Sri Lankan President Anura Kumara Dissanayake will wrap up his inaugural visit to China Friday after securing a landmark investment deal that can help his country’s struggling economy, while adding value to Beijing’s Belt and Road Initiative projects in the strategically-located island.

Sinopec, China’s state-owned and largest oil refiner, signed an agreement with Sri Lanka’s energy ministry to invest $3.7 billion in a state-of-the-art oil refinery with a capacity of 200,000 barrels, Dissanayake’s office announced Thursday.

The new refinery will be built in southern Sri Lanka near Hambantota Port, which was constructed with a $1.5 billion Chinese loan as a part of BRI projects, according to sources familiar with the southern port. Most of the oil refined there is meant for export, the president’s office said, to enhance foreign exchange earnings.

The Sinopec deal is a big help for the newly elected Dissanayake, as it will be Sri Lanka’s highest single investment to date by a foreign country, surpassing another BRI investment of $1.4 billion to build the Port City Colombo that was secured by one of his pro-China predecessors.

Hambantota Port also entered into the foreign direct investment ledger subsequently after a previous Sri Lankan government secured $1.1 billion investment from China Merchant Port Holdings in a debt-for-equity swap that prompted Western governments to accuse Beijing of exerting “debt-trap” diplomacy.

Xi said that China will actively support Sri Lanka in focusing on economic development in areas including modern agriculture, digital economy and the marine economy, according to Chinese news agency Xinhua. Both leaders highlighted the BRI upgrade in a joint statement released late Thursday. “The two sides agreed to advance all major signature projects including the Port City Colombo and Hambantota Port integrated development,” the statement said.

Dissanayake’s visit to China comes at a critical juncture as Sri Lanka tries to rebuild its economy after its meltdown in 2022, when it ran out of foreign reserves and declared bankruptcy. The country defaulted on its foreign and domestic debt, which stood at $88 billion. Dissanayake inherited the broken economy from his pro-Western predecessor, Ranil Wickremesinghe, who salvaged the country by securing macro-economic stability in two years under an International Monetary Fund bailout program.

China is on the top list of Sri Lanka’s bilateral lenders. It is estimated to account for 10% of all foreign loans Sri Lanka owes, with lending varies from building of highways, power stations, a port terminal and an airport.

After initial reluctance to join other bilateral lenders to shape a common debt restructuring arrangement, China raced ahead of other foreign creditors to announce in mid-2024 that it would first restructure the $4.3 billion Sri Lanka owed to the Export Import Bank of China, helping to move debt restructuring talks forward.

Observers say the island nation welcomes Beijing’s offer of new foreign direct investment (FDI) instead of more loans. “Sri Lanka is not in a position to increase its debt from China by securing loans for new infrastructure projects, so securing Chinese investment on this visit is an achievement,” said George Cooke, executive director of the Regional Center for Strategic Studies, a Colombo-based think tank.

Sri Lanka’s dependency on China as an all-weather-friend is not lost on the Dissanakayke administration either. “In the multilateral arena, China has supported Sri Lanka irrespective of which government was in power,” said a veteran South Asian diplomat, who spoke on condition of anonymity. “China and Sri Lanka are on the same page when it comes to external pressure on sovereign issues.”

But Dissanayake’s initial success with Beijing will have to be balanced against how he fares with India, where he traveled on his first foreign visit in December, as both Asian powers jockey for influence in the South Asian nation. India has enjoyed the edge since Sri Lanka’s economic meltdown after it rushed a $4 billion financial lifeline, triumphing over China who had been on the ascendency hitherto.

A key test of the new government’s foreign policy balancing act will be what to do with the decision by the Wickremesignhe administration, which was under Indian pressure to issue a one-year moratorium through 2024 on Chinese research vessels docking in Sri Lankan ports. New Delhi suspected the vessels — two of which made port visits in 2022 and 2023 — of being “spy ships,” according to Colombo-based diplomatic sources.

The testy maritime issue has exposed Sri Lanka’s own short comings. “Sri Lanka is an island and cannot live without marine scientific research,” Y. Nandana Jayarathna, retired rear admiral of the Sri Lanka navy, told Nikkei Asia. “If Sri Lanka doesn’t develop it locally, it has to depend on external maritime science research.”

A “rules based order” is the way out to strike diplomatic balance, he added, “not a pressure driven policy.”