Sri Lanka signed an agreement in principle on Thursday to sell at least 80 percent of its deep-water port on the country's southern coast, near the world's busiest sea lanes, to a Chinese state-backed firm, according to The Wall Street Journal citing senior officials.

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China Merchants Port Holdings Co. Ltd. will pay $1.1 billion for its shares in the port and adjoining land in Hambantota district, the EJ Insight noted.

The remaining 20 percent of stake will be owned by Sri Lanka's port authority. The deal is expected to close early January.

Meanwhile, in a report earlier last month, Ravi Karunanayake, Sri Lanka's finance minister, said that the money will be used to pay the country's expensive foreign loans. And the deal will turn the port into a Chinese investment zone, the Diplomat noted.

The initiative followed after Prime Minister Ranil Wickremesinghe made an offer during his visit to China in April to swap equity in Sri Lankan infrastructure projects against some of the $8 billion debt it owes to China, according to the Fresh Plaza.

The establishment of the Hambantota airport in 2010 was backed by China under its previous leader Mahinda Rajapaksa. Although the current government sees the port not financially viable, China, on the other hand, sees Sri Lanka's geopolitical importance for its ambitious Maritime Silk Road.

The port in Hambantota is located along an important trade route connecting the Middle East and Asia. It could be noted that China's navy has been extending its operations in the Indian Ocean as it seeks to project power westward.

Its strategic location and proximity make other nations like India and the US nervous as Sri Lanka lies near shipping lanes through which a huge volume of the world's trade passes en route to China and Japan, the Fresh Plaza noted.

 "We will watch carefully," a US senior official said. "These things do have long-term implications."  

TagsSri Lanka, china, Hambantota Port, China and Sri Lanka, Chinese investment zone, Sri Lanka port, China Merchants Port Holdings Co. Ltd.