Dinesh Gunawardena. File
| Photo Credit: AP

Sri Lankan Prime Minister Dinesh Gunawardena arrived at Beijing on March 25 for a six-day official visit during which he will hold talks with Chinese President Xi Jinping and Premier Li Qiang on ways to further deepen bilateral ties.

“Mr. Gunawardena was received on his arrival by Chinese Vice-Foreign Minister and former Ambassador to India Sun Weidong,” Chinese official media reported.

This will be the first visit by a Sri Lankan leader to Beijing after Colombo put a moratorium on recurring visits by Chinese research ships to Hambantota port, reportedly due to India’s security concerns. Colombo’s move had drawn angry reactions from China.

Earlier this month, however, Sri Lanka said it would allow foreign offshore research ships for replenishments at its ports despite a one-year ban on such vessels.

Some of China’s infrastructure investments in Sri Lanka drew global concerns over Beijing’s debt diplomacy especially after China took over Hambantota port on a 99-year debt swap.

Mr. Gunawardena’s visit also comes days after the International Monetary Fund (IMF) reached a staff-level agreement with Sri Lanka for the next phase that would enable it access to $337 million from the nearly $3 billion bailout approved in 2023 for the cash-strapped country.

In 2022, Sri Lanka announced a default on over $51 billion foreign loans, following which India pitched in with about $4 billion in assistance to enable the island nation to recover from a deep economic crisis.

According to Sri Lanka’s official data, China tops the list of its creditors with 43% followed by Japan with 23% and India with 15%.

As the annual meeting of China’s Parliament approaches next month, its leaders are facing the greatest pressure in almost a decade to take bold policy decisions that safeguard the economy’s long-term growth potential.

The start of the year saw Chinese stocks tumbling to five-year lows on growth concerns and deflation deepening to levels unseen since the global financial crisis, prompting comparisons with the 2015 turmoil that forced policymakers into action.

“The last time the Chinese leadership faced this kind of pressure was in 2015,” said Tommy Wu, a China economist at Commerzbank. “2024 is a crucial year for China to stabilize the economy.

“However, the current situation is a lot more complicated,” he added.

China overcame the 2015 crisis by devaluing the yuan and tightening its capital account to prevent outflows, while pouring resources into property and infrastructure, and slashing interest rates by more than 100 basis points.

But that policy ammunition is now spent, bent or broken, limiting its options to fix a stuttering economy and find a way out of what threatens to become a self-feeding downward spiral in consumer and investor confidence and economic growth. The property market has been in free fall since 2021 because of a series of defaults among developers after years of overleveraged, bad investments. Infrastructure spending is difficult to sustain because of high levels of local government debt.

Further monetary policy easing risks a run on yuan assets due to a yawning interest rate gap with other economies and could exacerbate deflationary pressures as cheap credit flows into China’s industrial complex, ridden with overcapacity.

As China’s rubber stamp Parliament, the National People’s Congress (NPC), begins its annual meeting on March 5, there has been no indication of major stimulus or a grand reform plan in the making.

“It is widely underappreciated how constrained Beijing is at this point, in terms of options to stimulate the economy via fiscal policy, or through more rapid credit growth from banks,” said Logan Wright, a partner at Rhodium Group.

“There will be no policy bazookas unveiled at the NPC, in part because China has no good options to maintain growth via its traditional channels.”

‘Stuck by choice’

Fleeing investors have expressed frustration that authorities have not unveiled a roadmap to fixing structural issues laid bare last year when the Chinese economy failed to replicate the explosive recovery experienced by other economies after COVID-19.

Markets want clear, long-term plans for cleaning up the property sector, restructuring municipal debt, and switching to a more sustainable growth model that relies less on debt-fuelled investment excesses and more on household consumption.

The NPC is not the traditional venue for Chinese leaders to declare momentous policy shifts, which are usually reserved for events known as plenums, held by the ruling Communist Party between its once-every-five-year congresses.

One such plenum was initially expected in the final months of 2023, and while the meeting could still take place in the near future, the fact that it has not yet been scheduled has deepened investor concerns over policy inaction.

At the NPC, Premier Li Qiang will deliver his annual work report and set the year’s economic targets, including growth for 2024 at around 5%, and a budget deficit of 3% GDP.

But setting a target similar to last year’s without new policies to redirect resources from infrastructure and manufacturing investment to households runs the risk of hurting confidence, rather than boosting it, analysts say.

Fathom Consulting estimates that every additional 10 yuan invested in the economy today generates 0.2 yuan in output, down from 2.1 yuan in 2002.

On the demand front, consumer confidence languishes at record lows more than a year after COVID lockdowns ended.

“There is a lack of investor confidence and business confidence. But the root cause of this is consumer confidence,” said Joe Peissel, an economic analyst at Trivium China. “The most effective way to deal with this is through reforms that put more cash in consumers’ pockets.

“However, (President) Xi Jinping has previously aired an antipathy toward cash transfers or generous social security provision.”

The rebalancing policies economists and investors are calling for now are steps Xi flagged as early as 2013, but which China never took, resulting in debt levels growing much faster than the economy.

Some analysts say policymakers prioritised social stability and national security over growth sustainability, due to concerns over the disruption engendered by a different development model. That would come about as such measures empower consumers and private businesses at the expense of the government sector.

“A big shift would acknowledge serious long-term mistakes – that’s unlikely,” said Derek Scissors an economist at the American Enterprise Institute. “China is stuck, by its own choice.”

A big shift would acknowledge serious long-term mistakes – that’s unlikely.

China is stuck, by its own choice 

Australian Prime Minister Anthony Albanese. File
| Photo Credit: AP

Prime Minister Anthony Albanese said on November 1 he will raise the plight of a detained democracy blogger with Chinese leaders during a state visit to China.

Mr. Albanese said he had approved a draft letter to the sons of Yang Hengjun, who has been detained in China since 2019.

“We’re very sympathetic and understand the concerns that they would have for their father and for this Australian who has been detained now for a long period of time,” Mr. Albanese told reporters.

The sons have made public a letter to Mr. Albanese, dated October 28, that said there was a “narrow window of opportunity” before Mr. Albanese left for China to secure their father’s freedom.

“We ask that you make it clear that it is not possible to stabilise the bilateral relationship with a government that is holding an Australian citizen just a few kilometres south of where you will be hosted,” the brothers added, referring to Beijing.

They said they had just last week received the first letter Yang had been allowed to send from detention. Yang wrote: “I’m sick, I’m weak, I’m dying.” Yang, who once worked for China’s Ministry of State Security, is still awaiting a verdict from his closed-door trial on espionage charges in May 2021.

His sons are 24 and 31 years old. Family friend Feng Chongyi said the sons had not been publicly identified because they feared Chinese retaliation for their father’s activities. Feng said Mr. Albanese becoming the first Australian Prime Minister in seven years to visit China created an opportunity for Yang.

“It’s not the last chance, but it’s the best chance,” Feng said. “The visit symbolises the complete normalisation of relations between the two countries.” Mr. Albanese’s visit that begins on Saturday is a sign that bilateral relations have improved since his centre-left government was elected last year following nine years of conservative rule.

Mr. Albanese will meet with President Xi Jinping and Premier Li Qiang in Beijing and attend the China International Import Expo in Shanghai during the three-day visit.

Mr. Albanese raised the plights of Yang and another detained Australian, journalist Cheng Lei, in his first meeting with Xi on the sidelines of a Group of 20 summit in Indonesia a year ago. Cheng was deported last month in what many saw as Beijing clearing the way for Mr. Albanese’s visit.

Yang’s sons wrote that said they had been “inspired by the wonderful news” of Cheng’s release. They hoped Australian authorities could “achieve a second miracle by saving our father”. Asked about Cheng’s case, Mr. Albanese told reporters: “Every case is … different.”