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. COLOMBO 00000933 002 OF 002 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