http://www.nytimes.com/2010/02/16/business/global/16port.html

By VIKAS BAJAJ

HAMBANTOTA, Sri Lanka — For years, ships from other countries, laden with oil, machinery, clothes and cargo, sped past this small town near India as part of the world’s brisk trade with China.

Now, China is investing millions to turn this fishing hamlet into a booming new port, furthering an ambitious trading strategy in South Asia that is reshaping the region and forcing India to rethink relations with its neighbors.

As trade in the region grows more lucrative, China has been developing port facilities in Pakistan, Bangladesh and Myanmar, and it is planning to construct railway lines in Nepal. These projects, analysts say, are part of a concerted effort by Chinese leaders and companies to open and expand markets for their goods and services in a part of Asia that has lagged the rest of the continent in trade and economic development.

But these initiatives are irking India, whose government worries that China is expanding its sphere of regional influence by surrounding India with a “string of pearls” that could eventually undermine India’s pre-eminence and potentially rise to an economic and security threat.

“There is a method in the madness in terms of where they are locating their ports and staging points,” said Kanwal Sibal, a former Indian foreign secretary who is now a member of the government’s National Security Advisory Board, said of China. “This kind of effort is aimed at counterbalancing and undermining India’s natural influence in these areas.”

India and China, the world’s two fastest-growing economies, have a history of tense relations. They share a contested Himalayan border over which they fought a war in 1962. India has given shelter to the Dalai Lama, who fled Tibet as China exerted control over it. And China has close military ties with Pakistan, with which India has fought three wars.

But the two countries also do an increasingly booming business with one other. China recently became India’s largest trading partner, and both have worked together to advance similar positions in global trade and climate change negotiations.

Chinese officials deny ulterior motives for their projects in South Asia. And top Indian leaders have tried to play down talk of a rivalry with China, saying there is enough room in the world for both economies to rise simultaneously.

As recently as the 1990s, China’s and India’s trade with four South Asian nations — Sri Lanka, Bangladesh, Nepal and Pakistan — was roughly equal. But over the last decade, China has outpaced India in deepening these ties.

For China, these countries provide both new markets and alternative routes to the Indian Ocean, which its ships now reach through a narrow channel between Indonesia and Malaysia known as the Strait of Malacca. India, for its part, needs to improve economic ties with its neighbors to broaden its growth and to help foster peace in the region. Some of the shift in trade toward China comes from heightened tensions between India and Pakistan, which has hurt trade between them. But China has also made inroads in countries that have been more friendly with India, including Sri Lanka, Bangladesh and Nepal.

Moreover, protectionist sentiments have marred India’s relationships with its neighbors. South Asia has a free-trade agreement, but countries that are part of the pact get few benefits, economists say, because India and its neighbors refuse to lower tariffs on many goods and services to protect their own businesses. By contrast, the countries of Southeast Asia have minimal or no duties on most goods and services that they import from each other.

India has had some success in establishing closer ties with Sri Lanka, with which it has a strong bilateral trade agreement. But China has become a partner of choice for big projects here like the Hambantota port. China’s Export-Import Bank is financing 85 percent of the cost of the $1 billion project, and China Harbour Engineering, which is part of a state-owned company, is building it. Similar arrangements have been struck for an international airport being built nearby.

Sri Lankan officials here have big ambitions for Hambantota, which was devastated by the 2004 tsunami. They want to turn the district, which is the home constituency for President Mahinda Rajapaksa, into the second-largest urban area in the country after the capital, Colombo. (It is the ninth-biggest today.) The government is also building a convention center, a local government complex and a cricket stadium.

Sri Lanka needs foreign assistance to make those dreams a reality, because the government’s finances are stretched by a large debt it accumulated in paying for a 25-year civil war that ended in May. In 2009, the country borrowed $2.6 billion from the International Monetary Fund.

Mr. Rajapaksa has said he offered the Hambantota port project first to India, but officials there turned it down. In an interview, Jaliya Wickramasuriya, Sri Lanka’s ambassador to the United States, said the country looked for investors in America and around the world, but China offered the best terms. “We don’t have favorites,” he said.

Still, Sri Lankan officials have refused to disclose information that would allow analysts to compare China’s proposals with those submitted by other bidders. The country has also kept private details about other projects that are being financed and built by China, including a power plant, an arts center and a special economic zone.

The Sunday Times, a Sri Lankan newspaper, recently estimated that China was involved in projects totaling $6 billion — more than any other country, including India and Japan, which have historically been big donors and investors in Sri Lanka.

Harsha de Silva, a prominent economist in Colombo and an adviser to the country’s main opposition party, said the Sri Lankan government appeared to prefer awarding projects to China because it did not impose “conditions for reform, transparency and competitive bidding” that would be part of contracts with countries like India and the United States or organizations like the World Bank.

Other analysts say China is winning big projects here and elsewhere in the region because its companies offer lower costs. Chinese companies are also competitive because they have acquired a lot of expertise in building large infrastructure projects in China, said Jerry Lou, Morgan Stanley’s China strategist.

In 10 years, Chinese companies, for instance, have become the biggest suppliers to ports of cranes used to move shipping containers, displacing Korean and Japanese companies that once dominated the business, he said. “They are running at very high efficiency and at the lowest costs,” Mr. Lou said. “China is a game-changer, rather than a new player in the world’s construction industry.”

Indian officials are starting to respond to China’s growing influence by becoming more aggressive in courting trade partners. India recently signed a free-trade deal with the Association of Southeast Asian Nations and Korea. Officials have even begun talking about signing a trade deal with China to bolster exports.

India’s chief trade negotiator, D. K. Mittal, acknowledged that the country’s economic ties with its neighbors were not as strong as they should be and blamed political distrust between the countries. But he said leaders were now determined to improve economic relations, something he said was highlighted in a recent agreement with Bangladesh.

In that deal, India agreed to sell electricity to that country, provide it with a $1 billion line of credit for infrastructure projects and reduce tariffs on imports. Bangladesh agreed to allow Indian ships to use a port that is being redeveloped by China. “The political leaders have to rise above and say, ‘I want this to happen,’ ” Mr. Mittal said in an interview. “That’s what the leaders realizing.”