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Sri Lanka Turmoil Highlights Risk For Chinese Firms Investing Overseas

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(MENAFN– Colombo Gazette)

The turmoil in Sri Lanka is the latest warning to Chinese investors about political risk in emerging markets, analysts have warned.

Chinese companies operating overseas need to prepare crisis management plans in case of social unrest and political turmoil in these developing countries, according to Chris Torrens, a partner at the consultancy Control Risks.

“Sri Lanka is a reminder of the need to have effective crisis management plans in place and regular exercises or training to ensure that everyone knows what to do,” Torrens said.“Scenario planning is also essential as part of this process.”

The massive protests in Sri Lanka, triggered by severe shortages of food and fuel reached a peak in the past week, when angry demonstrators stormed and occupied the residence of former president Gotabaya Rajapaksa , who this week fled to the Maldives before resigning .

There have been growing concerns that the Sri Lanka-style chaos will occur in other highly indebted developing countries, for example Pakistan, where high inflation and prolonged power cuts prompted people to take the street in Karachi last month. At least one woman died in clashes between police and protesters.

“Investors may need to take into account the capacity of domestic governance when investing overseas particularly when the international environment is not doing well,” said Lin Minwang, a professor of South Asian studies at Fudan University in Shanghai.

“Countries in South Asia usually have high debt ratios, so to Chinese investors, [the Sri Lanka crisis] could be a reminder.”

Chinese companies in Sri Lanka, including those involved in infrastructure projects , have been on high alert.

According to the Chinese Ministry of Commerce, about 100 Chinese companies are operating in Sri Lanka, involved in everything from contracting projects, investment and trade. By the end of 2020 more than 3,400 Chinese nationals were working in Sri Lanka.

During a meeting via video-link on Thursday, Qi Zhenhong, China’s ambassador Colombo, told the Chinese companies to“be fully prepared as the current situation has become more complex and even volatile”, according to a statement from the Chinese Chamber of Commerce in Sri Lanka.

Qi urged Chinese companies to improve their emergency plans and carry out necessary drills“to ensure that they can be used when the situation is critical”.

Li Guangjun, a counsellor at the embassy, also told Chinese companies to reduce the number of unnecessary staff in Sri Lanka and stockpile supplies while“maintaining positive interactions with the security forces on the ground and the surrounding community”.

Torrens said his company had been approached by some Chinese clients about evacuation.“Some are unfamiliar with the political risk environment and assume that economic problems in the country mean heightened security risks,” Torrens said.

Lin said:“The changes in the domestic situation could affect the whole operation of these projects. I think this kind of impact is inevitable, but will not be very big.

“Investors may need to take into account the capacity of domestic governance when investing overseas particularly when the international environment is not doing well.

“Countries in South Asia usually have high debt ratios, so to Chinese investors, [the Sri Lanka crisis] could be a reminder.”

The chaos in Sri Lanka also rekindled the debates over China’s lending to Sri Lanka . Torrens said there could be some local resentment towards Chinese investment because of negative media coverage.

The money – which has been used to build roads, ports and airports – accounts for about 10 per cent of its external debt, but critics have said it helped fuel the current financial and political crisis in the country.

Beijing rejects those claims and the state news agency Xinhua has instead blamed colonialism and rising US interest rates.

“Internally, Sri Lanka was colonised by the British and the poisonous legacy of the colonial economy has led to an economy that is still heavily dependent on a few crops such as tea and rubber, with a single economic structure that makes it less resilient to risk,” a Xinhua analysis said.

International bondholders own some 47 per cent of Sri Lanka’s debt and the appreciation of the US dollar has also increased its repayment costs by 60 per cent.

A Beijing-based scholar, who specialises in overseas investment risk and declined to be named because of the sensitivity of the topic, said Chinese firms are finding it harder to invest in the United States and Europe amid growing suspicion about Beijing’s intentions.

“It’s impossible for Chinese companies to invest in safe and stable places with high returns,” the scholar said.“Meanwhile, those developing countries are eager for investment.”

He also said the increasing number of developing countries facing a credit crunch has heightened the risks to Chinese investment.

Torrens said it was important to have a“deep understanding and close monitoring of local situations”.

In some countries Chinese firms have been changing the way they operate in response to threats.

For example, in Pakistan, where extremist groups have targeted Chinese projects , companies are considering reducing the number of Chinese personnel they send, swapping them out with local staff.

Even in countries like Angola, where Chinese businesses have a long-established presence, the threat from organised crime means the Chinese community has been forced to take precautions to reduce the risk of kidnapping or extortion. (South China Morning Post)

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