The TLDR: It’s bad enough having China perched on our head in Ladakh, New Delhi now has to deal with it nibbling at our toes. The new Port City Project in Sri Lanka has created sovereign Chinese territory just a few hundred kilometres away from Kanyakumari. We look at this project in the context of the Rajapaksa government’s dangerously close relationship with Beijing—which in turn is cleverly using its economic clout to military advantage. (Requested by subscriber Prateeque George)

Researched by: Sara Varghese and Ragini Puri

What’s this Port City Project?

• At its simplest, this is a Special Economic Zone created to attract foreign investment. The aim—according to the government, which is run by two brothers, PM Mahinda Rajapaksa and President Gotabaya Rajapaksa—is to create a global hub that can compete with Singapore and Dubai.
• It is a public-private venture between the Sri Lankan government and a company called CHEC Port City Colombo—a specially created 100% owned subsidiary of China Harbour Engineering Company Ltd (CHEC).
• But the $1.4 billion project is being entirely funded by the Chinese partner. CHEC in turn is owned by China Communications Construction company—which is a Beijing-run enterprise.
• The SEZ will sit on 269 hectares (660 acres) of reclaimed land near Colombo’s seafront. While all the land is technically owned by the Sri Lankan government, 116 hectares will be given to CHEC on a 99-year lease—which is similar to terms on which the British government got Hong Kong.
• According to Mint, the terms of the partnership “effectively turns these 660 acres into Chinese sovereign territory.”

This is what Port City will look like when completed:

But it’s just a free-trade zone right?

Yes, but it is an example of how China secures its strategic advantage using what is called “debt-trap diplomacy.” Here’s how it works. As with Port City, China invests money in infrastructure projects in countries that are cash-strapped—be it in Africa or South Asia. The terms are difficult to meet, and eventually the country can’t repay the money owed. At that time, China extracts political and economic concessions that offer military benefits. A good example is the Hambantota Port—also in Sri Lanka. 

• Back in 2008, Prime Minister Mahinda took a $307 million loan from Chinese government’s Export-Import Bank (Exim) to build a port in Hambantota.
• Part of the deal was that CHEC (the same Port City partner) would build the port. 
• Another requirement was intelligence sharing: “We expect you to let us know who is coming and stopping here.” 
• Then this happened: “Over years of construction and renegotiation with [CHEC]... the Hambantota Port Development Project distinguished itself mostly by failing, as predicted. With tens of thousands of ships passing by along one of the world’s busiest shipping lanes, the port drew only 34 ships in 2012.”
• In 2012, Rajapaksa took another $757 million loan to scale up the project.
• In 2015, China poured money into Rajapaksa’s reelection campaign—via CHEC, no less.
• Rajapaksa lost the election, but the new government could not pay off the money owed to CHEC. In 2017—desperate to reduce its debt—Sri Lanka signed a $1.1 billion dollar deal that handed over the port to CHEC on a 99-year lease. See the pattern? 

Point to note: China follows a very different policy in Africa where it has made similar investments—and often eases the terms of repayment in such situations. So the underlying motive for any of its debt-trap initiatives is often revealed in the outcome, As The Wire spells out:

“China’s ‘debt trap diplomacy’ is not a figment of imagination. While it may have decided, for strategic reasons, to keep it in abeyance in some parts of the world, it is blatantly apparent in others. The pattern is quite clear in India’s neighbourhood where it is systematically acquiring real estate for strategic reasons.”

Point to note: Hambantota’s location:

Also of note: The Port City Project is hardly a one-off deal. According to the Colombo Telegraph, CHEC will be accumulating many more goodies in the days to come:

“Over the next two years, the government plans to sell hundreds of acres of prime state-owned land in Colombo Fort and its adjacent Slave Island area, including property currently being used by the Sri Lanka Air Force and Sri Lanka Army. Colombo Telegraph learns that the bulk of these properties have been reserved for China Harbour Engineering Corporation, through an intermediary local firm created specifically for the purpose of easing the path for transfer to the Beijing-owned entity and other affiliated investors.”

Why is Sri Lanka doing this?

Likely because of the Rajapaksa brothers' close relationship with Beijing. As Mint notes, “China’s shadow seems to loom dark over Sri Lanka whenever the Rajapaksa brothers—Mahinda and Gotabaya—win elections and come to power.” Also rising debt:

“Fitch Ratings downgraded Sri Lanka’s sovereign debt Friday, saying its debt would rise this fiscal year to 100% of gross domestic product, from 87% last year. The ratings company warned of increased risk created by the coronavirus economic shock, low foreign-exchange reserves and large debt payments due over the next few years.”

And Beijing has been more than happy to ease the pain. Last year, 43% of loans for major projects came from China. Sri Lanka is negotiating a fresh $700 million loan from China—on top of a $500 million loan and a $90 million grant doled out earlier this year.

Point to note: The Rajapaksas unilaterally cancelled a memorandum of cooperation with India and Japan for joint development of the Eastern Container Terminal at the Colombo Port. It also rejected a $480 million US aid package. 

The bottomline: The Mint best sums up what this means for India:

“The [Hambantota] port-grab had been China’s objective from day one. It now owns strategic territory only a few hundred kilometres from India. Chinese military submarines have been docking at Hambantota, which is today a key part of China’s ‘string of pearls’ strategy to encircle India somehow. And with Colombo Port City, Beijing is closer than ever to Kanyakumari.”

China’s likely next target: Maldives which owes 78% of its $1.4 billion debt to Beijing.

Reading list

Mint and ORF have the best assessments of the strategic importance of the Port City Project. New York Times did an excellent investigative piece on the Hambantota port deal. For more on China’s debt trap diplomacy, read The Wire (for an Indian perspective) and The Atlantic (for a global view). Economic Times has a good read on China’s attempt to control the Indian Ocean. Daily News out of Sri Lanka looks at the diplomatic stakes for SL as it tries to juggle its relationship with India and China.