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Economy

Sri Lanka-China rapprochement rolls on

Kabir Hashim, Sri Lanka's minister of public enterprise development, is part of a government team renegotiating loans with Beijing. (photo by Simon Roughneen)

JAKARTA -- After deteriorating during the early part of President Maithripala Sirisena's tenure, Sri Lanka's relations with China appear to be on firmer footing as both sides continue to iron out differences over Chinese investments in the island country.

"In most of the cases, we found we got better terms," Kabir Hashim, Sri Lanka's minister of public enterprise development, told the Nikkei Asian Review. He added that a few more Beijing-backed projects are currently under review. 

"In some cases we renegotiated the loans, in some cases the contracts had legal issues, which we cleared up," Hashim said, without going into detail about specific projects.

Under the previous president, Mahinda Rajapaksa, Sri Lanka forged close relations with China as Beijing's economy boomed and China's overseas economic reach grew rapidly during Rajapaksa's decade in office from 2005.

Sri Lanka's relations with the U.S. and with India, its giant neighbor to the north, diminished as ties with China grew -- and as the country's government fought a savage and ultimately successful civil war against ethnic Tamils, with civilians suffering the brunt of the army's onslaught. In a signal of an increasingly close bilateral relationship, China worked to stymie potential U.N. Security Council measures against Colombo after the civil war ended in 2009.

But after a surprise election win in January 2015, Sirisena -- whose campaign was based partly on accusing Rajapaksa of turning Sri Lanka into a Chinese vassal -- vowed to review Chinese investments in Sri Lanka.

However, the need to repay China for loans made during the Rajapaksa era has forced Sirisena to rethink his shift away from Beijing, not least as Colombo needs Chinese foreign investment in infrastructure.

Prime Minister Ranil Wickremesinghe visited China in April, seeking an equity swap on some of Sri Lanka's $8 billion worth of Chinese loans. Sri Lanka's government debt has ballooned over the past decade to around 75% of its $82 billion gross domestic product.

Sri Lanka and China are also discussing a free trade agreement. China's restarting stalled investment projects in Sri Lanka would allow Colombo portray the country as a safe destination for foreign investment.

Speaking at the World Islamic Economic Forum in Jakarta on Aug. 2, Wickremesinghe said that improving Sri Lanka's infrastructure -- an ambition that will require huge foreign investment -- is key to the government's plans to turn the island of 22 million people into a business hub that meshes with a chain of locales stretching from Hong Kong to Singapore to Dubai. Developing a $40 billion "corridor" from Colombo to Kandy to the southern port town of Hambantota -- site of another major Rajapaksa-era Chinese project -- is central to the government's plans.

Getting China back on-side is crucial, and to that end the Sri Lankan government recently revived the $1.4 billion Colombo Port City project, a Chinese-led attempt to build a "mini-city" on reclaimed land near the capital, and deemed a major link in China's drive to expand trade ties across Asia and create a so-called "Maritime Silk Road," giving China access to strategically located ports across the region.

Sirisena suspended the project shortly after taking office, part of his wider review of Chinese investment in Sri Lanka, the extent of which has caused alarm in India, a strategic rival to China and Sri Lanka's biggest source of imports.

Chinese Foreign Minister Wang Yi visited Sri Lanka in July, when, according to Chinese state media, the minister said the relationship between the two countries had "returned to healthy and stable development after the change of Sri Lankan government."

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