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"We want to be here ... for the long term," say the new Chinese-Sri Lankan joint-venture operators of Hambantota Port. (Photo courtesy of Hambantota International Port Group)
The Big Story

Sri Lanka's 'debt trap' port thriving, Chinese owners claim

Seen as an emblem of Beijing's expansionist goals, business is picking up in Hambantota

MARWAAN MACAN-MARKAR, Asia regional correspondent | Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan

HAMBANTOTA, Sri Lanka -- Sri Lanka's growing dependence on China to support its maritime economy keeps Ray Ren on edge in Hambantota, where a $1.5 billion port built with Chinese loans sits along the Indian Ocean island's southern coast. The Chinese executive of the port operator has to fend off criticism that the port is to become a "Chinese colony."

"This is not a port where we will only welcome Chinese investors," Ren, the chief executive officer of the Hambantota International Port Group, told the Nikkei Asian Review. "We want to be here and be part of the development of the country for the long term, that's why we've invested billions [of dollars] in Sri Lanka; we are not looking at short-term business."

HIPG -- a public-private partnership between China Merchants Port Holdings and the Sri Lanka Ports Authority -- has become a geopolitical lightning rod, as China, India, Japan and the U.S. jostle for influence in the Indian Ocean. In December 2017, CM Port struck a deal with the debt-strapped Sri Lankan government, injecting $1.1 billion in exchange for an 85% stake and a 99-year lease. Western critics, including U.S. Vice President Mike Pence, pounced on it as a display of China's "debt diplomacy" -- doling out loans to poorer nations, and using them as leverage to gain a strategic advantage.

But the troubled Hambantota Port had been a political football years before the bailout. Mahinda Rajapaksa, president from 2005 to 2015, had welcomed Chinese investment in what was his home constituency; his opponents in the 2015 presidential election labeled the port, along with the $1.4 billion "Port City," built on reclaimed land on Colombo's shorefront, as vanity projects.

However, when that opposition coalition came to power, they had to soften their stance on China. They had little choice. Sri Lanka's foreign exchange earnings from exports are insufficient to meet its international debt obligations. The country's foreign reserves, which were $8.34 billion in July, are increasingly stretched, and the government will have to find $17 billion to pay for maturing foreign loans and debt servicing between 2019 and 2023. Chinese lenders account for 10% of the estimated $55 billion in foreign debt, according to the Central Bank of Sri Lanka.

China's economic heft in Sri Lanka has unnerved Washington, New Delhi and Tokyo, according to a Colombo-based diplomatic source. "U.S. diplomats were livid after the Hambantota transfer, and they are still monitoring the port," the diplomat added.

The investment in HIPG is bearing fruit. Before the deal, the port had struggled to attract ships and ran regular losses, despite its strategic location on the edge of one of the world's busiest shipping lanes. An estimated 36,000 ships ply the route six nautical miles south of the Sri Lankan coast. In 2017, before the Chinese took over the port, only 175 cargo ships dropped anchor. By the end of 2018, the new port operator said that 300 vessels had called, contributing to a 60% growth in the number of cars shipped through Hambantota to Africa, the Middle East and South America.

Nippon Yusen, a Japanese shipping conglomerate, signed a deal in mid-October with HIPG to upgrade the port's services for the transshipment of cars, currently the main shipping activity. It follows deals inked earlier this year for transshipment cargo with Hyundai Glovis, a South Korean shipping company, and Hoegh Autoliners, a Norwegian automobile carrier.

In April, the Chinese oil and gas giant China Petroleum & Chemical Corp., commonly known as Sinopec, outbid more than 20 competitors to win a tender to run bunkering -- ship refueling -- out of Hambantota. The port operator said that it hopes Sinopec's global reach will allow it to become a bunkering hub for South Asia, and ultimately to put the port back on the map for global shipping.

"The drill and petrol processing ships have been brought into Sri Lanka for the first time by HIPG," says Ren. "Chinese companies are looking for countries to invest in the region, and Sri Lanka will be competing with countries in the region to attract foreign investment to Hambantota."

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