China and Sri Lanka are likely to sign a free-trade agreement by the end of 2014, as the countries boost their bilateral ties.
This move might be seen as a severe blow to India, traditionally Sri Lanka's closest economic partner.
"The feasibility study is on the verge of completion," Sri Lankan Foreign Minister Gamini Lakshman Peiris, who is on a four-day visit to China, told the official Xinhua news agency in an interview.
He added that the pact would be the most significant bilateral achievement since the 1952 Rubber-Rice Pact, when rubber and rice was bartered between China and Sri Lanka.
Gaining access to the vast Chinese market will be much easier for Sri Lanka, according to Peiris. He also said this agreement will open the door for more rapid expansion of trade, investment and tourism; a whole range of economic activities.
The agreement is expected to be vital for Sri Lanka's future growth. The country targets its growth at 7.5% for 2014.
Increasing Ties with China
Sri Lanka ended a 30-year civil war in 2009 after killing Velupillai Prabhakaran, the leader of Tamil separatist group Liberation Tigers of Tamil Eelam (LTTE).
Since then, China has emerged as the island nation's largest loan provider. So far, China has loaned about $4bn to the country, funding its massive infrastructure projects in highways, railways, coal power plants, airports and harbours.
"In terms of development assistance, China is among the nations contributing most to Sri Lanka's economy," Peiris said.
During Peiris' visit, China and Sri Lanka agreed to expand marine cooperation and jointly build a 21st-century maritime Silk Road.
In addition, China has consistently defended Sri Lanka's human rights record, after the country was criticised for its violations during the civil war.
Peiris's visit to China comes as the US is planning a third resolution on Sri Lanka's human rights record to be presented before the UN Human Rights Council in March.
Chinese Foreign Minister Wang Yi held talks with Peiris and expressed China's support for Sri Lanka.
"China opposes other countries' interference in the internal affairs of Sri Lanka under the pretext of human rights issues," Wang said.
Blow to India
China's increasing ties with Sri Lanka have caused worries to neighbouring India, which traditionally was Sri Lanka's closest economic partner.
With the new free-trade pact, China is expected to take away a large amount of trade in Sri Lanka from India.
Furthermore, there are concerns that China's increased investment in Sri Lanka is part of Beijing's plan to develop a strong foothold in the strategic Indian ocean.