Sri Lanka’s President Loses an Election—and China Loses an Ally

January 10, 2015;

Supporters of Sri Lankan President Mahinda Rajapaksa on January 8, 2015 in Colombo, Sri Lanka

By Bruce Einhorn, Business Week

China has spared no effort to make friends with Sri Lankan President Mahinda Rajapaksa. The island nation has more than $ 4 billion worth of Chinese-backed investments, including a $1.4 billion project now under construction of offices, hotels, apartment buildings, and shopping centers on reclaimed land in Colombo that is the largest foreign investment in the country’s history. The leading provider of loans to Sri Lanka, China is also financing a $1.3 coal power plant and $1 billion highway.

For Chinese President Xi Jinping, who visited in September, cozying up to Rajapaksa has been a twofer. Building a Chinese presence in the country helps further Xi’s ambitions to build a “maritime silk route” expanding China’s reach in the Indian Ocean.

At the same time, China’s expansion in the Indian Ocean country has provided a useful way to irritate Sri Lanka’s big neighbor and China’s regional rival: India. China and India have a longstanding border dispute, and China has been eager to take down India a notch by focusing on Sri Lanka and other small countries that have traditionally been in India’s sphere of influence. India, for instance, was displeased last year when two Chinese submarines docked at a Chinese-funded port terminal in Colombo.

For his part, the Sri Lankan president has been more than happy to cozy up to the Chinese. Criticized by Human Rights Watch and other groups for the government’s conduct during the country’s civil war against ethnic Tamil separatists, Rajapaksa has counted on support from China, which of course has no patience for foreign do-gooders meddling in such issues as human rights. The Sri Lankan leadership has looked to China in part because of “its fear of being taken to task internationally on the issue of war crimes,” Jehan Perera, executive director of the National Peace Council of Sri Lanka, a group that promotes ethnic reconciliation, told Bloomberg Television today. “They saw China as a guarantor that they would not be taken before any UN type of trials.”

Those pesky voters in Sri Lanka, though, have gotten in the way of China’s plans to use the island as a thorn in the side of India. The news from the island nation shows that when it comes to choosing a reliable ally in Sri Lanka, Xi may have been done in by democracy. Rajapaksa, who called an election two years earlier than necessary, has just lost his reelection bid to challenger Maithripala Sirisena. Rajapaksa had reason to be confident: He presided over the end of the civil war and the subsequent peace dividend that helped boost economic growth above 7 percent. Sri Lanka’s benchmark stock index jumped 23 percent last year.

Still, former ally Sirisena was able to capitalize on worries of many Sri Lankans concerned about the incumbent’s tilt toward China. “There’s a perception that the Chinese are underpinning misgovernance and corruption in the regime,” Paikiasothy Saravanamuttu, executive director of the Colombo-based Centre for Policy Alternatives, told Bloomberg News before the election.

The new president will try to rely less on China, but with Sri Lanka stuck with a junk rating and facing a big budget deficit, the country isn’t in a position to turn down Chinese investment. Economic growth has picked up since the end of the civil war in 2009, and Rajapaksa was successful in reducing the budget deficit from a high of 10 percent of GDP to 5 percent last year. But the government’s red ink is Sri Lanka’s biggest economic challenge, according to Anushka Shah, an analyst with Moody’s (MCO), which rates Sri Lanka one notch below investment grade.

The defeat of China’s ally is sure to complicate Chinese efforts to expand in India’s backyard. “India is our first, main concern. But we are not against Chinese investment either. We will maintain good relations with China too. The problem is that in the name of development, some people made colossal money themselves by robbing and crushing this country. That will be stopped immediately,” Sirisena said in an interview with the Hindustan Times.

One person no doubt happy to see a change in Colombo is Narendra Modi. The Indian prime minister today said via Twitter (TWTR) that he had already called President-elect Sirisena to say congratulations on the win. “As a close friend & neighbor,” Modi “reaffirmed India’s continued solidarity & support for Sri Lanka’s peace, development & prosperity.”