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Politicization and mismanagement of Sri Lankan state enterprises worry China

July 31, 2016
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Politicization and mismanagement of Sri Lankan state enterprises worry China

Editor by Editor
July 31, 2016
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Colombo, July 31 (NIA): Rampant politicization and inefficient management of Sri Lanka’s state-owned enterprises are worrying China which is now being called  upon to rescue some loss making big ticket Sri Lankan public sector enterprises by converting its loans into equity.

According to the Colombo-based Sunday Times, China has told Sri Lanka that its laws do not permit it to convert loans given to loss making Sri Lankan state enterprises into equity.

This was conveyed to the Sri Lankan Prime Minister,Ranil Wickremesinghe, by the Chinese Ambassador in Sri Lanka, Yi Xianliang, in response to the Sri Lankan request to convert debt into equity in the case of the Hambantota Sea Port and the Mattala Airport. Yi told Wickremesinghe that China would rather strike commercial deals with private sector companies in running these two assets.

The Sri Lankan government is burdened with a US$ 496 million loan taken from China’s Exim Bank to build the Hambantota Sea Port and the Mattala Airport, both of which have turned out to be White Elephants, hardly attracting any traffic.

Overall, Sri Lanka owes to China US$ 8 billion because of the borrowing spree of the predecessor government led by Mahinda Rajapaksa.

When Sri Lanka’s Minister of Strategic Development, Malik Samarawickrama, visited Beijing, he had requested the Chinese to convert their  loans into equity. At that time, the Chinese were evasive. But now they have told the Lankans that Chinese laws do not permit such conversion.

But the Chinese contention appears to be baseless. According to The Financial Times of March 16, the Chinese government had made debt-equity swaps in 1999 to save some local companies which were in the red.  The government’s four asset management companies have been converting debt into equity with encouraging results. For example, China Huarong Asset Management Company, posted 16.9 billion Yuan as net profit the past financial year, up by 30%.

China itself has a huge corporate debt problem. As per an IMF estimate, US$ 1.3 trillion of Chinese corporate debt is at risk of default. This accounts for 15.5 percent of total commercial bank loans to the corporate sector.

The real reason for not going in for a debt-equity swap is not what the Chinese Ambassador trotted out but the fear of becoming part of loss making Sri Lankan state enterprises and projects.

“It would be meaningless if China only swaps some bad debts for nonperforming assets in Sri Lanka’s enterprises. The two countries may need to set up mechanisms to ensure China has sufficient bargaining power in negotiations with Sri Lanka to obtain high quality assets,’’ Hu Weijia wrote in Global Times, one of China’s widely read official organs.

Hu lamented the lack of confidence in the continuity and stability of Sri Lanka’s economic policy and said that Colombo must, “learn to respect bilateral agreements and business contracts.”

“If China gets more deeply involved in the Sri Lankan economy by holding more assets instead of only lending money to the country, it will be increasingly important for Sri Lanka to run its economy free of political interference,’’ he said.

“China may need to invest more in local industries which could create stable jobs for local communities to promote regional economic prosperity and social stability, ensuring that the country becomes more capable of repaying the loans offered by China,” Hu said.

 

 

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