Let’s get down to brass tacks. Sri Lanka did not go down because it was collapsing under the weight of Chinese debt.
Beijing and Tokyo each account for 10% of that country's total debt. The Japanese dominated Asian Development Bank is owed 13%. Almost half of the entire debt is held by mainly Western private sector banks and funds, whose demand for a $1.5 billion payment recently was the straw that broke the camel's back.
Instead, Sinophobia has been evident in many media circles, particularly virulent in Indian corporate media. They have an axe to grind, a geo-political one.
This is more than a case of the Rajapaksa brothers being too keen on Chinese investment. The hidden issue lies in the bloody events over a decade ago. The Buddhist Sinhalese wanted an end to the war, by whatever means necessary, but the West preferred a permanent low burn fuse to glow.
Colombo then turned to Asian powers, including China. Loaded up on new armaments, General Sarath Fonseca launched a brief and brutal campaign, wiping out the Tamil guerilla forces in Jaffna. Delhi, as the regional hegemon, felt embarrassed, more so as China and Russia provided diplomatic support to Sri Lanka in the UN.
China then and now
Chinese soldiers did once roam that island, as they did in Bengal too (not that many today are aware). The great Muslim admiral from Yunnan, Zheng He, on his third voyage, engaged in one of his rare conflicts.
Two thousand Chinese soldiers went up against a 50,000 strong Sinhalese army, captured the king, and took him off to Beijing. Nevertheless, the royal family was subsequently returned to the island, the Ming dynasty had never wanted to occupy the island, like another island from the North Sea would do later.
Modern Sinhalese know all of this, and the specific background to it. They also understand that modern China is broadening relationships via trade (which was essentially the core of the Zheng He missions in the Indian Ocean).
What Colombo means to Washington today is instead best understood through the Global NATO frame. The tools are SOFA (military cooperation agreements) and the Millenium Challenge Corporation (MCC) grants allegedly affecting control of up to 3 million acres of Sri Lanka 's land (four-fifths under public sector ownership). By comparison, China was given 15,000 acres around the Hambantota harbour.
A friendly new regime could secure the western edge of the Bay of Bengal and, potentially, put pressure on East Asian (Chinese) commerce and oil-laden ships sailing past the island.
Geographically and militarily Sri Lanka is a potential Malacca Straits of South Asia. Meanwhile, economically, its domestic elites dreamed of becoming the next Singapore.
Is foreign debt a bad thing?
It depends. By definition it has to be repaid in foreign exchange, usually dollars.
If your government contracts this debt then it must have a plan to service the interest and principal.
If the loans are, directly or indirectly, for export industries, which then earns dollars abroad, then there should be no problem. That's what South Korea successively did in the 1970s and early 1980s to finance its massive heavy and chemical industries.
Around the same time, Latin America borrowed from US banks but wasted it on consumption or non-dollar generating projects. That led to Wall Street carving up the continent with the onset of the infamous debt crisis in 1982.
Debt crises have stemmed from Western banks for countless decades, nay, centuries.
Look West, not East for the source. By the way, this year is the 25th anniversary of the Asian Crisis.
Taking a wrong turn
For Sri Lanka, it could have been so different.
The garments industry in Bangladesh is a direct result of South Koreans relocating factories for quotas but mainly to escape the Sinhalese-Tamil Civil war engulfing the island.
The essential structural problem stems from sticking to the neo-liberal economic model.
Why did Sri Lanka, blessed with a highly educated population and splendid location, not push full speed ahead for a new phase of state-led export industrialization, learning from East Asia?
Instead of stadiums and property speculation, why not an eco-system of industrial clusters? Why did they enact deep tax cuts from the neo-liberal playbook?
Why did they go to the risky bond markets? These are to sovereign countries what loan sharks are to neighbourhood mom and pop shops.
Do finance ministers and central bankers think they can handle absolute behemoths like Black Rock? Seriously? Even Goldman Sachs, that so-called vampire squid, pales in comparison.
Black Rock is the new financial East India Company. It manages or holds financial assets worth nearly ten trillion dollars.
Among these, it owns 5% of Apple and 6% of Google, for example. Its tentacles are found in almost every major multi-national.
It even managed the recent elephant size Covid stimulus in the US, and charged the Federal Reserve for the pleasure.
The view from China
Chinese media has been all over this news about Sri Lanka.
Xu Luping, from the Chinese Academy of Social Science in Beijing, noted that this is a foreign exchange crisis after the tourism, textile, and tea sectors dived.
Worryingly, he warned that Nepal and the Maldives are on the edge, while Africa and Latin America (Argentina and Brazil) are flashing red alerts too.
Long Xingchun of the Chengdu Institute of World Affairs says radical reforms based on national conditions are necessary in Sri Lanka, and this means not copying Western models.
Wait till Africa gets going. When it all goes up in flames, first do try and check a Reuters news item about a study by Debt Justice.
This group looked at World Bank data and found that China accounted for merely 12% of that continent's $700 billion foreign debt.
More than a third (35%) was owed to Western and Japanese private credit (held by bond holders and oil traders).
And guess what? Tim Jones, head of policy at the British based Debt Justice charity, observed that: “[While] China took part in the G20's debt suspension scheme during the pandemic, private lenders did not.”
Looking ahead and the emerging new configuration in Eurasia, this is an opportunity for the New Development Bank, Asian Infrastructure and Investment Bank to boost its lending massively in a BRICS plus / RCEP universe of industrialization.
However, many of the sub-continental elites don't want to be the next East Asia. Their choices indicate they (perhaps unconsciously) want to be the next Latin America. That's what happens when you tie the wrong geo-politics to the wrong economic model.
Farid Erkizia Bakht is a political analyst.