Chinese businesses in Sri Lanka seemed to be entering one of their most promising phases in decades—first under the Rajapaksa-led SLPP government and more recently under the National People's Power (NPP) administration, particularly within the framework of the Belt and Road Initiative (BRI). However, two major Chinese ventures in the country are now facing ‘renewed’ pressure.

Flagship Chinese projects in Sri Lanka—such as the Colombo Port City and Sinopec’s US$3.7 billion Hambantota oil refinery—are now entangled in complications the government is struggling to resolve. While both sides had lined up multiple ventures, recent issues, including regulatory concerns, have cast doubt on the long-term sustainability of Chinese investments.

In late July 2025, Sri Lanka Customs detained nearly China’s 1,000 BYD electric vehicles—mainly the ATTO 3 model—across six consignments. The seizure was due to discrepancies in the declared motor capacity, which directly impacted excise duty calculations.

President Anura Kumara Dissanayake undertook a four-day state visit to China from 14 to 17 January 2025, at the invitation of President Xi Jinping. During the visit, he held high-level discussions and was accorded full state honours, including a ceremonial Guard of Honour. A total of 15 Memoranda of Understanding (MoUs) were signed, covering areas such as economic and technical cooperation, agriculture, tourism and media. Among the most significant agreements was the formalisation of the Sinopec oil refinery project in Hambantota.

Upon President Dissanayake’s return, the biggest headline was the official green light for the long-anticipated US$3.7 billion Sinopec refinery—a project under negotiation for nearly five years. Although the full MoU details remain undisclosed, the government initially announced immediate commencement of construction. However, a major setback arose when Sinopec requested an additional 100 acres of land beyond the agreed terms and proposed revising the supply structure and Sri Lanka has agreed to offer it to ‘some extent’. While the original, 20% of the refinery's output was to be allocated to the domestic market, with the remainder for export, Sinopec requested that 100% of the refined output be retained for Sri Lankan consumption. This revision has prompted the government to reassess the agreement and even suggested that they ‘may call for a new tender’.

Such a change would disrupt longstanding oil supply arrangements, placing the government in a difficult position. The Secretary to the Ministry of Power and Energy publicly stated that the government cannot alter the MoU terms or bypass the tender process. He even hinted that the agreement might be annulled entirely, with a new tender process potentially being launched.

Meanwhile, the Colombo Port City project—a massive 269-hectare urban reclamation venture developed by CHEC Port City Colombo (a subsidiary of China Communications Construction Company)—has also encountered regulatory challenges. While the land is owned by the Sri Lankan state via the Urban Development Authority (UDA), 116 hectares have been leased to CHEC Port City Colombo on a 99-year lease. An additional 62 hectares remain under government control for commercial use, while 91 hectares are designated for public spaces such as parks and beaches. Despite this balanced structure, the project has come under pressure due to new fiscal reforms tied to the IMF bailout program.

Amid Sri Lanka’s ongoing financial crisis, the IMF has demanded an overhaul of the country's generous tax holidays for mega-projects. This includes those granted under the Strategic Development Act (SDA) and the Colombo Port City Act. As a result, from mid-2025, Sri Lanka has begun implementing IMF-backed reforms to restrict and redefine tax incentives.

As part of a structural benchmark agreement, the government has suspended approvals for new tax exemptions until legislative amendments are completed. Revisions are expected by August 2025 for the SDA and October 2025 for the Port City Act. Previously, these laws offered wide-ranging tax benefits—including waivers on customs duties, VAT, port and airport levies, and even tax-free executive salaries. In some cases, these perks extended up to 40 years for firms classified as of "strategic importance."

In addition, Sri Lanka has committed to monthly reporting to the IMF on all firms granted Business of Strategic Importance (BSI) status and corresponding tax exemptions. The aim is to enhance transparency and accountability in investment-related incentives.

These measures have triggered anxiety among Port City developers, who previously promoted Sri Lanka’s liberal tax regime as a key attraction in global investment roadshows. Several upcoming projects that had been banking on tax-free status are now in limbo. While existing approved ventures will remain unaffected, the IMF-driven reform process is widely seen as a deterrent to fresh foreign investment.

Chinese developers, who continue to position Sri Lanka as a key hub in their South Asian economic strategy, are now monitoring how the Port City Commission will interpret and enforce the new fiscal guidelines. Their concern underlines the delicate balancing act faced by Sri Lanka in trying to attract investment while complying with IMF conditions.

Historically, Sri Lanka has been a major BRI participant. Key projects such as the Hambantota Port, Southern and Central Expressways, and the Colombo Port City were all implemented with Chinese financial and technical backing. However, the Hambantota Port—leased to China Merchants Port Holdings on a 99-year agreement after Sri Lanka failed to service its debt—has become a global talking point on the risks of "debt-trap diplomacy."

In the broader South Asian region, Bangladesh joined the BRI in 2016 and has since signed infrastructure agreements exceeding US$38 billion. These include high-profile projects like the Padma Rail Link and the Karnaphuli River Tunnel. However, implementation delays and growing concerns about debt dependency have prompted Dhaka to reassess its investment strategy and seek a more diversified approach.

Similarly, the Maldives formally entered the BRI in 2014 and expanded cooperation under a 2017 bilateral MOU. Under President Mohamed Muizzu, who assumed office in late 2023, Malé has deepened ties with Beijing. His first foreign trip was to China in January 2024, where over 20 new agreements were signed across infrastructure, finance, trade, and climate resilience sectors.

However, the IMF has flagged Maldives as being at high risk of debt distress. Approximately US$1.3–1.4 billion of its public debt—roughly 40% of the total—is owed to China.

With a GDP just over US$5 billion, the island nation is working to recalibrate its ties with both India and the IMF to mitigate financial risks.

Nepal, for its part, signed a BRI agreement with China in 2017, identifying over 35 projects, including the Trans-Himalayan Multi-Dimensional Connectivity Network. Despite this ambition, no major BRI project has been completed in Nepal as of 2025. Progress remains sluggish, hampered by financing issues, a lack of feasibility studies, and strategic concerns heightened by Sri Lanka’s experience with Chinese-backed debt. Nonetheless, China's economic footprint in South Asia remains significant and cannot be dismissed. Going forward, what is needed is a more balanced approach. China must remain a cooperative and responsible partner, avoiding demands that could place undue strain on the economies of its regional allies. By focusing on win-win outcomes and respecting domestic constraints, China can maintain its role as a key development partner without destabilising the nations it aims to support.

The views expressed above belong to the author(s).