Pitfalls of Chinese FDI in Sri Lanka – A case study of the Colombo Port City Project

Omkar Bhole, Research Intern, ICS

One significant cause of Sri Lanka’s current economic crisis is a shortfall in its forex reserves. This has been compounded by staggering increase in Sri Lanka’s overall external debt burden amounting to around $45 billion of which it owes $8 billion to China alone. Many experts also suggest that China’s debt-trap policy has actively engineered Sri Lanka’s economic collapse. Therefore, it is pertinent to examine Chinese investments in Sri Lanka to gauge its impact. Colombo Port City Project (CPCP) which was inaugurated by the President Xi Jinping during his state visit to Sri Lanka in 2014, is the largest FDI project in Sri Lanka and thus warrants a careful examination.

CPCP is an ambitious real-estate project with an initial investment of $1.4 billion and involves reclamation of 269 hectares of land near Colombo. This project is entirely financed and implemented by China Harbour Engineering Company (CHEC) with the Sri Lankan government being only responsible for providing all legal clearances and utility services. CHEC promises to establish a world-class city for entire South Asia by 2041 through creation of facilities for commercial space, retail space, hospitality, residential area and social infrastructure.

Impact on Sri Lankan Economy   

            CPCP is crucial for boosting Sri Lanka’s deteriorating economy. A report prepared by PricewaterhouseCoopers (PwC) estimates that this project will create more than 3 lakh jobs for both locals and foreigners. However, the 2021 Colombo port city economic commission act provides that salaries of those employed in port city will be paid in foreign currency. This may create an opportunity for China to promote the internationalization of RMB. Secondly, the amended 2021 act provides for 75% reservation of jobs for locals, but lack of skills among them can be a big concern. CPCP will bring about $8.7 billion FDI during its construction stage and approximately $1 billion FDI every year in its operational stage. The Sri Lankan government must maximize benefits for locals. Also, returns on 70% of FDI proceeds are estimated to be realized from the sale or leasing of property which may not generate much employment. Similarly, investments in the form of debt will further add to Sri Lanka’s already acute debt burden.

            CPCP will also impact Sri Lanka’s Balance of Payments (BoP). CPCP will have a negative impact on BoP during the construction stage due to imports of construction materials and loan repayments. This loss is expected to be offset in the operational stage through tourism, logistics, IT and financial services, etc. and generate $6 billion of positive BoP. Lastly, this project will also cause a rise in Sri Lanka’s GDP and government revenue. However, this may not materialize fully considering huge tax concessions and other benefits offered for CPCP.

Environmental concerns

            CPCP was blamed for a flawed Environment Impact Assessment (EIA) since its inception. This project would lead to several environmental issues like water and soil pollution, waste dumping, destruction of marine biodiversity, etc. This would also impact the fishing industry near Colombo, a principal income source for many locals. Supplementary EIA was also conducted in 2015 which estimated $10 million as an environmental cost of this project . However, the recurring environmental cost of this project is not considered in EIA which can be a huge factor while assessing the success of CPCP.

Sovereignty issues

            Chinese companies are currently working on more than 50 infrastructure projects in Sri Lanka worth $11 billion. This is despite the fact that Chinese financial institutions charge heavy interest rates compared to the Western ones. Laxity in regulatory compliances imposed by Chinese institutions in contrast to other organizations might be one reason for their popularity. Similarly, China’s political support to Sri Lanka during allegations of human rights violations and corruption has also made China an attractive lender. China’s readiness for debt-equity swap such as in the case of Hambantota port puts China ahead of other global institutions.             However, such lenient lending brings other disadvantages with it. The CPCP Concessionary agreement between CHEC and Sri Lankan government has promised 108 hectares of marketable land to China out of which 20 hectares will be given on free lease for indefinite period and 88 hectares will be given on lease for 99 years with a hold period of 35 years, effectively making it 134 years. This is similar to what Britain did with Hong Kong which China had opposed earlier. Also, Sri Lanka’s recent decision to temporarily default on its external debt may provide another opportunity for China to gain more stakes in CPCP. As the entire funding for this project is borne by a Chinese company, it will get priority in monetizing their projects over the Sri Lankan government. CPCP master plan has allocated the highest proportion of land to residential space which will be affordable mainly to high-net worth Sri Lankans and foreigners. This might deprive Sri Lankans from occupying these spaces and ultimately turn it into a foreign settlement. Moreover, if instability continues in Sri Lanka for long, there is a fear that this project might end up becoming a ‘ghost city’ due to lack of further investments.


            CPCP has a great potential to transform Sri Lanka’s economy in the next few years. However, Sri Lanka has to reassess the cost at which this development has been taking place. Environmental issues have become more serious globally and hence, must not be neglected. On the other hand, Sri Lanka cannot afford to allow any foreign country to increase its foothold through such investments. Although there have been some false narratives regarding Chinese presence in Sri Lanka like the fake passport case, concerns behind such narratives cannot be dismissed. Considering Sri Lanka’s strategic position in the Indian Ocean, China may resort to military use of this space in future which may affect India’s position in this region.

            Hence, Sri Lanka must be careful about the long-term impact of such Chinese investments and restrict them turning into strategic gains for China. Sri Lanka’s recent efforts to seek help from IMF is a welcome step in that direction. With regards to CPCP, Sri Lanka has the advantage of a long gestation period during which it can make adequate arrangements to ensure that this project becomes a commercial success without affecting its own interests as well as its economy optimally benefits out of it.  

The Blog was written under the guidance and supervision of Santosh Pai, Honorary Fellow, ICS. The views expressed here are those of the author(s), and not necessarily of the mentor or the Institute of Chinese Studies.

Book Review: KAI-FU LEE, AI Superpowers: China, Silicon Valley, And the New World Order (New York: ‎Houghton Mifflin Harcourt, 2018), pp. 272, e-book, ISBN 978-132-8546-39-5

Arushi Singh, Research Intern, ICS

From his perch at Zhongguancun, Beijing’s Silicon Valley, Kai-Fu Lee, the author of AI Superpowers: China, Silicon Valley, and the New World Order, delves into various nuances to explore the development of artificial intelligence (AI) prowess of Google’s AlphaGo that also showcases the versatility of the intuitive pattern recognition technology which smoothly segues into the incoming AI wave. The Chinese government is not far behind in taking the helm of all AI affairs. It has launched various ambitious programs also on “clear benchmarks for progress” for AI development. This response, in part, has been triggered by the swift acceleration of real-world AI applications in areas such as speech recognition, vaccine development, and applied natural language processing, which has rendered the book’s subject matter immensely consequential.

Lee’s wealth of information originates from his research conducted under the guidance of AI maverick Raj Reddy, to whom he has dedicated this book. In the 1980s, Lee programmed the first AI gaming software to defeat a member of a world championship team (Othello, a simplified version of Go) and Sphinx, the very first speaker-independent program. He illustrates how modern advanced AI systems are powered by deep learning that has “turbocharged the cognitive capabilities of machines”. The author further elucidates that AI winters commenced due to a lack of data that inadvertently resulted in reduced funding. However, technological advancements have solved the problem of paucity of data to a large extent.

AI Evolution at a Glance

The author delves deeper into the evolution of two AI approaches, i.e., the “rule-based” approach that focused on the encoding of logical steps and the “neural networks” approach that emphasised the construction of “layers of artificial neurons that can receive and transmit information in a structure akin” to humans’ neural networks. Lee also aims to dispel rumours regarding the prodigious development of AI in the recent decades; instead, the author highlights the innovative application of decades worth of research that focuses on the buttressing of learning and transfer learning that comprises and have been instrumental in constructing the current misguided AI perceptions.

Invoking Robert Mercer’s phrase that “there’s no data like more data”, the book emphasises the treatment of data that fuels AI. Mercer has formerly worked as an IBM language recognition specialist and later, the Co-CEO of Renaissance Technologies, a quantitative hedge fund firm. Notably, this emphasis on data in the book was exemplified by the author focusing on data’s role in pattern recognition and outcome optimisation through “narrow AI” powered by data.

The book has eight succinct chapters, organised into distinct themes that are the culmination of Lee leveraging his extensive AI background to secure the opportunity to establish Sinovation Ventures and invest in multiple companies in China. The first part is on the evolution of AI development in China. The second is the differences in AI development approaches in the US and China, from a private market and governmental perspective. The third section assesses the gradual development progression of AI or “AI waves”. The last portion of the book contends with integrating AI and humans to empower humanity. Lee shows prescience regarding AI development in China. For instance, Baidu has been making great strides in its AI ventures since the book was published, such as its LinearFold AI algorithm, Apollo Go Robotaxi service, ERNIE-GEN, Paddle Quantum, and Quantum Leaf.

AI Development Practices in US and China

The author’s personal experience shed light on the cultural affinities, the socio-economic atmosphere, academic norms, and government regulations propelling Chinese AI development, particularly in his aptly named “Copycats in the Coliseum” chapter. He differentiates between the American and Chinese practices that mean a world of difference in incubating future “AI giant”. These additional and ingeniously developments showcase the remarkable commitment and advancements in AI research that are ready to stand shoulder to shoulder with US AI research efforts.

Lee attempts to dispel the myth that China is still stuck in its “pixel-for-pixel” copying phrase and states that “pure copycats never made for great companies”. As stated by Lee, the reality is more complex, and Chinese companies have begun to move beyond mere copying. They have had to innovate in a highly competitive environment at a face pace, led by “gladiator entrepreneurs” who are intricately involved in innovation and reiteration.

Furthermore, one of the most important discussions is the technological culture difference between China and the US. Silicon Valley, to Lee being “downright sluggish” compared to its Chinese counterpart. Paradoxically, to stay in the AI race, constant innovation to achieve every product iteration necessitates a culture of continuous copying in China. Additionally, Lee also points out the strategies employed by giants in gaining their market share and how these strategies could outperform companies in the AI race. However, many such strategies and tactics are anathemas, especially in the US.

Overall, the book provides a comprehensive understanding and helpful overview of the existing realities of China’s AI research. The author has attempted to prescribe ways to deploy AI more effectively in the future deftly. The book’s last section gives the reader the factual assessment of the “AI race” brewing between the US and China. The book was woven together by anecdotes from Lee’s time as a venture capitalist and by his invaluable experiences as part of various companies such as Apple, Microsoft, Google and Silicon Graphics International during the course of his career. Therefore, Lee has been able to render a more vivid picture of the AI landscape in China and the US.

This book attempts to provide a balanced evaluation of the incremental gains made by companies in AI both in China and in the US, along with the global repercussions of their consequent “game-changing AI products”. Moreover, all the chapters display a firm grip over identifying the key drivers of AI development and investment. However, there is a greater focus on the personal trials and tribulations of the author that drives the focus away from the larger analytical framework focused on the topics of AI. While informative, the book’s limitation surfaces in its absence of inclusion of an in-depth analysis of the US government’s AI policy implementations. Likewise, the author does not care to discuss some of the significant AI hubs of China in provincial cities such as Chongqing, Chengdu, and Guiyang, some of the regional towns.

Nevertheless, the work is highly pertinent, and such niche themes have seldom been explored realistically. He suggests that AI-powered technologies could harness universal basic incomes by incentivizing “socially beneficially activities”. The book’s strength lies in its unique exploration of China’s “data-scape” in granular detail. It lays the foundations for further scholarship on the topic, which are pivotal as humanity is marching towards what Lee describes as “the quantification of the human thinking process, the explication of human behavior”, a subject that becomes more relevant by each passing day.