SRI LANKAN-CHINESE TRADE TILTS HEAVILY TOWARD CHINA

C O N F I D E N T I A L SECTION 01 OF 02 COLOMBO 000933

SIPDIS

DEPARTMENT FOR SCA/INSB

E.O. 12958: DECL: 10/02/2019
TAGS: CE CH ECON ETRD PGOV EINV
SUBJECT: SRI LANKAN-CHINESE TRADE TILTS HEAVILY TOWARD CHINA

REF: COLOMBO 745

Classified By: AMBASSADOR PATRICIA BUTENIS. REASONS 1.4 (B, D)

(C) SUMMARY: Although Sri Lankan President Rajapaksa
trumpets the importance of Sri Lanka,s friendship with
China, the relationship is verylopsided in terms of trade.
For example, in 2008 Chinese exports to Sri Lanka constituted
96% of total bilateral trade. In terms of investment, Hong
Kong has become a key source of foreign direct investment to
Sri Lanka, while China proper focuses on direct government
aid. In contrast, Sri Lanka investment in China consists of
a few tea shops. Though at times the Government of Sri Lanka
(GSL) asserts it does not need the U.S. and the West since it
can turn to new friends such as China, there is no indication
that China can replace Western export markets. In terms of
investment and trade importance, Sri Lanka,s new friends
cannot compete with her old ones in the United States and EU.
End Summary.

SRI LANKAN-CHINESE TRADE TILTS HEAVILY TOWARD CHINA


2. (SBU) China remains one of Sri Lanka's fastest growing
trading partners. Trade between the two countries almost
doubled from 2005 to 2008, rising from US $660 million to US
$1.138 billion. While Sri Lankan exports increased from US
$29.4 million in 2005 to US $46.8 million in 2008, imports
from China have grown even more. In 2008, Sri Lanka imported
US 1.091 billion from China resulting in a net trade deficit
of US 1.044 billion. China is one of Sri Lanka's largest
sources of imports, second only to India, which totaled more
than US 3.4 billion in 2008. Sri Lanka's primary exports to
China include raw commodities, apparel items, and tea. Sri
Lanka primarily imports various types of machinery and
equipment, raw materials, and chemicals from China. Sri
Lankan imports from China accounted for a significant portion
of total Sri Lankan imports while Sri Lankan exports to China
comprised a very small portion of total exports in 2008.

CHINESE INVESTMENT IN SRI LANKA


3. (SBU) While Hong Kong has become a significant source of
Foreign Direct Investment (FDI) for Sri Lanka, the lion,s
share of support from China comes primarily in the form of
direct aid. Overall, China and Hong Kong invested US $102.5
million in Sri Lanka in 2008, although Hong Kong contributed
US $86 million of that total. In 2008, China and Hong Kong
combined to form Sri Lanka's fourth largest source of FDI
behind Malaysia, India, and The Netherlands, respectively.
As of September 2009, 16 mainland Chinese businesses have
invested in garment, leather, telecommunications, and
electronics facilities in Sri Lanka. Chinese entrepreneurs
have also been provided with an exclusive Economic Processing
Zone (EPZ) in Mirigama. If the Mirigama EPZ proves
successful, additional EPZ's may be established in Godagama,
Matara, and in the Eastern Province. As an incentive to
invest in Sri Lanka, Chinese business persons who invest a
minimum of US $25 million are eligible for a Sri Lankan
passport as a "second home."

SRI LANKAN INVESTMENT IN CHINA


4. (SBU) In contrast, Sri Lankan FDI in China and Hong Kong
is a pittance. The Government of Sri Lanka (GSL) recently
established a consulate in Shanghai, China and is planning to
open another in Chengdu in October 2009. The consulate in
Shanghai facilitated the signing of a "Three Sister Cities"
agreement between Sri Lanka and eastern China in an effort to
increase trade, investment, tourism, economic and
infrastructure development, and establish greater market
access. Additionally, Sri Lankan tea manufacturer/retailer
Heladiv opened three exclusive tea boutiques in Fujian
province and Beijing in August 2009. Heladiv plans to open
20 tea boutiques by the end of 2009 and a total of more than
100 tea boutiques in China and Hong Kong by 2011.

FUTURE PROSPECTS FOR CHINESE INVESTMENT


5. (SBU) The Sri Lankan Embassy in Beijing, in close
coordination with the Sri Lankan Board of Investment (BOI),
held two seminars for Chinese entrepreneurs in March 2009.

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The events attracted more than 90 mainland Chinese
businessmen from sectors that included infrastructure, real
estate, agriculture, paper manufacturing, steel, and
telecommunications. Two Chinese car manufacturers are
currently negotiating with the Sri Lankan BOI to build
manufacturing/assembly plants in Sri Lanka. Vehicles would
be assembled for export to Latin American and African
countries. Sri Lanka's Micro-Car Company and China's DMC Car
Company have begun negotiations to launch a joint project.
In the Gulf of Mannar, the China National Petroleum
Corporation has begun oil exploration after recently
receiving an exploration block from the GSL. In July 2009,
the Chinese Development Bank (CDB) and the Central Bank of
Sri Lanka (CBSL) signed an investment facilitation agreement
which facilitates CDB US dollar deposits with the CBSL. The
two banks also plan to establish closer ties over the long
term.


6. (C) Comment: At times, the Government of Sri Lanka
strikes a defiant nationalist tone, claiming that it does not
need the U.S. and the West since it can turn to new friends
such as China. The trade figures do not bear this out, as
investment and trade is a one way street, and the West
remains an irreplaceable export market. Sri Lanka exports
37% of its goods to the EU, followed by the U.S. with a 23%
share. Meanwhile, the U.S. runs an enormous trade deficit
with Sri Lanka. In 2008 Sri Lanka exported $1.96 billion of
goods to the U.S., and only received $283 million in American
imports. Although China may well offer an excellent long
term market, in terms of trade opportunities Sri Lanka,s new
friends cannot compete with her old ones in the United States
and EU. End Comment.
BUTENIS