Bloomberg Business

To woo the island nation of Sri Lanka, China lent more than $200 million to fund a new airport built by then-President Mahinda Rajapaksa near his hometown. It wasn’t one of the Chinese government’s better investments. Mattala Rajapaksa International Airport opened in 2013, but two years later there is only one scheduled daily flight, on Flydubai. In January, just after Rajapaksa’s reelection campaign ended in an upset loss, state-owned SriLankan Airlines canceled its flights to the airport.

To gain an edge over rival India, China’s leaders have spent years cultivating the governments of Sri Lanka and other nations in South and Southeast Asia. In Sri Lanka, located along the shipping lanes to and from the Middle East and Africa, China offered about $5 billion in loans over six years to fund such projects as a $290 million expressway and a $360 million port. In the deal with the highest profile, Rajapaksa embraced a Chinese plan to invest $1.4 billion in a new port city to be built on reclaimed land near the port of Colombo, the capital.

Two visits by Chinese submarines last year highlighted China’s success in elbowing out India. But the Sri Lanka adventure has since soured. President Maithripala Sirisena has put the new city on hold, saying the government needs to investigate whether the Chinese-backed project violated rules protecting the environment and preventing corruption. “China discounted the possibility of regime change,” says Deshal De Mel, senior economist at Hayleys, a Sri Lankan conglomerate. The airport that was so closely associated with Rajapaksa “is one example of a project they may have thought twice about financing.”

China’s rivals have rushed to capitalize on Beijing’s unpopularity with the new government. Both India and the U.S. had a stormy relationship with Rajapaksa, who crushed a decades-long rebellion by the Tamil minority in 2009. India, which has a large Tamil population, and the U.S. supported a campaign to have the United Nations Human Rights Council investigate alleged war crimes by the Rajapaksa regime. The Chinese offered Rajapaksa military and diplomatic assistance during the war.

Sri Lanka’s new government, which pledges to honor term limits and work closely with Parliament, has been mending ties with New Delhi and Washington. The nation’s overtures paid off when U.S. Secretary of State John Kerry traveled to Colombo on May 2, the first visit by a U.S. cabinet member in a decade. He praised the government’s commitment to democracy. “The United States,” he said, “wants to work with Sri Lanka.”

In March, Indian Prime Minister Narendra Modi visited, the first trip by an Indian leader since 1987, and emphasized the cultural and religious links between the countries. Modi prayed at a Buddhist temple that has a tree said to descend from the one under which the Buddha attained enlightenment. He unveiled plans to help fund power plants and railroads. During the visit, the two sides agreed on a $1.5 billion currency swap that would moderate volatility in Sri Lanka’s rupee.

Modi’s “deft diplomacy” helped wean Sri Lanka away from China, Kadira Pethiyagoda, a visiting fellow in Asia-Middle East relations at the Brookings Doha Center, wrote in a May 1 column. The setback should teach China, wrote Pethiyagoda, “that its ‘tried and true’ ” tactics of commercial trade and military aid cannot succeed on their own.

Yet Sri Lanka needs infrastructure, and China has more money than India. Sri Lanka has signed on as a founder of the Chinese-backed Asian Infrastructure Investment Bank, which is based in Beijing and designed to compete with the World Bank. “Even India is going to China for financing,” says Dushni Weerakoon, deputy director of the Institute of Policy Studies in Colombo.

“I don’t think China is just going to pack up and walk away,” says Sarah Graham, a lecturer in foreign policy at the University of Sydney. While Sirisena has shown less interest than Rajapaksa in a close partnership, “the Chinese will gladly engage with Sirisena’s administration.” The countries are “in the final stage” of talks on a free-trade pact, China’s official Xinhua News Agency reported on April 21. Sirisena hasn’t unfrozen the new city project, but China still hopes it can be “pushed forward steadily,” Foreign Ministry spokeswoman Hua Chunying said at a May 6 press conference. Sri Lanka’s Board of Investment says the city project is undergoing environmental studies. It didn’t rule out a role for China.

The experience with Rajapaksa should be a learning moment for Chinese leaders, says John Lee, senior fellow at the Hudson Institute in Washington. Developing strategic partnerships “is not something they’re very practiced at, to be frank,” he says. “They will get better.”

This article was originally published at Bloomberg Business