China is concerned about its reputation. A recent study reveals that nearly half of the African leaders in 55 countries think China is the most preferred partner.’ Sri Lankan leaders were also on the same path choosing China as the most preferred until realising the sizeable China factor in the crisis.

Sri Lanka, one of the initial South Asian nations partnered with BRI, was a centrepiece of Chinese infrastructure diplomacy, propelled by the Mahinda Rajapaksa regime and continued by subsequent governments. Today, the nation is facing its worst economic crisis due to unsustainable debt and economic policy blunders from the past in which China had a significant role to play. BRI projects failed to capture the expected public attention in Sri Lanka due to its financial losses from projects such as the Mattala airport and the Lotus Tower. There were several problems in the BRI projects, including non-transparency, corruption, environmental concerns, and failure of the business models.

GDI was launched at a time when the BRI had been facing severe criticism in countries such as Sri Lanka, where the public viewed Chinese projects as a significant cause of the economic turmoil. GDI will help BRI in two ways. First, it will deflect some of the fierce criticism directed at the BRI by . The green initiative will bring an overall change, baptising the BRI with a fresh outlook.

Second, the GDI will assist China in filling gaps in the BRI when it comes to projecting a more globally-oriented initiative. A part of the concern was that the BRI was not perceived as an international project. For instance, China developed the Colombo port city Special Economic Zone (SEZ) for foreign investors. There was nothing global about the project except a strong Chinese image. GDI will bring sustainable-development grants with capacity-building for the BRI projects to tag along with international best practices such as UN SDGs. GDI will help developing nations transfer to low-carbon economies, and China is well-positioned in most BRI host nations to engage in this exercise. GDI will add a layer of climate diplomacy to the existing Chinese infrastructure diplomacy.

The GDI will be executed in Sri Lanka to regain China’s lost image post the crisis. There are challenges for the local policy circle though. Will China favourably look at restructuring Sri Lanka’s debt? While China engages in bringing the GDI to reconfigure BRI’s image, public trust will further deteriorate by delaying the debt restructuring process. As Michael Kugelman rightly assesses: ‘Sri Lanka’s economy continues to sputter, and core public grievances remain unresolved. The country still seems like a powder keg—susceptible to more mass protests—particularly if the public faces new austerity measures.’

President Wickremasinghe indicated that another uprising was in the making, and he would use emergency powers and the military to crack down any such uprising should it happen. Arresting protestors and front-loading the military is not a solution but a push towards a full-blown insurrection. What is required is to transfer power to the people through a democratic election and not continue with an appointed leader, which only ensures the continuance of Rajapaksa rule from the shadows. Further, the delay in debt restructuring by China, which is affecting the IMF’s financial assistance to Sri Lanka, will impact macroeconomic stability and lead to a further deterioration of economic conditions. If this continues, the uprising will no longer be a choice but an inevitability.

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.