Alerts. Real-time analysis of events occurring at the intersection of economics, finance and global security concerns.

China Harbour Engineering and China Merchant Holdings secured a $1.1 billion agreement on July 29 for the supply, operation, and transfer of Hambantota Port in Sri Lanka.  The agreement had been delayed by several months owing to concerns the PLA Navy would use the port for military operations.  According to reports, the Chinese government acquiesced to Sri Lankan demands in the final contract negotiations that the facility only be used for commercial operations.  The interpretation of this clause in practice, however, will remain to be seen, including distinctions made regarding port visits, securing the necessary approvals, etc.

Concerns regarding China’s presence and level of control were addressed by reducing its stake in the port to 70%.  After 10 years, Sri Lanka will gradually acquire an additional 20% stake, eventually leading to equal ownership of the port.  Again, the specific provisions of the contract with regard to management and control (as well as other intangibles in the bilateral relationship) will play a role in the long-term nature of this facility in the hands of large Chinese state-owned enterprises.

Sri Lankan authorities also say the deal will increase the country’s ability to repay loans agreed with China under previous Prime Ministers Ratnasiri Wickremanayake and D.M. Jayaratne, although the indebtedness of the nation to Chinese banks is likely to be a significant issue and potential point of leverage over the long-term.