Relevance: GS-2: India and its neighborhood- relations.

Why in news?

• During his official visit to Sri Lanka Chinese Foreign Minister Wang Yi issued a statement which inter-alia stated that No “third party” should interfere in China-Sri Lanka ties. It was also the 70th anniversary of the historic Rubber-Rice Pact between China and Sri Lanka (signed on December 18, 1952) and the 65th anniversary of establishment of diplomatic relations between two countries.
• The statement is being seen as an apparent reference to India's concerns over Beijing's big-ticket strategic projects in the island nation in the Indian Ocean.

Gist of the Statement made by Chinese Foreign Minister

• Two sides should make good use of “the two engines”, referring to the $1.4-billion China-backed Colombo Port City in Colombo and the Hambantota Port in the island’s Southern Province.
• Sri Lanka to “tap the opportunities” of the Regional Comprehensive Economic Partnership (RCEP) and China’s “vast market” and restart talks on a free-trade agreement “to send more positive signals to the world and contribute to Sri Lanka’s economic recovery and development”
• Yuan 800 million for partnerships in the health sector and technical cooperation besides supporting construction of low-cost housing in Colombo.
• Proposal for establishment of establishment of a “forum on the development of Indian Ocean island countries” to build consensus and synergy and promote common development was also made which include six island nations are located in the Indian Ocean, namely Comoros, Madagascar, the Maldives, Mauritius, Seychelles, and Sri Lanka.
• Proposal for establishment of a “forum on the development of Indian Ocean island countries” sounded very similar to Prime Minister Narendra Modi’s SAGAR (Security and Growth for All in the Region) initiative.
• China proposes to help Sri Lanka become a manufacturing nation and to help build the “Made in Sri Lanka” brand.

Why such a statement by China?

• Last month, China suspended a project to install hybrid energy plants in three islands of Sri Lanka's north, citing "security concern" from a "third party", amid reports of Indian concern over its location which is not far from Tamil Nadu's coast.
• Earlier in December 2021, the Colombo-based Chinese Embassy tweeted about a Chinese company shifting its solar energy project from northern Sri Lanka to the Maldives, in the wake of “security concerns from a third party”.
• While the Embassy did not name the party, it was clearly alluding to India that objected to the Chinese project in three islands off Jaffna peninsula.
• In 2016, China became Sri Lanka’s largest source of imports, surpassing India. However, in subsequent years, the value of Indian imports has marginally exceeded Chinese imports. Although China was unable to remain Sri Lanka’s largest import partner, even its one-off claim to that title indicated the significant growth of Chinese imports and trade relations with Sri Lanka. On top of the noticeable rise of Chinese investments in Sri Lanka, this scenario clearly wouldn’t please India — particularly when China is able to export more to Sri Lanka than India does.

Timing of the visit of Chinese Foreign Minister

• Sri Lanka is battling a severe economic crisis of a persisting dollar crunch, soaring living costs and a shortage of essentials in the import-reliant island nation. Infact the country is crippling under an acute financial crisis with inflation at its highest level in decades.
• China is the second-largest foreign lender to Sri Lanka, but it accounts for just over 10% of the overall debt. Most of the loans had been taken by from the international market on commercial basis. Hence the crisis.
• The international rating agencies have expressed doubts over the island nation’s ability to meet its international sovereign bond payments of USD 1500 million, the first USD 500 million of which falls next week for payment.

What does Sri Lanka want from China?

• To restructure the debt repayments of Sri Lanka wants from China as a solution to the economic crisis that has arisen in the face of COVID-19 pandemic. It is estimated that Sri Lanka owes debt payments to China in the region of USD 1.5 to 2 billion this year.
• Concessional trade credit scheme for imports from China to enable Sri Lankan industries to run smoothly
• Beijing’s assistance in dealing with Lanka’s deepening forex crisis and spiralling external debt.

Chinese investments in Sri Lanka- a global concern

• Considering Sri Lanka's geo-strategic location, China has pumped in billions of dollars of investments in the island nation.
• During the decade of 2010-2020, China was the largest foreign investor in Sri Lanka. China continues to be the largest goods exporter to Sri Lanka despite the pandemic. Over the years, China has become the major source from which Sri Lanka obtains raw material for its garments industry, and garments are a major item of export.
• China is seeking to deepen its ties with Sri Lanka making billions of dollars of investments in ports and infrastructure projects amid criticism that they are debt traps. China's takeover of the Hambantota port on 99 years' lease for USD 1.2 billion debt swap drew international concerns over Beijing acquiring strategic assets far away from home by providing heavy loans and investment to smaller nations.
• The Hambantota port together with Colombo port city project where China is building a new city with reclaimed land in the sea were viewed with concern, especially in India as Beijing seeks to increase its presence in the Indian Ocean. There have been global concerns over debt traps and regional hegemony by China using its Belt and Road (BRI) infrastructure projects.
• Donald Trump administration had been extremely critical of the BRI and was of the view that China's "predatory financing" is leaving smaller counties under huge debt endangering their sovereignty.

Recent tension in Sri Lanka – China ties

• In December, 2021 Lankan government had rejected a 20,000-tonne consignment of organic fertiliser stocks from Shandong-based Qingdao Seawin Biotech over what Chinese sources call shady claims of quality issues. The row over organic fertilisers has turned into a major diplomatic spat between the two close allies.
• After the fertiliser stocks were rejected, a Sri Lankan court instructed the People's Bank not to pay the Chinese firm. Subsequently, the Economic and Commercial Office of the Chinese Embassy in Colombo blacklisted the People's Bank for failing to make the payment, according to the Letter of Credit and contracts between the two parties.
• Earlier this month, Seawin Biotech had also launched an international arbitration against Sri Lanka on this issue in Singapore.
• However, both sides appear to have decided not to upset the traditionally friendly ties and days before Wang’s visit (January 8-9) the fertilizer issue was resolved by negotiations. The Colombo Commercial High Court has now asked the State-owned Peoples’ Bank to pay the Chinese company its due on the grounds that the parties to the dispute had settled the matter among themselves and the Chinese company had agreed to deliver a fresh consignment of organic fertilizer of the required quality.

What is Letter of Credit (L.C.)?

Basically L.C. is a letter issued by a bank to another bank in a different country to serve as a guarantee for payments after the shipment is done by the exporter. In this document, it is mentioned the name of the currency that the payment is settled by and between the two banks in the importing and exporting country; usually that currency is U.S. dollar.

Geopolitical Significance of Sri Lanka in the Indian Ocean region

• Sri Lanka has a list of highly strategic ports located among busiest sea lanes of communication.
• Sri Lanka’s Colombo Port is the 25th busiest container port in the world and the natural deep water harbor at Trincomalee is the fifth largest natural harbour in the world.
• Port city of Trincomalee was the main base for Eastern Fleet and British Royal Navy during the Second World War.
• Sri Lanka’s location can thus serve both commercial and industrial purposes and be used as a military base.

Sources: The Hindu

Mains Question:

Q. China proposes that a forum on the development of Indian Ocean island countries should be held at an appropriate time to build consensus and synergy and promote common development. Six island nations are located in the Indian Ocean, namely Comoros, Madagascar, the Maldives, Mauritius, Seychelles, and Sri Lanka.
In a tweet, the Chinese embassy in Colombo described Sri Lanka as "real Pearl" of the Indian Ocean.