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Sino-Lankan Economic Relations: A Dynamic and Forward Looking Perspective

Can there be a great leap forward for Sri Lanka?

A previous Pathfinder Foundation (PF) Economic Alert (64) argued that the Sino-Lanka FTA
has the potential to be the ‘Jewel in the Crown’ in the bilateral economic relationship. It can
have a transformative impact not just on market access for Sri Lanka’s exports to China but
also on inward investment and technology transfer. Internal trends within China also
reinforce the prospects for an encouraging future in the bilateral economic relationship.
Furthermore, China’s Maritime Silk Road initiative provides a framework for a multifaceted
strengthening of the partnership. High priority should be attached to taking advantage of the
existing close bilateral Sino-Lanka relationship to shape the economic links between the two
countries to serve Sri Lanka’s development priorities. It is important to elaborate briefly on
these themes.

Benefiting from the trade/investment nexus between Sri Lanka and China

The FTA¸ which is expected to be completed this year, will increase market access for Sri
Lankan exports, such as high value apparel, value added tea, coir, rubber products and gems
and jewellery. Sri Lanka is already globally competitive in these products. As a result, the
incremental benefits in terms of increased exports through the Sino-Lanka FTA related
market access would be relatively limited, particularly as there are some binding constraints
in bringing about large increases in the supplies of some of these products (e.g. tea, rubber,
coconut and gems and jewellery). It is important, therefore, to adopt a dynamic rather than
static approach to trade under the Sino-Lanka FTA.
The full potential of this FTA can only be realized if Sri Lanka is able to catalyse Chinese
(and other) FDI to produce far greater supplies of a competitive and diversified range of
products which can take advantage of the FTA – enabled preferential access to the large
Chinese market. As mentioned above, this requires large scale inflows of FDI with its
technology, branding, management skills and market access. This trade – investment nexus is
crucial for realising the full potential of the Sino – Lanka FTA. This is also the way to
address Sri Lanka’s large trade deficit with China.
In seeking to attract large inflows of Chinese FDI, it is important to recognize that Sri Lanka
is no longer able to leverage low-labour costs. It cannot compete with countries like
Bangladesh, Cambodia, Laos and Myanmar on this front. Priority should, therefore, be
attached to identifying higher value exports servicing niche markets. On the Sri Lankan side,
the challenge is to provide a conducive investment climate (the Chinese like to operate within
industrial parks) and the necessary human resources. In the short-run it may be necessary to
relax visa regulations to attract the required skilled labour.


‘Push’ and ‘Pull’ factors: change within China

On the Chinese side, there are a number of internal trends which give cause for optimism.
Chinese companies are being encouraged to go abroad to overcome the competitiveness
challenges emerging from rising domestic costs (including wages), as well as the expected
appreciation of the Yuan in the medium-term. The prospects of large-scale export of capital
from China over the next few years offer Sri Lanka the opportunity to attract some of it. The
PF has consistently advocated the need for a significant increase in FDI inflows. No other
country offers greater potential in terms of capital that is available to be deployed abroad.
This should be taken into account when managing the bilateral relationship.
In addition, China’s strategy to rebalance its economy from external to domestic demand,
combined with rising incomes, will result in a change in the composition of imports. There
will be less of an emphasis on raw materials and more on consumer goods and services. This
means that the opportunity exists for Sri Lanka to take advantage of both outflows of capital
from China and the rising Chinese domestic demand for imported consumer goods and
services. There are, therefore, both ‘push’ and ‘pull’ factors which create a set of propitious


Triggering FDI flows and export expansion

As pointed out in previous PF articles, the upside scenario would be to attract Chinese FDI to
produce competitive supplies which can be exported back into the Chinese market on
preferential terms. In addition, the potential also exists to export into the Indian market using
the Indo-Lanka FTA, particularly if the scale of production is already being established for
selling into the Chinese market.
This process can be facilitated by Sri Lanka’s Commercial Hub Legislation which has created
entrepots at Hambantota and Katunayake, as well as bonded areas for ‘offshore operations’
for FDI – driven exports.
The combination of the bilateral FTA and Chinese FDI provides a framework to trigger the
export expansion, which is crucial for achieving sustained growth to improve the lives of the
Sri Lankan people by generating higher value employment.


Strengthening Sri Lanka – China ties further

There are also two additional points related to strengthening the Sino-Lanka commercial

 China has been extremely supportive in building much needed infrastructure in Sri
Lanka. In the next phase, it can play an important role in using and marketing these
facilities, such as the Hambantota port and airport. This would be mutually beneficial
as it would also assist in servicing the financing received from China for these
 The stronger Sino-Indian relations become, the more room for manoeuvre there is for
the other South Asian countries to benefit from their commercial relations with China.
In this connection, President Xi’s successful visit to India and other high level
bilateral contacts are encouraging, as is the cooperation which is taking place within
the BRICs framework.


The multifaceted benefits of the Maritime Silk Road (MSR)

The MSR is designed to generate win-win economic gains and promote the security of
vital sea-lanes based on the principles of mutual respect and sovereign equality among
nations. The bilateral commercial Sino-Lankan relations can be given a significant boost
through the MSR initiative at a number of levels.

 The MSR can strengthen the conditions for taking advantage of the China – Sri
Lanka Strategic Partnership by generating considerable benefits for Sri Lanka’s
development prospects. This county’s strategic location, being equidistant from
East Asia, the Middle East and Africa is particularly significant for taking
advantage of the improved connectivity in the Asian region which is a major
objective of the MSR.
 The connectivity facilitated by the MSR can support the trade and investment
opportunities which will be created by the Sino-Lanka FTA; as well as open up
new commercial prospects for Sri Lankan enterprises in other Asian countries.
 The MSR is complementary with Sri Lanka’s services-based strategy, which
focuses, inter alia, on the maritime and commercial sectors.
 It offers considerable potential for cooperation in the areas of maritime
connectivity, fisheries, marine research, marine environmental protection and
disaster management.
 The MSR also creates a conducive environment for taking advantage of historical,
cultural and social ties to promote people-to-people contacts, particularly tourism
from China, which has been growing at an exponential rate.
 In parallel with the MSR, the combination of China’s massive external reserves,
as well as the strengthening and internationalization of the Yuan, offers
opportunities for greater financial integration.


Avoiding pitfalls and being proactive: Recommendations for

economic team of new government.


1.This is a crucial period for the new Government of Sri Lanka. It has gained power primarily on a platform of good governance and the rule of law. Therefore the major focus is on constitutional reform, anti-corruption, transparency and a level paying field. Newspaper reports and statements from various quarters have sometimes sent mixed signals regarding the future of the ongoing large-scale infrastructure development such as the Colombo port city development, southern expressway expansion etc. The Pathfinder Foundation strongly recommends that the new Government takes very early decisions regarding the implementation of these projects in accordance with declared screening procedures so as to avoid uncertainty among foreign and local investors, contractors.


2. Another recommendation for the new Government is to take considered decisions
on unsolicited proposals for development. These are a very commonly accepted
means of attracting foreign and local investors who have creative ideas for
business development. Priority should be attached to the expeditious
development of procedures for accepting and evaluating of such proposals
without divulging details to competitor businesses.

3. As the current economic team has vision, expertise and experience it is also
recommended that a portfolio of business proposals is developed early for the
attention of investors from China, India or the West.

While appreciating the promises from many other sources we must remember that the
bird in hand is a million times more valuable than hundreds flying over in the horizon.


The time is ripe for concerted action to boost Sri Lanka’s economic and commercial
relations with China to a higher level through taking advantage of the trade – investment
nexus which will be opened up with the signing of the bilateral FTA. The MSR provides
a framework to foster these commercial ties further. It can be useful in supporting the
transition from debt to FDI flows which is necessary to strengthen Sri Lanka’s growth


Chinese style of Economic Relations

Historically, China has maintained economic and other relations with countries and not
with specific regimes. Sri Lanka can benefit greatly if the new leadership can master the
art of working with this rising global economic power for the benefit of the country. In this
context, it is important to recognize that China’s worldview and ways of doing business are
different, particularly from the West. If there is mutual trust and confidence, there is a
great deal Sri Lanka can gain, inter alia, from multifaceted linkages in areas such as
technology transfer, non-conventional energy, maritime industries and related businesses.




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