Sri Lanka’s growing ties with China

When I last travelled from the Sri Lankan capital Colombo to Galle in the south of the country it was down a two lane, bumpy, dusty road, with honking cars overtaking at alarming close proximity and trucks zigzagging their way through the traffic. My next trip to Galle should be a lot smoother as last year a Chinese construction firm finished a section of Sri Lanka’s first motorway from Colombo to the Southern coast, which will cut the journey time in half, help tourists reach their hotels quicker and lorry drivers deliver their goods on time.

My visit also coincided with the time that the brutal civil war which ravaged the island for so long was drawing to a close and attention was turning to the rebuilding of war affected parts of the country and the anticipated rise in tourist numbers. That period also coincided with Chinese investment taking off on the island, helping the country repair and improve infrastructure which had been neglected and underinvested in due to the war and the 2004 tsunami which so badly damaged the coast of the country.

The road is one of many projects that are springing up over the country, perhaps the one with the highest profile is the development of the Port of Hambantota. The Chinese have reportedly spent up to $1.5 billion, much of these funds are a coming from a Chinese EX IM Bank $370 million loan to massively expand the City’s strategic deep water port, with the plan that it will be a significant logistics hub in the Indian Ocean, as it close to a major shipping route, with a multitude of cargo ships going from the Strait of Malacca to the Gulf, Suez canal and beyond. If only small proportion of this traffic stops off in the port, the boost to the local economy will be enormous.

Other commentators believe it is a future naval base for the Chinese navy and part of a wider strategy known as the “string of pearls”. This is a military and geo-political concept, building bases in the Indian Ocean as a way of encircling India and challenging US naval supremacy. If China is trying to enact this policy, then it has taken a blow as Burma has moved away from China’s orbit over the last year, with its move to a more democratic society and a perceived shift towards India. Pakistan, China’s traditional ally in the region continues to face internal turmoil and for now is an unreliable partner. While the naval base has not and may never materialise, the Chinese continue to be a major supplier of military hardware to the island.

Hambantota is an ambitious city, bidding (unsuccessfully) for the 2018 Commonwealth Games put down a marker of ambition and the City may bid again in the future. A new international airport 15 km from the port will cement the City’s status as regional hub. Unsurprisingly the airport is being built by the China Harbour Engineering Company, along with funding from China and is due to be finished at the end of 2012.

A curious story cropped up in the news about a Chinese man who swallowed a £13,000 diamond at a jewellery fair in Sri Lanka. While this garnered headlines in the curiosity pages of the world’s press, the incident highlights two trends affecting the Island. The Chinese are now among the biggest buyers of Sri Lankan gems and the growth in Chinese tourism to the island. Chinese tourism is rapidly growing; albeit from a small base a 71% increase (but only 13,889 in terms of numbers).

The Chinese overseas tourism market is still relatively young, but as Chinese people gain more freedom to travel, the market can only grow; there are anecdotal stories of rich Chinese tourists buying up the entire contents of Paris boutiques. But at a more mundane level as the Chinese middle class grows, so will this market. Asian countries can capitalise on this the most– having proximity to China, Sri Lanka will compete with countries like the Philippines, Indonesia and Thailand for this lucrative market. The Sri Lanka gem trade has boomed, with exports rising by 51% in the last year, the famed Sri Lankan gem trade dates back to the time of Ptolemy and attracts buyers from across the global, but the “China” effect is a powerful one, the idea of a billion plus consumers is highly intoxicating to businesses.

The Chinese are not the only East Asian investors in the island, South Korean car makers Hyundai have built a vehicle hub to handle up to 10,000 cars – which will be used to store cars before sending onto Africa and Europe. Other developing countries have invested in Sri Lanka, tourist arrivals from Russia have increased in recent years are expected to top 50,000 in 2012 – and Russia’s biggest company, Gazprom are reportedly interested in offshore oil exploration and are believed to be planning hotels to cash in on the tourism boom. But Sri Lanka looks set to focus on developing and strengthening its relations with China, Asia’s biggest investor and a useful hedge against its vast neighbour India.



Categories: Frontier Markets, Kula Ring Trade Blog, Silk Road

Tags: , , , , ,

3 replies

  1. As usual an interesting article from ML. Infrastructure development is extremely useful for developing countries but of course you cannot take it away with you if relations sour!! It will be useful to know the terms and conditions that are involved in these developments – but of course no one ever will. Another consideration is the use and training of the labour force as this could provide employment and skills. The evolving politics will be interesting to follow particularly as the Chinese take a 500 year view of most investment and involvement.

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