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Mint Explainer: What China’s $4.5-bn investment in Sri Lanka means for India

Sri Lanka has paved the way for a $4.5 billion investment by China in Hambantota. The town, which also houses a port that was leased to a Chinese state-owned shipping company in 2017, is at the heart of India’s concerns about growing Chinese influence in New Delhi’s strategic backyard. Mint take a look at the announcement and its implication.

What exactly was announced?

Sri Lanka’s energy minister Kanchana Wijesekera broke the news on Monday that China’s Sinopec will be awarded a contract to establish a refinery at Hambantota Port. “Cabinet approval was granted today to award the contract to China Petroleum & Chemical Corporation (Sinopec) of China, to enter into an agreement to establish a new Petroleum Refinery & Associated Product Processing center in Hambantota,” Wijesekera posted on X. 

This came after the country signed an agreement with Sinopec in May for the storage, distribution and sale of petroleum products. This was particularly important for Sri Lanka, given the energy shortages that have rocked the country in recent years.

Why is this announcement significant?

At the heart of this new development is China’s growing influence in India’s strategic backyard. China has become a major investor, trading partner and political player in the island nation in recent decades. Hambantota Port, which was financed with an estimated $1.3 billion of Chinese money, is seen as a key example of the lengths to which China will go to expand its influence. 

Experts have suggested that the economic logic for building the port has always been weak. Some reports suggest it was built to shore up China’s relationship with the Rajapaksa family, which has played a dominant role in the country’s politics. 

Whatever the case, the project ran up large debts and Sri Lanka’s government eventually handed it over to a state-owned Chinese firm on a 99-year lease in lieu of those debts. This is seen as an instance of China’s “debt-trap diplomacy”.

What are India’s concerns?

New Delhi has a range of concerns about China’s increased role in Sri Lanka. The first is that its economic presence gives it leverage over Sri Lanka’s government. Experts also suggest that India has been concerned about the security implications of China’s investments in Hambantota. Chinese vessels like the Yuan Wang V have docked at Hambantota Port, amid concerns that these ships are in the Indian Ocean to gather intelligence on India’s military capabilities. Given that Sri Lanka is currently battling for its economic survival, China’s role may continue to expand, as the latest investment from Sinopec suggests.

How has India reacted to China’s growing ties with Sri Lanka?

India has stepped up its own efforts to become a ‘partner of first resort’ for Sri Lanka. It approved a $4 billion economic rescue package for the country as its economic crisis worsened in 2022. It also played a key role in helping Sri Lanka secure a bailout from the International Monetary Fund. India has also unveiled a slew of new initiatives, including an energy pipeline, to alleviate some of Sri Lanka’s resource constraints. It has also conveyed its concerns to Sri Lanka about China’s military presence in the region.

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