China has taken a significant financial hit, losing Rs 60,000 Crore ($7 Billion) as part of Sri Lanka’s external debt restructuring, according to a statement from Chinese Ambassador to Colombo Qi Zhenhong, reported by the state-owned Daily News.

This marks a notable development in the ongoing saga of Sri Lanka’s economic recovery, following its first sovereign default in 2022 and the subsequent restructuring of $46 billion in external credit. The loss underscores China’s pivotal role as Sri Lanka’s largest bilateral creditor and its strategic recalibration in the face of the island nation’s fiscal crisis.

The restructuring agreement with China, finalized in October 2023, was the first bilateral deal Sri Lanka secured after its default, covering approximately $4.2 billion in loans from China’s Export-Import Bank (EXIM), as confirmed by Sri Lanka’s Finance Ministry at the time. Ambassador Qi highlighted Beijing’s restraint in publicizing the effort, stating, “The public does not know about these details. This is because we do not shout about our assistance to Sri Lanka.”

The $7 billion figure, however, suggests a broader write-down or concessional adjustment beyond the initial EXIM deal, reflecting terms like extended repayment periods or reduced interest—details Beijing has kept under wraps, consistent with its preference for opaque bilateral negotiations.

Sri Lanka’s debt crisis, triggered by years of mismanagement, a tourism-crippling pandemic, and a 2019 tax cut that slashed government revenue, forced the nation to suspend foreign debt payments in April 2022. Of its $40.6 billion public external debt (per 2021 China Africa Research Initiative data), China held nearly 20%, dwarfing contributions from Japan ($3.5 billion) and the Asian Development Bank.

The restructuring has been a linchpin for unlocking a $2.9 billion IMF bailout, with China’s concessions paving the way for subsequent tranches—$334 million expected soon after the IMF’s first review.

The loss aligns with China’s evolving stance on debt-distressed nations. Historically reluctant to join multilateral frameworks like the Paris Club, Beijing shifted tack in Sri Lanka, agreeing to terms after initial resistance—offering a $1 billion loan in 2022 that Colombo rejected in favor of IMF-led restructuring. The $7 billion hit, likely a mix of principal reductions and foregone interest, signals a pragmatic retreat from its hardline creditor posture, possibly spurred by international pressure and Sri Lanka’s strategic importance in the Belt and Road Initiative (BRI).

Projects like Hambantota Port, leased to China Merchants Port Holdings in 2017 for $1.12 billion after failing to generate revenue, exemplify the high-stakes lending that fueled the crisis.

Ambassador Qi also floated a vision for trilateral cooperation, expressing hope that “China, India, and Sri Lanka can work together one day to implement a viable project” in Sri Lanka’s northern province—a nod to easing regional tensions with India, which restructured $4 billion in loans in 2023.

While China’s loss dents its financial returns, it preserves influence in a geopolitically vital Indian Ocean hub, balancing economic sacrifice with long-term strategic gains. As Sri Lanka eyes a $16.9 billion debt reduction by 2027, per Reuters, China’s role remains central—its $7 billion concession a costly but calculated step in a shifting global debt landscape.