By Dr. Palitha Kohona Courtesy Ceylon Today

China has been a major investor in Sri Lanka. In fact, after the brutal conflict with the terrorist LTTE was successfully ended in 2009, China became the main source of foreign direct investments (FDIs) in the country at a time when more traditional sources of investments could not or did not wish to invest in Sri Lanka. Our infrastructure, highways, ports, airports and water supply projects, which required restoration or construction, all benefited from Chinese funding. China stepped onto the plate like a true friend when others hesitated.

Today our investment climate is not the same. The financial crisis, the social unrest of last year, the perceived instability, etc, have all contributed to creating a negative environment and a lack of confidence in Sri Lanka in the investor mindset. The Embassy worked very hard to restore the confidence of the Chinese investor community. We noted that the Sri Lankan economy was gradually regaining its strength. Opportunities to address trade and investor conferences in Beijing, Shanghai, Shenzhen and the other provinces were used regularly to convey a positive message about Sri Lanka. TV and print media opportunities were exploited extensively, with major articles appearing in all the key Chinese and English language media, including in Hong Kong and Singapore. Still, some hard work remains to be done with the Chinese financial institutions.

The visits of Foreign Minister Ali Sabry and the Treasury Secretary to Beijing helped tremendously. I am pleased to say that China Harbour and Hunan Construction have committed to invest USD 1.2 billion in the Colombo Port City (CPC). SINOPEC has plans for a multi-billion dollar investment, including in an oil refinery in Hambantota. CZK has declared its intention to establish a major gem trading centre at the CPC. China Great Wall, CIDCA and Wuhan University were exploring a multi-million dollar investment in a high-tech University which can still be resuscitated. Sinopharm had plans to establish a pharmaceutical, mainly vaccine, packing plant in Sri Lanka. Chinese solar and wind power companies have recently expressed considerable interest in Sri Lanka’s renewable energy sector, including solar panel fabrication. Talks are continuing on a complex Light Rail Project. With further effort, we should be able to encourage these corporate giants to locate some of their overseas investments in Sri Lanka.

Electric vehicle manufacturers have begun to evince considerable interest in the assembly and manufacture of vehicles in Sri Lanka, not only for the local market but also to target the regional markets. Chinese tour operators, including the major cruise lines, were beginning to look at Sri Lanka as a desirable port of call in their itineraries. This is an area of significant potential which must be exploited more by Sri Lanka.

Similarly, with the predicted surge in demand for strategic minerals, Sri Lanka should be able to exploit the potentialities of the marketplace more aggressively. According to the Energy Transitions Commission, a think-tank, by 2050 the world will require 15 times today’s wind power, 25 times more solar, a tripling of the grid size and a 60-fold increase in the fleet of Electric Vehicles (EVs). By 2030 copper and nickel demand could rise by 50-70%, cobalt and neodymium by 150%, and graphite and lithium six- to seven-fold. All told, according to the International Energy Agency, a carbon-neutral world in 2050 will need 35m tonnes of green metals a year. Adding aluminium and steel, etc, demand between now and then is expected to exceed 6.5bn tonnes. Sri Lanka possesses high-grade graphite and silica.

I had begun to discuss with Chinese telecom giants to enhance their perception of Sri Lanka as a potential investment hub. The critical thing at the moment is to encourage confidence in our economy and the predictability of our investment climate in the minds of Chinese companies. This will require not only getting the technical message right but also creating a higher comfort level for the investor community at the political level.

The Impact of Chinese Investments on Sri Lanka

Chinese investments in the post-conflict period contributed tangibly to Sri Lanka’s impressive economic performance in those years when our economy became one of the most admired in Asia. Funds poured into our stock market. A number of critical infrastructure projects were launched and completed. The impact of these on the long-term economic stability and development of Sri Lanka as a modern State with a dynamic economy would be crucial. Investments in public goods have resulted in long-term substantial benefits in many countries. The highways linking Colombo with the Bandaranaike International Airport and distant Hambantota Port have considerably improved the speed of transportation of people and goods between those cities, not to mention the savings on fuel and convenience. Today people drive from Colombo to Galle for Sunday lunch. A modern State needs effective and efficient transportation links. The transformation that China itself has achieved after building its stunning 42,000 km of high-speed rail network and the multi-lane highway system which crisscrosses this large country while refining its road and bridge building and tunnelling technology is simply breathtaking.

The entry of Sinopec into the petroleum retail business, petroleum refining and bunkering and the Chinese solar and wind power generation companies into the renewable energy market of Sri Lanka will be a game changer.

Of course, criticisms largely based on political convenience and prejudice have sprouted on occasion, mainly in the Western media. The costs of borrowing and the borrowings themselves have come in for negative comments. This cannot be avoided in the fractious democracy that prevails in Sri Lanka and the Western media which relishes opportunities for pouring scorn on China. I am confident that in the long run, these criticisms will become muted as the benefits of these developments begin to have wider economic and social impact and be appreciated.

Chinese funding for development projects has come mainly from loans, some of it on concessional terms. The long-term sustainability and viability of these developments, especially the CPC and the Hambantota Port, will depend on our ability to generate adequate confidence in the investor community that Sri Lanka is a trustworthy long-term partner and encourages them to invest in Sri Lanka. We need to be more proactive in this area considering that investors have other options and competing States are also seeking to woo the same investors. We need a multifaceted approach to create a better investor-friendly environment which provides assurances of predictability and transparency of our laws and policies, the strength and certainty of our politics, the sympathy of our political and social environment, and the security provided by our investment regime.

The media has an important role to play in this respect. The legal and regulatory structures governing both the CPC and Hambantota Port are rapidly falling into place. Once a critical number of major investments are attracted, it is likely that they will be a catalyst for many other investors from around the world to exploit the opportunities that Sri Lanka provides, including our excellent relations with the West and India, our literate and flexible workforce and our welcoming nature. Considering that Chinese companies (and East Asian) are influenced by considerations other than pure economic advantage in their decision-making processes, e.g. feelings of trust and confidence (guanshi), the cultivation of these aspects will also be important. The Government must continue to aggressively promote a positive image of Sri Lanka as a destination for FDIs.

The Debt Trap – Fact or Propaganda?

The Chinese role in Sri Lanka’s debt is grossly exaggerated and exploited mischievously for political advantage. Research done by the Kadirgamar Institute suggests that it is around 10% of Sri Lanka’s entire debt burden. Some, using complex criteria, have suggested a higher figure. It is likely that the percentage is lower today given the infusions of large dollops of aid by India in the last two years. We have also begun to repay some of the funds borrowed, including to Bangladesh and India.

Sri Lanka’s debt was being effectively managed until the country was devastated by a combination of converging economic storms and China was not responsible for any. The Easter terrorist attack of 2019, the unprecedented and crippling Covid-19 pandemic, the consequent decimation of our tourism industry which had contributed over 10% of our national income and provided employment to over one million, directly and indirectly, the reduction of remittances by expatriate workers, the contraction of the global economy coupled with mismanagement and a culture of borrowing for consumption had all contributed to the unprecedented economic crisis that froze economic activity in the country.

However, due to the stringent remedial measures adopted by the government in the past eighteen months, Sri Lanka is showing signs of recovery much earlier than anticipated and to the surprise of the international community. The IMF has expressed confidence in Sri Lanka’s recovery efforts. The approval by the IMF of a USD 2.9 billion bailout package has contributed to enhancing a positive image of Sri Lanka’s economy. Much more work remains to be done in reforming the economy and more hardship and sacrifices will require to be endured in the short and medium term. A concerted and carefully planned effort needs to be made to further increase exports and attract more FDIs. In this respect, China remains a crucial partner. Sri Lanka also must continue to explain its efforts to the international community.

Sri Lankan Businesses in China

Sri Lankan businesses operating in China can do much better. To begin with, the efforts of the Embassy have generated considerable political goodwill for Sri Lanka in China. Sri Lanka is recognised as a close friend and a strategic partnership is in place. There has also been a steady enhancement of Sri Lanka’s image in the host country as well with repeated articles and reports in the social and print media and TV appearances by Ambassador Dr. Palitha Kohona. These have been very important enabling factors in facilitating the success of our businesses in China and these need to be exploited more by the business community. Unfortunately, compared with other competing countries, we have not been sufficiently active in leveraging our natural advantages, especially our warm political relationship.

China is considered to be the most lucrative consumer market in the world with the Chinese Government actively promoting consumption as a key part of its economic strategy, both domestically produced and imported goods. Imports of consumables exceed USD 750 billion annually and are growing. The Chinese Government promotes import expos designed to encourage importers of foreign goods to access the domestic market. These expos create significant opportunities to showcase our products and enable foreign businesses to interact with and develop local business contacts, if necessary, with government assistance.

While some Sri Lankan businesses operate in China, they are by no means a major factor in the marketplace. While branding is considered important in attracting Chinese consumers, our brands have a long way to go. More effort needs to be made by Sri Lankan brands, especially on social media to popularise themselves. Our tea exporters have made a significant impact on the Chinese marketplace. Sri Lankan rubber products and coconut products are beginning to compete well. While Sri Lankan gems are sought after, it is doubtful whether they are making a sufficient contribution to Sri Lanka’s national income.

While the massive Chinese market can absorb more than what our nascent businesses can supply, there is a disappointing and perceptible reluctance among Sri Lankan businesses to adopt a cooperative approach. They could also benefit from targeted government assistance.

China also applies stringent border controls for products entering the domestic market, including phytosanitary, labelling packaging and coding requirements. Many would consider these to be unreasonable barriers. Rich developed countries have opened up the Chinese market for their products through concerted lobbying and even legal action at the World Trade Organization (WTO). Poor developing countries, with limited diplomatic and legal resources, do not enjoy such luxuries. China itself could assist developing countries which are seeking to access the Chinese market.

While the Sri Lankan Embassy has proactively sought to raise the awareness of Sri Lankan exporters to these challenges, the message is seeping through only slowly. The Embassy has consistently sought to encourage the Chinese authorities to adopt a more sympathetic approach to Sri Lanka. It is also important to recognise that Sri Lankan black tea, our gems, especially the blue sapphires, coconut products, some marine products, rubber products, etc enjoy considerable consumer acceptance and sell very well in China. Our market share can be increased dramatically if these products secure easier access. Sri Lankan seafood will find a ready market in China. But the approval to export a wider range needs to be secured.

Sri Lankan authorities need to recognise the vast opportunities presented by the Chinese marketplace and proactively assist exporters to access the almost limitless possibilities available, including by assisting businesses to participate in the export-import fairs, providing training on entry requirements and using every prospect to improve and promote Sri Lankan products. A comprehensive well thought-out plan needs to be formulated.

The Chinese consumer is more attuned to social media promotions and online buying. The former Ambassador achieved celebrity status in China through his participation in live-streaming sessions and celebrity cooking events. There are lessons to be learned from the way countries like Australia, New Zealand, France, Germany, Japan, Indonesia, Thailand, etc promote their products in China.

In addition to the factors discussed above, there appears to be a reluctance among our business community, in general, to engage with the Chinese business community. This psychology, influenced by a history of dealing with the West, appears to condition our business mindset. In China, like in most of East Asia, building personal relations is essential to develop business relations. (Referred to as guanshi). Developing trust and confidence takes time and effort. As one highly respected Australian Diplomat once observed, you have to drink copiously and eat prodigiously, at considerable risk to your health before you begin to make an impact in the East. In the East, personal relations play a much greater role in nurturing business relations than in the West. A bureaucracy like ours, conditioned to engaging other parties through anonymous notes, will find it difficult to develop sustainable and trusting relations.

The language is also a critical factor. The Chinese tend to shy away from foreign languages in general, including English. Being familiar with the Chinese language or obtaining professional assistance readily opens many doors.

Many countries which have concluded bilateral Free Trade Agreements (FTA) with China have done marvellously in accessing the Chinese market. Among them are New Zealand, Australia, the ASEAN countries, and even geographically distant countries such as Chile and Cyprus. The exports of these countries have expanded dramatically in range and value. China is Australia’s largest export destination and biggest source of foreign students despite ongoing political tensions. Australia has an effective bilateral FTA, an investment promotion and protection agreement and a double taxation agreement in place with China.

About the author:

Dr. Palitha Kohona is a former Ambassador of Sri Lanka to China.

(To be continued)

By Dr. Palitha Kohona