Sri Lanka may be on cusp of tipping out of China’s sphere of influence amid economic crisis

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As tens of thousands filled the streets of Sri Lanka’s capital Saturday, China’s ambassador to the South Asian country was handing out food parcels in a city 100 kilometres away.

By the time Qi Zhenhong returned to Colombo, protesters had stormed and occupied the presidential palace in scenes reminiscent of the Arab Spring, when Beijing watched with horror as allies across North Africa and the Middle East faced popular uprisings.

It was to China’s great relief that most of those revolutions ultimately failed. But with many in Sri Lanka partly blaming the outgoing government’s closeness to Beijing for the current economic crisis, the island nation may be on the verge of tipping out of China’s sphere of influence, wiping out billions of dollars the Asian superpower has invested in building an Indian Ocean foothold.

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“Bilateral ties were already under strain before the events of July 9,” said Fung Siu, a senior analyst at the Economist Intelligence Unit, noting that China has been less willing than other creditors, particularly regional rival India, to sit down with Sri Lankan officials to negotiate the country’s debt.

Chinese Foreign Affairs Ministry spokesman Wang Wenbin told reporters in Beijing Monday that China was following the latest developments closely.

“As a friendly neighbour and co-operative partner, we sincerely hope that all sectors of Sri Lanka will bear in mind the fundamental interests of the country and people and work together to overcome difficulties,” he said.

China’s footprint has grown significantly in Sri Lanka in the past decade, as Colombo sought aid and investment after the end of the 26-year civil war. Multiple administrations have sought to balance India’s influence with China’s, playing the two against each other.

Under the presidency of Mahinda Rajapaksa, which ended in 2015, Colombo moved much closer to Beijing, straining relations with New Delhi, though this was reversed somewhat under his successor Maithripala Sirisena. When Mr. Rajapaksa’s younger brother Gotabaya won the presidency in 2019, he continued the balancing act, seeking to reassure New Delhi while also improving relations with Beijing.

But while he may have had some diplomatic nous, his economic management has proved disastrous, exacerbating a crisis that saw his heavily indebted country running out of money to pay for food and fuel.

China only holds about 10 per cent of the billions of dollars owed by Colombo, about the same as Japan, but is viewed with far greater suspicion in Sri Lanka and overseas than other lenders.

Those who accuse Beijing of attempting to leverage lending to take control of key infrastructure in other countries – what is known as a “debt trap” – often point to the case of Hambantota International Port in southern Sri Lanka, which a Chinese company took over under a 99-year lease in 2017 after the government could no longer afford repayments.

While reality is far more complicated than the “debt trap” picture painted by Beijing’s critics, and Chinese officials fiercely deny such claims, such perceptions have hurt China’s image in Sri Lanka, as has the now colossally unpopular Rajapaksas’ apparent coziness with Beijing.

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With protesters paddling in his presidential pool this week, Gotabaya Rajapaksa finally agreed to resign. His brother stepped down as premier several weeks ago in a move that failed to stem the unrest.

Opposition parties are in the process of forming a new government, which will face the unenviable task of negotiating with Sri Lanka’s numerous debt holders and attempting to get the economy back on track amid intense public scrutiny.

“The people’s struggle is for wider political reforms,” protester Jude Hansana told Reuters Monday. “Not just for the president to leave. This is just the start.”

While Beijing has touted the food and other aid it has provided Sri Lanka since the current crisis began, it did not step up financially in the way that some – including, apparently, the Rajapaksa administration – expected.

Both through the Belt and Road Initiative and other deals, Beijing has lent billions of dollars to small countries around the world in recent years and does not want to send the message that debts can be easily restructured in times of crisis, let alone written off, analysts said.

“I think it’s safe to assume the creditors will be asked to write off some of the principal owed by Sri Lanka,” Ms. Siu said. “The biggest unknown is whether China will accept this. If it doesn’t, debt-restructuring talks could stall.”

And while Beijing will seek to avoid losing influence in Sri Lanka completely, the ruling Communist Party will be wary of engaging with a government brought to power by mass protests, just as it was during the Arab Spring.

Over the weekend, China’s embassy warned its citizens in the country not to take part in demonstrations. On Chinese social media, where discussion of popular movements is heavily censored, some pointed to the chaos in Sri Lanka as evidence of the dangers of democracy, compared with the stability of China’s authoritarian system.

In an editorial Sunday, the Chinese state-run tabloid Global Times criticized the “twisted excitement” some in the West expressed over the prospect of Sri Lanka pulling away from China and warned against the island country becoming a pawn in “great power competition.”

With files from Reuters and Alexandra Li