By Krishna Kumar
In December 1952, during a historic visit to China to conclude the rubber-rice barter trade agreement, Sri Lanka’s then commerce minister Richard Gotabhaya Senanayake was presented with a gift by Zhou Enlai, then premier of the People’s Republic of China.
A beautiful Chinese walking stick, inscribed with some 20 Chinese characters, one of them meaning ‘longevity’, symbolized the pact as just the beginning of longstanding cordial relations between the two Asian nations.
Five years after this historic agreement — under which Sri Lanka supplied natural rubber and for which China paid with rice — the two countries formally established diplomatic relations.
The same year premier Zhou visited Sri Lanka for the first time. Since then, top-level leaders from the two sides have visited each other many times, the latest being Sri Lankan President Mahinda Rajapaksa’s sixth state visit to Beijing last May.
Rajapaksa has described China as an important partner, noting that the friendship between the two countries goes back centuries.
“Bilateral relations have extended to educational, social, cultural and all kinds of aspects. A high-level strategic cooperative partnership has been formed, and we are satisfied with the investments from China,” he said.
Echoing this view, Chinese Premier Li Keqiang has said the two sides have developed a healthy and stable relationship and suggested strengthening infrastructure cooperation, implementing major projects on ports, railways and highways, expanding pragmatic cooperation and research on aerospace and marine science, and broadening cooperation in culture, education and tourism.
To bring the island economy back on track after the end of the civil war — between the separatist Liberation Tigers of Tamil Eelam (LTTE) and the Sri Lankan government — in 2009, China had provided US $1.2 billion assistance in the form of grants, loans and credit, representing 54 percent of the total US $2.2 billion committed by foreign countries and multilateral agencies.
And in 2010, it lent US $821 million. In 2011 the amount fell to US $784.7 million but China remains involved in almost all the large-scale projects.
Bilateral trade has moved quite rapidly beyond the rubber-rice barter. Sri Lanka-China commercial exchanges clocked US $2.6 billion in 2012, with China enjoying a surplus.
Bilateral trade has been growing by leaps and bounds — US $659.94 million in 2005, US $805.1 million in 2006, US $958 million in 2007, and US $1.13 billion in 2008 — with the volume touching US $3.14 billion in 2011. Sri Lanka’s exports to China have increased from a mere US $28 million in 2005 to US $108 million in 2012.
Biggest trading partner
A possible free trade agreement (FTA) will make China Sri Lanka’s biggest trading partner, surpassing India. According to the Central Bank of Sri Lanka, China is at present ranked 16 among export destinations.
“The FTA will certainly change the shape of bilateral relations, and would elevate the relationship to a much higher level,” Ajith Nivard Cabraal, governor of the Central Bank of Sri Lanka, tells China Daily Asia Weekly.
“It will not only help Sri Lanka to have convenient and preferential access to the second largest economy in the world, but also will serve to encourage further Chinese investment in Sri Lanka. Naturally, it is a very exciting prospect for both countries, but more significantly, for Sri Lanka.”
Sri Lanka, which already has a free trade deal with India, is pinning its hopes on the pact with China, which would remove all tariffs on goods from the island nation, to breathe life into its US $59 billion economy after the civil war ended.
Lilly Li, partner and regional leader with Asia Pacific Trade & Customs at KPMG China, says FTA will be good for the region as a whole.
If the deal materializes, all textile products from Sri Lanka would be exempted from tariffs, which currently range from 14 to 25 percent, depending on the product type. It is expected that the deal will be signed this year.
“However, the exact outcome of the FTA can be worked out only after it is being implemented,” says Harin Malwatte, secretary general and CEO at the Ceylon Chamber of Commerce, one of Sri Lanka’s leading business chambers. “We will interact closely with the authorities to ensure that the recommendations are given consideration when the FTA is negotiated.”
Last May, China and Sri Lanka signed an agreement to upgrade the relations to a “strategic cooperative partnership” during President Rajapaksa’s Beijing visit.
Apart from enhancing trade and economic relations, the agreement envisaged greater cooperation in law enforcement, security and defense, with Sri Lanka planning to launch a telecommunication satellite at a cost of US $ 320 million in partnership with China’s State-owned Great Wall Industry Corporation.
Three other agreements in the fields of education, mass media and culture have been signed recently between China and Sri Lanka.
“China has been providing generous support in financing development following the end of the conflict, particularly the unprecedented infrastructure development program, which has addressed a key bottleneck constraining Sri Lanka’s growth prospects for decades,” says Basheer Ismail, managing partner, SJMS Associates, an independent correspondent firm to the global professional services firm Deloitte.
“China has provided unhesitating support at times when other friends of Sri Lanka have shown reluctance,” he adds.
In recent years, the two countries forged agreements including cooperation between the film industries and in agriculture mechanization.
However, the most major milestone in bilateral ties was the completion of the Bandaranaike Memorial International Conference Hall in 1973. The hall was recently refurbished at Beijing’s expense and was used as one of the venues of the Commonwealth Heads of Government Meeting 2013. It was also where a high-powered Chinese business delegation met Sri Lankan counterparts to sign deals amounting to over US $1.5 billion.
On the foreign direct investment (FDI) front, Sri Lanka has been making steady progress with Chinese help. Sri Lanka is a favored investment destination for Chinese companies under Beijing’s “going out policy” that encourages overseas investment.
According to the Board of Investment of Sri Lanka, China has emerged as the largest foreign direct investor accounting for 24 percent of the inflows in 2013.
The board says FDI inflow for the period January to September 2013 reached US $870 million. Colombo International Container Terminals, part-owned by a Hong Kong-based company, is a major investor while Hong Kong-headquartered MAS Holdings Group also invested US $25.5 million last year.
In 2012, Sri Lanka received US $1.2 billion in FDI. However, the island nation is aiming for around US $2 billion FDI by the end of this year with investments coming from strategic development projects and country-wide investments mainly from the Chinese mainland and Hong Kong.
“We are expecting investments in tourism, mixed development projects, heavy industrial zones, telecommunications, information and communications technology and thermal power, to achieve the US $2 billion target,” says Dilip S Samarasinghe, director of media and publicity with the Board of Investment of Sri Lanka.
According to a Central Bank of Sri Lanka paper, Economic Impact of Foreign Direct Investment in Sri Lanka, until 1977 FDI flows were negligible. The annual average inflow of FDI during 1970 to 1977 was only US $500,000.
“With the economic policy reforms introduced in 1977, the FDI flows rapidly increased continuously until 1983. The annual average FDI inflows increased to 4.2 percent in the period 1978 to 1982,” the paper said.
However, between 2001 and 2010 FDI inflows have shown a steady growth. In 2011, Sri Lanka attracted significant inflow of FDI after achieving sustainable peace.
China played a pivotal role in establishing peace in Sri Lanka by providing military, financial, and diplomatic support to defeat the LTTE in 2009.
Cabraal of the Central Bank of Sri Lanka sums up as follows:
“China would undoubtedly assume a leading role in emerging Asia. And those countries which will have strong economic and political partnerships with China would benefit by the changing economic fortunes of the second largest economy in the world.”