Abstract

People have flocked to the streets in Sri Lanka to protest about growing prices and supply shortages as well as denounce the government's poor economic management. The country is currently going through its worst economic crisis since gaining independence from Britain in 1948. In July, the Sri Lankan President fled to Singapore and the Prime Minister has since been named acting President. The Sri Lankan government has amassed $51 billion in foreign debt, $6.5 billion of which is owed to China. The two nations are currently negotiating how to restructure the debt.

Sri Lanka is an important node along China's Maritime Silk Road, and its sovereign debt default and bankruptcy will undoubtedly have an impact on China's Belt and Road Initiative, but this impact should not be exaggerated. Colombo Container Terminal and Hambantota Port are examples of China's current investments in Sri Lanka's strategic infrastructure. The bankruptcy of Sri Lanka has caused systemic damage to the Chinese-invested terminals and ports, but the joint venture strategy has mitigated political risks to a moderate degree. About 10% of Sri Lanka's total foreign debt is comprised of Chinese loans, making China the largest creditor in Sri Lanka's restructured debt. China is now the largest stakeholder in Sri Lanka's debt restructuring, as the repayment of international sovereign bonds and multilateral bank debts have become Sri Lanka's top priority.

China's response is threefold: first, actively carry out international public opinion guidance and maintain China's international reputation; second, pay more attention to economic rationality and risk control of foreign investment; and third, promote the long-term development of the Belt and Road Initiative in a consistent manner.