Historical Background

Pakistan established diplomatic relations with the People’s Republic of China (PRC) in 1951, the first Islamic country to do so. The earliest decade of the bilateral relationship was lukewarm, as in 1954 Pakistan became a treaty ally with the United States and joined the Southeast Asia Treaty Organisation (SEATO), making it a member of the anti-communist camp. China responded to Pakistan’s move with pragmatism, seeing that Pakistan’s positioning was more about building up its own military capacity vis-à-vis India than ideological hostility to communism. Later, because of this unique position of having close contacts with both China and the United States, Pakistan was able to facilitate the secret visit of then US Secretary of State Henry Kissinger to Beijing in 1971, which paved the way for the momentous US–China rapprochement of 1972.

India was the primary reason why Pakistan started to move closer to China in the 1960s. Seeing that both the United States and the Soviet Union were leaning toward India, Pakistan looked upon China as a counterweight. Starting from 1961, the Pakistani authorities voted at the United Nations to support the PRC’s bid for admission. In 1962, they concluded the boundary negotiations with China, and the following year they signed the final agreement. Ignoring US pressure, in 1964 Pakistan started a commercial flight between Karachi and Shanghai via Canton (Guangzhou), the first air link connecting China to a non-socialist country.

China, on the other hand, was splitting from the Soviet Union, and its relationship with India deteriorated to the point that a brief war broke out on the Himalayan border in 1962. In this context, having closer relations with Pakistan also worked in China’s interest. When Pakistan and India went to war for a second time in 1965, the PRC provided weapons to the former and helped apply international pressure on India. Since then, China has become Pakistan’s primary source of military assistance, and the two countries have also provided mutual assistance for each other’s nuclear programmes. While China does not have a formal security alliance with Pakistan, their military cooperation comes close to that.

In 1971, as Pakistan experienced the most serious political crisis in its history—a civil war that led to its dismemberment—China again offered political support. While expressing disappointment for the violent crackdown that the Pakistani authorities initiated in the seceding eastern region of the country, Beijing vetoed Bangladesh’s admission to the United Nations. The relations between Pakistan and the PRC continued to grow in the 1970s, with some of the highest-profile project assistance being provided in this decade, including the Karakoram Highway and the Heavy Mechanical Complex (HMC) and Heavy Forge and Foundry (HFF) in Taxila.

The bilateral relationship developed steadily, if more quietly, in the 1980s and 1990s. Since the 1980s, mutual visits by national leaders have taken place at least once a year. Since the late 1990s, the Chinese Communist Party has also maintained a programme of party-level contacts with various political parties in Pakistan, including the religious ones. As China’s relations with India gradually thawed, the Chinese authorities sought to maintain a balance between the two archrivals. By the 1990s, China’s position on Kashmir shifted from backing Pakistan to a more neutral support for bilateral efforts of Pakistan and India for a peaceful settlement. When India and Pakistan tested their nuclear weapons in 1998, triggering a series of crises in South Asia, China tried to exert a moderating influence on Islamabad’s position on the diplomatic front while strengthening its military cooperation with Pakistan.

After the 9/11 attacks in 2001, Pakistan became embroiled in the US Global War on Terror. China showed support for the enhanced military cooperation between Pakistan and the United States, a move that was partly motivated by Beijing’s own goal to tackle alleged terrorist elements in its Xinjiang Uyghur Autonomous Region, which borders Pakistan. While the China–Pakistan relations are largely smooth, one exception has been China’s belief that some Uyghur militants received training in al-Qaeda camps in Pakistan. To allay these concerns, the Pakistani authorities actively cooperated with China in the crackdown of the so-called ‘three forces’ of terrorism, separatism, and religious extremism in Xinjiang. Similarly, when China’s policies toward the Uyghurs and other Muslim minorities in Xinjiang began to receive international condemnation in the late 2010s, Pakistan took China’s side.

In the new millennium, Pakistan and China stepped up their economic cooperation. A landmark project was the Gwadar port, which China helped build in 2002–5 and which later became a centrepiece of the China–Pakistan Economic Corridor (CPEC). In 2005, the two countries signed the ‘Treaty of Friendship, Cooperation, and Good Neighbourly Relations’, which provided the legal basis for the bilateral relationship. While Chinese and Pakistani leaders have described their relationship as ‘all-weather’ at least since 2006, this epithet was formalised in 2015 with the announcement of an ‘All-weather Strategic Cooperative Partnership’, a unique designation among all of China’s bilateral relationships. In official statements, China repeatedly proclaims that its relationship with Pakistan ‘is always a matter of highest priority’, while Pakistan reiterates that this relationship is the ‘cornerstone’ of its foreign policy. Both countries have also sought to deepen their ties through cultural diplomacy and people-to-people exchanges, which were traditionally weak. Five Confucius Institutes and two Confucius Classrooms have been set up in Pakistan between 2005 and 2019 to promote the study of the Chinese language and culture. The Chinese government also provides scholarships for Pakistani students to study in Chinese universities. By 2019, over 7,000 Pakistani students had been funded under such programmes.

BRI Status

The China–Pakistan Economic Corridor (CPEC) is considered a flagship and pilot project of the Belt and Road Initiative (BRI). Pakistan and China signed an MoU on CPEC in July 2013, before the unveiling of the BRI. When China’s State Council released the BRI Action Plan in March 2015, CPEC was included as one of the six economic corridors envisioned. Although work had already started following the signature of the MoU in 2013, CPEC was formally launched during Xi Jinping’s state visit to Pakistan in April 2015. On that occasion, a total financial cost of 46 billion USD based on an estimate of projects then under discussion was circulated, which was later raised to 62 billion USD. While media reports continue to cite this figure when referring to CPEC, it is not accurate because projects to be included in CPEC keep changing as well as the costs of individual projects. Pakistan and China signed a further MoU on BRI cooperation during the first Belt and Road Forum for International Cooperation in 2017.

A Joint Cooperation Committee (JCC) was set up in 2013 to steer the development of CPEC, with multiple Joint Working Groups (JWGs) established under it to coordinate bilateral cooperation in specific areas. Over time, a total of 13 JWGs were created, including planning, energy, transport infrastructure, Gwadar, industrial cooperation, security, international cooperation and coordination, social and economic development, agriculture, science and technology, information technology industry, water resources, and climate change. By 2024, the JCC had convened 13 meetings.

As of September 2024, official CPEC website reports completion of 14 power sector projects, six transport infrastructure projects, six projects in Gwadar, and several other socio-economic development projects. According to China’s official news agency, by the end of 2022, CPEC had brought 25.4 billion USD in foreign direct investment to Pakistan and created 236,000 jobs. The infrastructure development under CPEC resulted in 510 kilometres of newly built highway, over 8,000 megawatt of installed capacity, and 88.6 kilometres of transmission lines.

CPEC enjoyed rapid progress during the Pakistan Muslim League (Nawaz) (PML-N) government (in office from 2013 to 2018). Most of the projects that have been brought to completion so far were initiated or even completed during this period, due to the active push from both the Chinese and the Pakistani sides. The power sector was the primary focus, which was driven importantly by the PML-N government’s campaign promise to end Pakistan’s severe power shortage.

The momentum for infrastructure projects slowed down after the PML-N government was replaced by the Pakistan Movement for Justice (Pakistan Tehreek-e-Insaf, PTI) government, which was brought to national power for the first time in the historic 2018 election. Led by a more populist leader, Imran Khan, the PTI government, which would remain in office until 2022, placed much less emphasis on pursuing large-scale infrastructure projects, but instead called for more resources for community-level social welfare projects. This shift in Pakistan coincided with a general slowdown in China’s overseas financing for large-scale infrastructure projects and an increased role for China’s newly established foreign aid agency in supporting socio-economic development.

However, there was a widespread perception among Pakistani observers that the PTI government was turning away from CPEC. Such a perception was partially caused by a highly controversial interview given by a senior minister of the PTI government to the Financial Times only a few weeks after the government came into power. Abdul Razak Dawood, a prominent Pakistani industrialist and minister for commerce, textiles, industry and investment, accused the PML-N government of mishandling the CPEC negotiations and ‘[giving] away a lot’ to the Chinese. Although the PTI government was quick to refute the interview, the perception persisted.

Overall, although a much smaller number of new projects were initiated during the PTI government, existing projects were carried forward, and there was no evidence of the PTI government intentionally blocking any initiative. Imran Khan, the Prime Minister, visited China four times during his tenure, never failing to reaffirm the importance of CPEC for his country. However, the CPEC’s progress was greatly affected by the Covid-19 pandemic and Pakistan’s deteriorating macroeconomic conditions, including surging inflation and worsening balance of payments. Pakistan had to go to the International Monetary Fund for bailout for the 22^nd time in its history. These challenges further reinforced the perception that the CPEC had stalled during the PTI government.  

In April 2022, the PTI government collapsed after the Prime Minister Imran Khan was ousted in a no confidence vote, an outcome widely believed to be the result of the Pakistani military’s maneuvering. Pakistan fell into a period of political turmoil. Shehbaz Sharif, a leader of the PML-N party and brother of the Prime Minister in the previous PML-N government Nawaz Sharif, replaced Khan. This coalition government remained in power until August 2023, before a caretaker government took over. During this time, Imran Khan was arrested, convicted for corruption, and barred from politics for five years. The February 2024 election was marked by great controversies. While PTI-backed candidates won the largest number of competitive seats, PML-N eventually claimed the most seats in the National Assembly after being awarded the reserved seats for women and minorities. The implication for CPEC is that after Imran Khan’s fall in 2022, with the PML-N party effectively in control of the government, a narrative blaming the PTI for sabotaging CPEC was promoted as part of the political struggle to discredit it.

However, this narrative overlooked more significant reasons for CPEC’s loss of momentum, which cannot be entirely attributed to the PTI government. One of the most consequential factors was that the power projects built in the first phase of CPEC, despite significantly increasing Pakistan’s generation capacity, began to encounter financial difficulties. Over the years, the Pakistani government has struggled to collect sufficient payments from electricity users to cover the full costs of electricity generated by these new power plants, leading to a situation known as ‘circular debt’. A series of perennial problems in Pakistan’s power sector are responsible for the circular debt, including inefficient transmission lines, electricity theft, unreasonable subsidies, and corruption. These challenges were further exacerbated by reduced demand for electricity during the Covid-induced economic slowdown and the surge in prices of imported fuel for the power generation triggered by the Russian war on Ukraine. These financial troubles have become a central issue for CPEC, as Chinese companies are discouraged from further investments in Pakistan, given the loss in their existing investments, and Chinese banks holding back on financing. These underlying issues, more than the PTI government’s stance, are the primary reasons for the lack of new investments in CPEC. Security concerns were another key factor behind the depressed economic activities.  Despite Pakistan providing high-level security for CPEC projects, including the deployment of a special security division  since 2017, terrorist attacks targeting Chinese nationals have continued over the years (see below). On the one hand, the perception of insecurity deters potential Chinese investors from visiting Pakistan; on the other hand, companies already operating in Pakistan are constrained by stringent security measures, making it extremely challenging for them to travel within the country or conduct business normally.

Current Economic Relations

Trade: Pakistan and China signed their first trade agreement in January 1963. Border trade started in 1967. To promote economic exchanges, both countries formed Joint Committees on economic, trade, science and technology cooperation in October 1982. The first bilateral Free Trade Agreement (FTA) on goods was signed in 2006, with an additional agreement on services trade signed in 2009. The FTA was upgraded in 2019, with provisions that would gradually increase the proportion of tariff-free products between China and Pakistan from 35 per cent to 75 per cent. World Bank’s data shows that, as of 2021, China was Pakistan’s second largest export market, a distant second after the United States, but its top source of import. The bilateral trade was highly imbalanced, with China’s export to Pakistan close to seven times as much as what Pakistan exported to China. Chinese export to Pakistan grew 21-fold between 2003 and 2021, mostly driven by the export of capital goods and machinery and electronic projects, reflecting the fact that Pakistan is one of China’s largest overseas construction and engineering contracting markets. In comparison, Pakistani exports to China grew eleven-fold during the same period, with top export categories being intermediate goods and textile and clothing.

Investment: According to the Pakistani Board of Investment, China has been Pakistan’s largest source of foreign direct investment (FDI) since the 2013–14 fiscal year. Between 2013 and 2023, China on average accounted for 33.8 per cent of Pakistan’s annual incoming FDI, while FDI from other major sources such as the United Kingdom and the United States fluctuated. The surge in FDI from China seems to be driven by CPEC, as China was not among Pakistan’s leading sources of FDI before 2013.

Aid: China started to provide economic assistance to Pakistan in 1956. Some of the economic assistance projects, such as the Heavy Mechanical Complex (HMC) and Heavy Forge and Foundry (HFF) in Taxila that China helped build in the 1970s, are considered to have significantly contributed to Pakistan’s industrial take-off. According to the Pakistani Ministry of Economic Affairs, China currently is Pakistan’s largest source of bilateral economic assistance (Pakistan counts grants and various types of loans to the government as such). Between 2013 and 2019, the period since CPEC was proposed, China disbursed 62.45 million USD of grants and 8.33 billion USD of loans to Pakistan, representing respectively a 24 per cent and 174 per cent increase from the previous six-year period. Except for a small amount of humanitarian aid, almost all Chinese economic assistance is ‘project aid’, i.e. in the form of specific infrastructure or industrial projects typically contracted to Chinese companies. In addition to the physical projects, China also provides training for Pakistani government officials and scholarships for Pakistani students. The New Gwadar International Airport, funded with Chinese foreign aid grant of 230 million USD, is one of the largest grant aid projects China provides to any country.

Key Controversies

Macroeconomic impacts: CPEC has been hailed as a ‘game changer’ for Pakistan, especially by the PML-N government who wished to take credit for reviving the Pakistani economy. The hype may have been counterproductive, as it led to the anticipation that Pakistan will become overly dependent on China financially, and that Chinese investment will jeopardise the country’s indigenous industries. Partly due to CPEC projects which had to import large amounts of materials and equipment from abroad (in particular from China), in 2019 Pakistan ran into a balance of payment emergency and had to request a bailout from the International Monetary Fund (IMF) for the 13^th time in 30 years. This raised the question of whether the Pakistani government can properly manage the fiscal impact of the CPEC, especially given its low planning and coordinating capacity.

Transparency: The lack of transparency in the CPEC’s decision-making process has caused concerns. During the project’s initial planning, the PML-N government conveyed inconsistent messages about their agreement with China regarding the route—whether it would go through the poorer western provinces of Khyber Pakhtunkhwa (KP) and Balochistan or mainly stay within the richer eastern provinces of Punjab and Sindh. This uncertainty fed into the long-standing tension between Punjab, the province economically most developed and inhabited by the ethnic majority that traditionally dominates Pakistan’s political scene, and the other provinces. In particular, the PML-N government initially gave ambiguous answers to whether the Orange Line metro project in Lahore, the capital city of Punjab, would be part of CPEC. It led to the suspicion among the other provinces and political parties that PML-N, which also ruled Punjab province (the chief minister of Punjab was a brother of then prime minister Nawaz Sharif), was scooping the CPEC benefits to their own political advantage. While both the PML-N and PTI governments promised to prioritise the development of the western route, the commitment was not matched up by actual investment.

Another controversy caused by the opaque policymaking process relates to the drafting of the CPEC Long Term Plan, which was jointly formulated by the PML-N government and the Chinese government. After the Plan failed to meet its scheduled deadlines to be released, the Dawn newspaper obtained a 231-page draft of the plan and reported about it in June 2017. The government denied the legitimacy of the report, and when it finally published the Long Term Plan in December that year, it appeared to be an abridged version of less than 40 pages. This again led to concerns about the government’s lack of transparency. This perception did not improve much after PTI took power, as the Senate Special Committee on CPEC complained in a 2019 report about the failure of the government to properly communicate progress on this project. Nevertheless, it is worth noting that Pakistan is a rare case among the BRI partner countries in that it has an official website dedicated to CPEC-related information.

Ethnic tensions and security: Gwadar port, the centrepiece of CPEC, is located in the resource-rich yet sparsely populated Balochistan province. With a history of deadly clashes with the federal government, there is general scepticism in the province about the federal government’s policies, as the Baloch people feel that they have been historically exploited for their natural resources while their development needs have been neglected. The routing controversy mentioned above further exacerbates local distrust that the CPEC would bring any direct benefit to the province. Even though Gwardar port is located in Balochistan, it is expected that the maritime economy promised by the port will be largely insulated from the rest of the province. There is also concern that the local population will not have the skill set required for the kind of modern industry that is to be developed in Gwadar, and that the new jobs that will be created will be taken by workers from the other provinces and even from China, reducing the indigenous population to a minority in their own homeland.

Insurgency groups from Balochistan and Khyber Pakhtunkhwa have taken advantage of such sentiment and targeted Chinese personnel. One of the earliest attacks was in 2004, when three Chinese engineers working in the Gwadar port project were killed in a car bombing. Incidents have been recurrent over the years since the launch of CPEC, including attacks on the Chinese consulate in Karachi in November 2018 and on the Confucius Institute on the campus of the University of Karachi in April 2022. The Dasu hydropower dam project in KP province, funded by the World Bank but contracted to the Chinese company Gezhouba for construction, suffered two deadly suicide bombings in July 2021 and March 2024. The first killed 13—including 9 Chinese nationals and 4 Pakistanis—and injured 28, and the second killed five Chinese and one Pakistani. The recurrent attacks have strained the mutual trust between the two countries. China has reportedly proposed deploying its own security contractors to protect Chinese nationals in Pakistan. However, Pakistan declined, viewing the presence of foreign armed personnel as a potential infringement on its sovereignty.

Debts: Similar to China’s experiences in other countries, it has faced accusations of engaging in ‘debt-trap diplomacy’ in Pakistan, particularly from US officials. In November 2019, Alice Wells, the former Assistant Secretary of State for South and Central Asian Affairs of the United States, delivered a speech criticising China for creating a debt burden for Pakistan through its CPEC engagements. She repeated this criticism during her visit to Pakistan in May 2020, calling Chinese loans to Pakistan ‘predatory’. These remarks have reinforced the perception in both Pakistan and China that the United States is hostile to their bilateral cooperation, or even intent on undermining it.

Both Pakistani and Chinese officials have refuted these accusations. A frequently cited fact is that the bulk of financing that China mobilised into Pakistan under CPEC has been in the form of foreign direct investment (FDI) and grant aid, rather than loans. Additionally, the sovereign loans provided by China under CPEC were concessional, with interest rates around 2 per cent. In other words, Chinese financing for Pakistan has been offered on relatively favourable terms.

However, the financial relationship between the two countries has become complicated by the deteriorating performance of the power sector projects under CPEC. While these are technically FDI projects and involve no debt between the Pakistani and Chinese governments, the Pakistani government has accumulated massive arrears, or unpaid bills, to the Chinese investors of these power projects. This issue, known as ‘circular debt’, arises when the Pakistani government fails to collect sufficient electricity bills from users due to electricity theft, transmission loss, and corruption. As a result, the government cannot pay the power generation companies in full. Pakistan’s challenge in paying for the electricity was exacerbated by the design of the contracts, which include a ‘capacity payment’ clause stipulating a fixed payment based on installed capacity, even if that capacity is not fully utilised. By the end of June 2024, Pakistan had an estimated outstanding dues of 401 billion Pakistani rupees (approximately 1.44 billion USD) to Chinese power projects. These lingering financial problems have prevented Chinese financial institutions from financing new projects in Pakistan and have become a central thorny issue in the CPEC.

The Pakistani government has sought to restructure these dues with China, but China has not agreed. Outstanding debts to Chinese investors have also been a point of contention in Pakistan’s negotiations with the IMF, which has insisted that its bailout funds should not be used to repay Chinese investors. Many believe this stance reflects the politicisation of IMF programs influenced by US interests. US government officials have openly expressed concerns about the possibility of IMF funds being used to repay Chinese debts.

Key Sources

English-language Media:

The media scene in Pakistan is quite dynamic. Major English-language newspapers include The Dawn, The Nation, The News International, The Express Tribune, and Business Recorder. All these newspapers offer good coverage of CPEC-related stories. Gwadar Pro is an English-language news website that aggregates stories related to China from major Pakistani newspapers, as well as providing original contents on China–Pakistan relations. It appears to work closely with China’s official news agencies.  Huashang News ( 华商报) is a Chinese-English bilingual news website registered in Pakistan, which provides extensive coverage on Pakistan’s economy, politics, and society, and mainly targets a Chinese audience.

Books, Reports, and Scholarly Articles:

• Abb, Pascal. 2023. ‘All Geopolitics Is Local: The China–Pakistan Economic Corridor amidst Overlapping Centre–Periphery Relations.’ Third World Quarterly 44(1): 76–95.
• Abb, Pascal, Filippo Boni, and Hasan H. Karrar (eds.). 2024. China, Pakistan and the Belt and Road Initiative: The Experience of an Early Adopter State. Oxon and New York, NY: Routledge.
• Ahmed, Zahid Shahab. 2019. ‘Impact of the China–Pakistan Economic Corridor on Nation-building in Pakistan.’ Journal of Contemporary China 28(117): 400–14.
• Ali, Ghulam. 2017. China–Pakistan Relations: A Historical Analysis. Karachi: Oxford University Press.
• Boni, Filippo. 2016. ‘Civil-military Relations in Pakistan: A Case Study of Sino-Pakistani Relations and the Port of Gwadar.’ Commonwealth & Comparative Politics 54(4): 498–517.
• Boni, Filippo, and Katharine Adeney. 2020. ‘The Impact of the China-Pakistan Economic Corridor on Pakistan’s Federal System: The Politics of the CPEC.’ Asian Survey 60, no. 3: 441-465.
• Gao, Bai 高柏 and Zhen Zhihong 甄志红 (eds). 2017. 中巴经济走廊的政治经济学分析 [Political Economic Analysis on the China Pakistan Economic Corridor]. Beijing: Shehui Kexue Chubanshe.
• Garlick, Jeremy. 2018. ‘Deconstructing the China–Pakistan Economic Corridor: Pipe Dreams versus Geopolitical Realities.’ Journal of Contemporary China 27(112): 519–33.
• Haider, Ziad. 2005. ‘Sino-Pakistan Relations and Xinjiang’s Uighurs: Politics, Trade, and Islam along the Karakoram Highway.’ Asian Survey 45(4): 522–45.
• Rafiq, Arif. 2019. ‘The China-Pakistan Economic Corridor: The Lure of Easy Financing and The Perils of Poor Planning.’ Asian Affairs 50(2): 236–48.
• Safdar, Dr Muhammad Tayyab. 2022. ‘Testimony before the U.S.-China Economic and Security Review Commission: China’s Response to U.S. Withdrawal from Afghanistan and China’s Engagement with Pakistan.’ U.S.-China Economic and Security Review Commission website,12 May. Link.
• Safdar, Muhammad Tayyab. 2024. ‘Domestic Actors and the Limits of Chinese Infrastructure Power: Evidence from Pakistan.’ Journal of Contemporary Asia 54(2): 317–41.
• Small, Andrew. 2015. The China-Pakistan Axis: Asia’s New Geopolitics. Oxford: Oxford University Press.
• Small, Andrew. 2020. ‘Returning to the Shadows: China, Pakistan, and the Fate of CPEC.’ The German Marshall Fund of the United States and Center for Asian Law, Georgetown University Law School, no. 16. Link.
• Wolf, Siegfried O. 2020. The China-Pakistan Economic Corridor of the Belt and Road Initiative. Cham: Springer International Publishing.

Updates & Corrections

15 April 2021: An earlier version of the text erroneously stated that in 1964 Pakistan started a commercial flight between Karachi and Beijing, instead of Karachi and Shanghai (via Guangzhou). We also fixed a typo on Khyber Pakhtunkhwa.

19 July 2021: Updated information about the number of CPEC Joint Working Groups, legal status of the CPEC Authority, and the deadly bus blast near the Dasu project in July 2021.

20 September 2024: Updated information about CPEC’s progress under successive Pakistani governments since 2013, and various economic data.

Cover Photo: Pakistan-China border. Credit (CC): @Teseum.

Background

We in Ceylon and the countries of Asia look upon the contribution which the People’s Republic of China is making in shaping the new world as perhaps the greatest contribution any country has made.

—Ceylonese Prime Minister S.W.R.D. Bandaranaike, 1957

The Chinese and the Ceylonese people have more or less the same destiny. —Chinese Premier Zhou Enlai, 1957

In 1957, Sri Lanka (then known as Ceylon) established diplomatic relations with the People’s Republic of China (PRC), becoming one of the first non-communist states to do so. The occasion was marked by a historic visit by Chinese Premier Zhou Enlai, who was bestowed the rare privilege of addressing the Ceylonese Parliament and attending independence celebrations as a foreign guest of honour. Recognising communist China was a bold step for the former British colony, which had just begun to chart a new course after its independence in 1948.

Such goodwill had been forged before formal diplomatic ties were established. Warm relations between Sri Lanka and China date to the Rubber–Rice Pact of 1952, when the two countries signed a mutually beneficial trade agreement to exchange Chinese rice for Ceylonese rubber amid a challenging external environment. During the Korean War (1950–53), China struggled to import rubber due to the US-led economic embargo. At the same time, Ceylon’s major export item, rubber, was suffering from a worldwide slump while global prices for its main import item, rice, had skyrocketed. Unable to make enough foreign exchange to import rice, Ceylon sent a trade mission to Beijing despite American threats to withdraw aid. The resulting Rubber–Rice Pact ensured a steady supply of rice to Ceylon at a time of global scarcity and saved the fledging rubber industry from ruin. As a testament to the pact’s enduring appeal, the trade agreement was renewed every five years until 1982.

But it was the election of left-wing Sinhalese nationalist Solomon West Ridgeway Dias Bandaranaike in 1956 that transformed the bilateral ties from a one-off commercial exchange to a deeper friendship. Founder of the Sri Lanka Freedom Party, Bandaranaike believed in a socialist economic policy and a nonaligned foreign policy and was eager to engage China. Bandaranaike used his maiden speech as Sri Lankan Prime Minister at the United Nations General Assembly in 1956 to call for the inclusion of China on the world stage.

Despite Bandaranaike’s assassination in 1959, Sino-Ceylonese ties continued to deepen after his widow, Sirimavo Bandaranaike, was elected prime minister. During the 1962 Sino-Indian War, she engaged in intense shuttle diplomacy to bring Beijing and Delhi to a peaceful resolution. In 1963, a key bilateral maritime trade agreement was signed—China’s first trade agreement with a non-communist country. During Zhou’s second visit to Sri Lanka in 1964, he pledged to gift Ceylon an international conference centre in memory of Bandaranaike. The Bandaranaike Memorial International Conference Hall in Colombo would become the first of several monumental buildings gifted by China to serve as enduring symbols of friendship.

In 1972, Ceylon adopted a new constitution to become an independent republic under the new name Sri Lanka, cutting the remaining ties with its colonial past and British influence. Soon after, Sirimavo Bandaranaike undertook a state visit to China—her first foreign visit in her new capacity as Prime Minister of Sri Lanka—which paved the way for a gradual increase in Chinese aid to the country.

The 1980s saw the formation of several institutional mechanisms to strengthen people-to-people and commercial ties. In 1981, the Sri Lanka–China Society was formed to strengthen friendship. The Sino-Lanka Joint Trade Committee and the Sino-Lanka Economic and Trade Cooperation Committee were established in 1982 and 1984, respectively. They were then merged in 1991 to form the Sino-Lanka Joint Commission for Economic and Trade Cooperation. In 1994, the Sri Lanka–China Business Cooperation Council was formed, adding to the growing attempts to strengthen the economic relationship between the two nations.

In 1983, as ethnic tensions between the Sinhalese majority and the Tamil minority escalated into civil war, China offered steadfast support to successive Sri Lankan governments against the separatist Tamil Tigers. By the 1990s, China emerged as the largest arms supplier to Sri Lanka. Military ties grew even closer with the election of Mahinda Rajapaksa in 2005, who consequently led government forces to defeat the Tamil Tigers and regain control of the entire country in 2009. The war—one of the longest running in Asia—left about 100,000 people dead and more than 300,000 displaced, according to UN estimates. Meanwhile, at the United Nations, China helped Sri Lanka fend off efforts by some Western countries to accuse the Sri Lankan military of human rights abuses during the war.

The end of the civil war in 2009 ushered in an economic boom. Sri Lanka’s economy grew at an annual average of 6.4% during 2010–15, and nominal gross domestic product (GDP) per capita increased by 40% to 3,891 USD—one of the highest in South Asia. Economic growth was led primarily by construction and other non-tradable sectors, as President Rajapaksa (in office until 2015) embarked on major reconstruction projects across the country to jumpstart economic development. Strong growth cut the country’s poverty rate from 2.4% in 2009 to 0.7% in 2016.

Yet much of the postwar spending spree was fuelled by debt. A small tax base and poor tax administration had long plagued Sri Lanka’s public finances. The country’s tax revenue-to-GDP ratio fell from 24.2% in 1978 to 11.4% in 2015—one of lowest in the world, according to the World Bank. The war effort had further drained government coffers. For decades, Sri Lanka relied on generous foreign aid to supplement the meagre tax revenue. But in 2009, Sri Lanka ‘graduated’ from low-income status and thus was no longer eligible for the cheapest types of foreign aid from multilateral development banks. Roughly at the same time, bilateral aid from Western countries largely stopped because of Sri Lanka’s alleged human rights abuses during the war. To finance its large-scale reconstruction program, the Rajapaksa government increasingly turned to foreign commercial loans that were more expensive and shorter in maturity. While Sri Lanka has remained reliant on foreign financing for about 40% of its public investment, its overall cost of borrowing has gone up significantly. Foreign-financed projects tend to concentrate on public infrastructure in the transportation, water, and power sectors.

Against this backdrop, China’s aid, trade, and investment ties with Sri Lanka flourished. Frequent high-level visits by Chinese and Sri Lankan leaders saw the signing of many economic cooperation agreements. In 2012, China became Sri Lanka’s biggest provider of development aid, surpassing traditional donors such as Japan, the Asian Development Bank, and the World Bank. By 2013, China had become the biggest source of foreign direct investment (FDI), investing in major infrastructure projects such as the Colombo International Container Terminal and Colombo Port City. The two countries started negotiating a free-trade agreement in 2014. In 2016, China became Sri Lanka’s largest trading partner, with bilateral trade amounting to 4.4 billion USD. But the trade relationship has been unbalanced: while China ranks first for Sri Lanka’s import origin, it ranks only tenth in Sri Lanka’s export destinations, with the United States first. In 2017, China contributed 35% of Sri Lanka’s overall FDI inflow of 1.36 billion USD—a figure the Central Bank believed would increase further as Colombo Port City and Hambantota Port began to attract significant FDI.

BRI Status

Sri Lanka was one of the first countries to openly support the Belt and Road Initiative (BRI), as it was seen as being aligned with President Rajapaksa’s vision for Sri Lanka’s development, known as the ‘Mahinda Chintana’. In December 2014, Sri Lanka’s Ministry of Finance and Planning signed a Memorandum of Understanding (MoU) with China’s Ministry of Commerce for cooperation on the Twenty-First Century Maritime Silkroad. The memorandum outlined in broad terms areas of economic cooperation, including transport, power, export processing zones, and tourism. The MoU came only several months after Chinese President Xi Jinping’s state visit to Sri Lanka, when both sides agreed to begin negotiations on a bilateral free-trade agreement. In May 2017, on the sidelines of the first Belt and Road Forum in Beijing, Sri Lanka’s Ministry of Development Strategies and International Trade signed the ‘Medium- to Long-Term Development Plan for China–Sri Lankan Investment, Economic, and Technological Cooperation’, specifying a list of major joint projects.

It is worth noting that Sri Lanka’s participation in the BRI has special significance. For many centuries, Sri Lanka was at the centre of the historical Silk Road connecting China with Europe. While the initial Silk Road was over land, after the fall of the Mogul Empire in the fourteenth century, the Ming Dynasty (1368–1644) shifted its approach to include a stronger emphasis on maritime trade, as evident in Admiral Zheng He’s maiden voyage to Sri Lanka in 1405. The discovery of foreign coins and objects in parts of Sri Lanka has led historians to believe the island served as a key hub where traders from the East and the West exchanged wares. To many Sri Lankan leaders today, the BRI represents a symbolic opportunity to strengthen its historical position as a centre of global trade and commerce in the Indian Ocean.

Current Economic Relations

Trade

Soon after its accession to the World Trade Organization (WTO) in 2001, China joined the Asia-Pacific Trade Agreement, of which Sri Lanka was a founding member in 1975. In the ensuing years, particularly since 2009, Chinese exports to Sri Lanka have grown rapidly. In 2016, China surpassed India to become the largest source of imports to Sri Lanka, accounting for 22% of total import volume. Of the 4.3 billion USD of goods Sri Lanka imported from China in 2016, electrical machinery, mechanical machinery, iron, and steel were the largest categories, together making up more than half the total. This reliance on Chinese industrial and construction equipment underlines China’s prominence in Sri Lanka’s postwar infrastructure boom. Sri Lanka also imported substantial amounts of knitted and crocheted fabrics, cotton, and humanmade staple fibre from China, which reflects its comparative advantage in apparel manufacturing.

However, the trade relationship has been unbalanced. China is an insignificant export market, making up only 2% of Sri Lanka’s export value in 2016. The United States and the United Kingdom are Sri Lanka’s top export markets, accounting for 27% and 10%, respectively. Moreover, Sri Lanka’s exports to China have seen only modest growth since 2001, in line with Sri Lanka’s overall trend of weak export performance to the rest of the world. Sri Lanka’s top export items to China include textiles and apparel, tea, raw coconut coir, and natural rubber. Cognisant of the growing trade imbalance, the two countries started negotiating a free-trade agreement in 2014. Several rounds of talks have been completed, but challenges remain, including coverage of products, speed of liberalisation, special and differentiated treatment, and treatment of non-tariff barriers. Moreover, Sri Lanka must also address its underlying weaknessAbeyratne, Sirimal. 2017. ‘Bilateral Economic Ties: Sri Lankan Perspective.’ In The Island of the Lion and the Land of the Dragon, edited by H. M. G. S. Palihakkara. Colombo: Pathfinder Foundation. in export competitiveness and its investment climate.

Investment

Sri Lanka traditionally struggled to attract FDI, with annual inflows of less than 1 billion USD. However, Sri Lanka has seen a major increase in FDI since 2011—a large portion of it from China. In 2009, just as the civil war was coming to an end, Sri Lanka’s central bank signed an investment facilitation agreement with the China Development Bank. In the five years between 2011 and 2015, mainland China and Hong Kong invested 990 million USD and 799 million USD, respectively, accounting for 16% and 13%, respectively, of Sri Lanka’s FDI inflows. In practice, major Chinese investments in Sri Lanka often go through Hong Kong, so the two can be grouped together. Mauritius and the United Kingdom ranked third and fourth. The United States ranked tenth, accounting for 3% of the total.

Major investment projects included the Colombo International Container Terminal (CICT) and Hambantota Port (after the concession agreement in 2017) by China Merchants Port Holdings, and Colombo Port City by China Harbor Engineering Company (CHEC)—both major Chinese state-owned enterprises (SOEs). Aside from investments from SOEs, private capital from China has also been active, especially in apparel, leather, telecommunications, and electronics manufacturing industries. It should be noted that the term ‘investment’ accounts only for equity investment and should not be confused with debt financing, which is another significant financial flow and which is elaborated on below.

Aid

While much Chinese aid to Sri Lanka has occurred in the post–civil war era, the aid relationship started as early as 1964, with Premier Zhou’s gift of the international conference centre in Colombo. Over the decades, China’s provision of development assistance has taken three major forms: concessional loans, interest-free loans, and grants. In 2012, China overtook Japan and the Asian Development Bank to become the largest provider of development aid. From 2012 to 2016, China committed a total of 4.2 billion USD in aid of all types to Sri Lanka. China’s annual disbursement over the same period averaged more than 400 million USD, while the second and third largest sources of aid, Japan and India, disbursed 74 million USD and 44 million USD, respectively.

Chinese development assistance to Sri Lanka spans almost all infrastructure sectors, including power generation, water and irrigation, hospitals, highways, railways, ports, airports, and urban development. Major projects funded by Chinese grants include the Mattala Rajapaksa International Airport, the Nelum Pokuna National Performing Arts Theatre, the Sri Lanka Supreme Court Complex, and the China–Sri Lanka Friendship National Nephrology Hospital. Less visible but no less important is Chinese aid in human development. China provided humanitarian assistance to the victims of the 2004 Indian Ocean Tsunami, the 2017 Aranayake landslide, and the 2022 global food crisis. China also funds an increasing number of Sri Lankan students, government officials, doctors, engineers, and teachers to study in China. During the Covid-19 pandemic, China provided Sri Lanka with 26 million doses of Sinopharm vaccines (as of September 2021), of which 5 million were donated. Chinese vaccines accounted for an estimated 80% of Sri Lanka’s vaccination drive.

Key Controversies

Debt, Sovereignty, and Dependency

Sri Lanka is often portrayed as the poster child of China’s ‘debt-trap diplomacy’—a term coined by an Indian think tank and subsequently popularised by members of the US Trump administration and the popular media. The Hambantota Port project has received the most scrutiny and media attention (for more details, see our project profile at this link). To critics, the project is the prime example of China’s ploy to subject smaller countries in the region to its economic and strategic influence by extending loans they cannot repay. Burdened by Chinese loans, these countries have no choice but to surrender control of the strategically located infrastructure to China—or so the theory goes. In other words, China acts like a predatory loan shark, using debt to create economic dependency.

A variation on the debt-trap theory claims China is using instruments of debt and dependency for military purposes. Because some of China’s investment projects involve ‘dual-use’ infrastructure (that is, infrastructure that can have both commercial and military uses), some speculate that China’s ulterior motive is to create a chain of overseas military bases—also known as ‘the string of pearls’. Hambantota Port is often cited as an example of a potential military base, after China Merchant Port Holdings signed a 99-year lease agreement with the Sri Lanka Ports Authority in 2017. Similar concerns have also been raised about the potential surveillance and cyber risks of the Lotus Tower project in Colombo, which is a 350-metre, 104-million-USD multipurpose communications tower mostly financed by the Export–Import Bank of China and built by China National Electronics Import and Export Corporation and the Aerospace Long-March International Trading Corporation Limited. In the high-profile Colombo Port City—a commercial real estate project—the Sri Lankan Government had to walk back its contractual commitment in 2016 to allocate 20 hectares of reclaimed land to its Chinese developer CHEC on a freehold basis after India protested that Chinese landownership could threaten India’s national security. While foreign commentators tend to frame these concerns in the language of security, locals tend to see them as issues of sovereignty.

Both the Chinese and the Sri Lankan governments reject these accusations. ‘Debt is a neutral term … [Y]ou cannot develop your economy without the use of debt,’ Chinese Vice-Foreign Minister Le Yucheng said in a rare interview with the Financial Times in 2018. Le maintained the origins of the debt burdens in some countries were complex and not necessarily due to the BRI, before adding that China was flexible about repayment terms for countries that were struggling to repay loans. In the same interview, Le insisted that China had no intention of using the BRI as a pretext to set up overseas military bases, instead relying on host countries to provide security.

In recent years, a growing number of scholars has pushed back against the debt-trap accusation. More grounded research and nuanced analysis have emerged to show that the BRI’s implementation is characterised by the same institutional fragmentation and experimentation that have defined China’s domestic development. Therefore, contrary to popular assumptions, there is no evidence of China intentionally setting a debt trap. On the contrary, a growing body of research suggests Sri Lanka’s government often plays a large role in shaping project outcomes, and its economic mismanagement in fact contributed to much of Sri Lanka’s vulnerability to debt distress. According to Sri Lanka’s Central Bank, around one-third of the country’s current external debt burden in fact lies in government borrowing from private creditors in the West on commercial terms (known as international sovereign bonds, or ISBs). These loans typically carry higher interest rates, shorter maturity periods, and no grace period compared with loans from China, whose share of Sri Lanka’s external debt is 9%, according to Central Bank data. As for Hambantota’s military potential, researchers argue that the port’s hydrological conditions and site layout would make it a poor choice for an overseas military base.

Transparency

While allegations of debt-trap diplomacy are increasingly being debunked, they do raise legitimate questions about China’s new role as the largest source of development finance worldwide. As many have pointed out, Chinese overseas lending is notable not only for its size, but also for its opacity. Virtually all Chinese loans are extended by state-owned banks, rather than directly by the government, and many are made to SOEs in recipient countries. This type of lending is often not captured or monitored by the statistics offices of developing countries and international debt reporting channels, which traditionally include only government-to-government lending on concessional terms. As a result, debtor countries like Sri Lanka may not have a complete picture of how much they have borrowed from China and under what terms.

Accusations of a lack of transparency have also been levied against specific projects. Critics often note that BRI deals are struck behind closed doors between Sri Lankan politicians and Chinese companies, with little public participation, open tendering, or competitive bidding. This opacity has contributed to public perceptions of corruption. Notably, critics alleged that CHEC was among a group of donors that transferred 8.1 million USD to members of Mahinda Rajapaksa’s staff in the leadup to the 2015 presidential campaign, when Rajapaksa was seeking a third term. Sri Lanka is among the few countries that do not prohibit foreign contributions to political campaigns, although both Rajapaksa and CHEC denied any wrongdoing. Still, widespread public perceptions of corruption eventually contributed to Rajapaksa’s defeat in 2015 and his family’s dramatic downfall. In 2022, amid rising public anger over Sri Lanka’s worst economic crisis since independence, both prime minister Mahinda Rajapaksa and his brother, president Gotabaya Rajapaksa, were ousted.

Environment

Several recent megaprojects built by Chinese companies with Chinese loans have run into environmental controversy. The Mattala Rajapaksa International Airport, built by CHEC in 2012 at a cost of 209 million USD, has received heavy criticism for being an ill-conceived white elephant and a pet project of Mahinda Rajapaksa. Not only is the airport in the middle of dense elephant habitat, it is also in the path of migratory birds. During the airport’s planning process, experts repeatedly warned of increased human–elephant conflicts and threats to aviation safety. The airport’s environmental impact assessment called for mitigation measures such as creating elephant reserves—warnings and recommendations that were ignored by Sri Lanka’s top officials. An estimated 810 hectares of forest were cleared to build the airport, threatening the habitat of several hundred wild elephants. Sure enough, Mattala Airport has been plagued by safety problems since it first opened in 2013. Within a year of its opening, three passenger planes collided with birds on take-off or landing, leaving windshields cracked and pilots scrambling. Moreover, wild elephants, deer, and peacocks can be seen roaming free on the airport’s grounds. By early 2015, almost all airlines had stopped regular flights to and from Mattala Airport, citing low demand and safety concerns.

Another high-profile project that attracted considerable environmental controversy was Colombo Port City, a multi-billion-dollar business district built on reclaimed land. By 2014, CHEC, the developer-cum-builder, had started dredging the ocean floor to prepare for the foundations of the 2.6-square-kilometre city. But an increasing number of local fisherfolk, most of whom depend on subsistence fishing, claimed the work had caused coastal erosion and, as a result, had reduced their fishing catch and damaged several homes. In 2016, hundreds of fisherfolk, priests, and activists took to the streets to protest the new government’s decision to resume work on the Port City project. Activists claimed the adverse environmental impact would hit the livelihoods of tens of thousands of people.

Sri Lanka’s environmental authorities disputed those claims, blaming existing port infrastructure and illegal sandmining for the coastal erosion. CHEC acknowledged the problem of coastal erosion but insisted that its dredging activities would not affect fish stocks. Nonetheless, CHEC said it recognised the difficult living conditions of local fisherfolk and launched a 550 million LKR (or 3 million USD) ‘fishermen livelihood improvement program’. With the program framed as part of its emerging corporate social responsibility program, the company restored beaches, improved a range of coastal infrastructure, provided health insurance to 15,450 fisherfolk as well as grants to those affected. The episode has also prompted CHEC to significantly step up its engagement with local stakeholders more broadly, including community organisations, trade associations, think tanks, and the media. Moreover, the company has gone to great lengths to promote its commitment to sustainability by adopting international best practices in urban design and master planning, according to Port City’s social responsibility report.

Key Sources

Sri Lanka’s newspaper landscape is dominated by several publishing houses, each of which runs a range of newspapers in English, Sinhalese, and Tamil. Leading English newspapers include Daily FT and its sister newspaper, Daily Mirror, which tend to lean centre-right; Daily News and Sunday Observer, which are state-owed; and The Island and its sister newspaper, Sunday Island, which tend to lean centre-left. EconomyNext.com has emerged as a leading online-only news website with independent coverage of financial and economic matters.

Sri Lanka is also home to a growing number of think tanks. The Institute of Policy Studies of Sri Lanka, a semi-official think tank, is well known for its economic policy research. The Lakshman Kadirgamar Institute and the Regional Center for Strategic Studies are leading voices on international affairs and foreign policy. The Centre for Poverty Analysis is known for its research on poverty and development.

Because Sri Lanka has traditionally been a large recipient of foreign aid, a range of bilateral and multilateral donors has conducted research for Sri Lanka either as part of their policy advisory work or as part of lending operations for individual projects. Many of these reports are publicly available. Institutions include the Asian Development Bank, the World Bank, the International Monetary Fund, UN-Habitat, Japan International Cooperation Agency, and Norwegian Agency for Development Cooperation, to name just a few.

Finally, various Sri Lankan government agencies publish a wealth of information, including socioeconomic indicators, major speeches, gazettes, laws, regulations, plans, and court cases. Researchers can find information from the websites of the Central Bank, the Ministry of Finance, the Department of Census and Statistics, the Department of National Planning, the Parliament, the Supreme Court, the Department of Government Printing, and the Urban Development Authority, among others.

Reports and Scholarly Articles:

• Brautigam, Deborah and Meg Rithmire. 2021. ‘The Chinese “Debt Trap” is a Myth.’ The Atlantic, 6 February. Link.

• Cooke, George and Lakmal Senanayake. Sixty Years of China–Sri Lanka Relations, 1957–2017. Colombo: Bandaranaike Centre for International Studies.

• Jones, Lee and Shahar Hameiri. 2019. ‘Debunking the Myth of “Debt-Trap Diplomacy”.’ Chatham House website, 19 August.

• Rithmire, Meg and Yihao Li. 2019. ‘Chinese Infrastructure Investments in Sri Lanka: A Pearl or a Teardrop on the Belt and Road?’ Harvard Business School Case 719-046.

• Samaranayake, Nilanthi. 2019. ‘China’s Engagement with Smaller South Asian Countries.’ United States Institute of Peace.

• Sirimal, Abeyratne. 2017. ‘Bilateral Economic Ties: Sri Lankan Perspective.’ In The Island of the Lion and the Land of the Dragon, edited by H.M.G.S. Palihakkara. Colombo: Pathfinder Foundation.

Cover Photo: Sergei Gussev (CC), Flickr.com.