Summary of Article

Submitted to: Mr. Awais Rasheed

Submitted by:

1. Tania Shaheen SP19-R04-006

2. Abdul Rehman Bin Yousaf SP19-R04-004

Topic: Analysis of China’s Model of Mutual Development and

Growth-A Case of Sri Lanka

Assignment # 02

Course Title: Advance Topics in International Finance

Class: MS-1

Submission Date: April 25, 2019

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 Summary of Article

What Money Can’t Buy: The Security Externalities

Of Chinese Economic Statecraft in Post-War Sri
Lanka

(Summary)
China is among one of those countries, who believes upon the development of other countries
along with the self-development. For this mutual growth and development, china has been taking
many steps from a long time. Major steps of China for this mutual development and growth
includes the trade establishment with other countries for mutual growth, huge investments for
mega-projects and multiple aid programs. The above brief discussion depicts only the one side of
a coin-the brighter side. However, the other side of the coin is very dark, and is unfortunately
hidden from the general public, as well as, from the target states. Resurgence of China as a
“Regional leader” has enhanced its influence over many states. Furthermore, huge capital
investments made by China (sender state), and trade dependency of other states on China, has put
it in a position to influence the policy making of target states. China is playing on multiple fronts
that is; economic, social and political fronts in order to increase its influence in the region along
with countering the influence of United States of America (USA)-the global leader, and India. The
previous statement would become clearer by considering the case of Sri Lanka.

The Sri Lankan episode was analyzed from 2009 to 2017, in three perspectives; firstly, the Sri
Lanka’s indebtedness to China owing to poorly conceived infrastructure-projects. Secondly, the
clashes between the economic and security interests, and lastly, identifying the major factor that is
whether trade or massive capital investment is responsible for substantial dependence of Sri
Lanka’s economy over China. Initiating with the trade, it is common notion that trade is a source
of mutual development. However, cross-border trade of goods and services between the sender
and the target states affects the target state’s policy making to a greater extent. This influence is
explained by “Hirschman Effect”- according to this concept the benefits enjoyed by the target
state in reference to trade with the sender state, enhances the dependency of firms and industries
of target state over the sender state, and thus empowers the target state to maintain positive

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 Summary of Article

relations with the sender state for long term benefit. The drawback of dependence of trade with
sender state is that mostly such goods are traded, which can’t be replaced easily by any other state,
thus making the government of target state vulnerable to the sender state.

However, in case of Sri Lanka this is not true. According to statistics of 2016-2017, the major trade
partner of Sri Lanka was India accounting for 15.2% of total trade, then comes China with 14.9%,
plus the goods imported from China could easily be replaced by other trade partners like USA, and
India. Though there would be a decline in the economic growth of Sri Lanka in short term owing
to termination of trade relations with China, but in longer run it would easily be overcome by Sri
Lanka. Thus previous discussion clarified that trade is not a key factor behind the economic
leverage of China over Sri Lanka.

Moving towards the capital, huge capital investment has been made by China in Sri Lanka since
the end of Sri Lankan Civil War. After the end of civil war, Sri Lankan economy was suffering
from financial crisis, so China intervened and helped the Sri Lankan economy in coming out of
crisis through, ODA (Official Development Assistance), loans and FDI (Foreign Direct
Investment). BY 2013, Chinese infrastructure loans totaled around $ 2.2 billion. By 2014, the total
loan given by the China to Sri Lanka was $ 3.8 billion, and presently this figure is estimated to be
about $ 5-7 billion.

Another interesting thing about China is, it always focus on the infrastructure projects, and the
underlying purpose is to hire the firms and labors of China for these projects rather than the firms
and labor of target state. Thus, the ultimate benefit related to these mega projects is enjoyed by the
Chinese firms and labors and the target state only has to bear the debt burden along with the little
benefit. Same happened with Sri Lanka. China initiated several infrastructure projects in Sri Lanka
like Magampura Mahinda Rajapaksa Port (Hambantota), Mattala Rajapaksa International Airport
(Hambantota), Lakvijaya Power Station (Puttalam), Colombo Port and Port city, but the major
beneficiaries from these projects were the Chinese themselves. Along with the interest earned over
the loan given to Sri Lanka, China was also taking high salaries from Sri Lankan Government for
its employees working in several projects in Sri Lanka, thus making Sri Lanka more vulnerable to
China.

Among these projects, some underwent from commercial failures and some became a cause of
ownership rights transfer from Sri Lanka to China over a period of time. In this regard the major
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project was Magampura Mahinda Rajapaksa Port (Hambantota), a major port of Sri Lanka. For
the development and construction of this port, china gave a loan of $ 1.5 billion in two phases.
This loan was given at an interest rate of 6.3 %, however, there was ambiguity regarding the
interest rate on which loan was given by China to Sri Lanka. This 6.3% rate of interest was
estimated by government of Sri Lanka, and was not actually disclosed by Chinses government.
This ambiguity regarding the interest rate on which Sri Lanka was supposed to return loan amount
to China, lead Sri Lanka to several menaces. Initially, when Sri Lanka became unable to repay the
loan to China, China asked the Sri Lankan government for lease of 35 years over the four out of
seven berths of this port. Later on, Sri Lankan government extended this lease from 35 years to 99
years, as it was unable to repay the loan amount back to China. Thus, exchange was made for
writing off the debt accounting $ 1.1 billion. Same goes with the rest of projects.

During the elections of 2015, a major change took place in government structure. Opposition
leader, Maithripala Sirisena, became president of Sri Lanka. Key motive behind the election of
Sirisena as a President was the frustration among the general public against the former president,
as he was alleged to have close ties with China, and was alleged for working in the interest of
China rather than the Sri Lankan public. Initially, the Sirisena rejoiced the public by saying; “no
more deal with China”, and if China want to trade with us then it will have to conform to our terms
and conditions. However, when this issue was brought on the negotiation table, the entire situation
was reversed. Sirisena came to know that Sri Lanka was trapped in a web of Chinese loan, and it
had no option except confirming to the demands of China. Thus, China gained colossal control
over Sri Lanka and acquired a position to influence the economic, political and financial policies
of target state- Sri Lanka.

In addition, the article highlighted certain factors responsible for supremacy of China. Primarily
there were four factors which assisted the Chinese economy to exercise control over Sri Lanka,
and these factors were; 1) Debt combined with financial weakness, 2) Leverage through
subsequent commercial failures of project, 3) Lack of information and 4) Corruption. Another
problem faced by Sri Lanka was the cultural differences with China. As both the countries had
different language, history, politics and society, so it was very difficult for the public to accept the
Chinese pubic with a vast difference between their respective cultures.

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In a nutshell, the key factor behind the massive sway of China over Sri Lanka was capital, not the
trade and social factors. After analysis of the multiple aspects it became clear that failure rather
than the successful capital investment generated vulnerability of target state for sender state.
Furthermore, previously mentioned four variables; debt burden, lack of information, corruption
and project failure were accountable for extensive leverage of China over Sri Lanka. Lastly, the
recommendation given by the author was, the target state can counter the influence of sender state
either through strong foreign policy actions or by the establishment of strong ties with a third party,
which is India in case of Sri Lanka in order to enhance its sway against the sender state. Such
close ties with a third state, would result in reduced dependency on a single state, thus diversifying
the risk of alien control.

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