China’s Belt and Road in Myanmar

More than four years have passed since China formally introduced the “Belt and Road Initiative” (BRI), President Xi Jinping’s signature foreign policy project, in September 2013. In the past few years, China has dedicated significant political and economic resources to ensure the friendly reception of the BRI by the world. Situated in the junction between South Asia and Southeast Asia, and between the Indian Ocean and China’s landlocked southwestern Yunnan province, Myanmar occupies a rather unique position in the Belt and Road Initiative. Most notably, Myanmar is seen as a link that connects both the 21st Century Maritime Silk Road and the Silk Road Economic Belt, making it an integral component of both. From a strategic perspective, Myanmar is one of the two direct access points to the Indian Ocean for China – the other being Pakistan, although that route and the politics surrounding it are both arguably more strenuous.

Theoretically, Myanmar should be a priority country in China’s Belt and Road Initiative, given its unique location. With that logic, we should have witnessed a massive inflow of Chinese investment, loans, and projects into the country. However, the expected Chinese enthusiasm has been largely rhetorical. Several factors contributed to the tepid Chinese approach, including lingering concern about the Burmese reception of Chinese projects, the uncertainty associated with various domestic crises, as well as the ill-fated Bangladesh, China, India, Myanmar Economic Corridor (BCIM). Although Chinese Foreign Minister Wang Yi most recently proposed the “China-Myanmar Economic Corridor,” which could indicate a renewed and enhanced efforts to promote economic ties in Myanmar, optimism is not warranted until the two countries find the balance between their national interests.

Numbers Don’t Lie 

In the Chinese and Burmese lexicon, China has been, and most likely remains, the largest cumulative foreign investor in Myanmar for the time being. As of the end of Myanmar’s last fiscal year (FY 2016/2017), total approved foreign investment from China was as high as $18.5 billion. This data point and the fact it represents are constantly referenced by the Chinese government and its official media to demonstrate the virility of China’s economic interest in Myanmar and the strength of bilateral economic relations.

However, in such references, China rarely goes beyond the cumulative data and specifies the annual FDI figure, which is more illustrative of the current level of investment interest. Indeed, almost 80 percent of that $18 billion in investments – about $14 billion – occurred before the BRI was introduced. In fact, most of the investment occurred before Myanmar began its democratic reform in 2011. In 2013, the year that the BRI was introduced, Chinese approved FDI in Myanmar was as low as $56 million, less than 1 percent of Chinese FDI ($8.2 billion) during its peak year of 2010. Although Chinese investment picked up speed in 2014 ($511 million) and in 2015 ($3.3 billion), the number rapidly plummeted by 85 percent in 2016, down to $482 million. The sharp increase of committed investment in 2015 was mostly due to “last-minute” deals the Thein Sein government approved before stepping out of power rather than real investment interest. And it is arguable that the sharp decreases the following year reflect a lack of confidence and cooperation with the new NLD government since its inauguration.

Even in terms of cumulative FDI, a comparison should be made between an emerging competitor – Singapore – and China. Singapore currently stands as the largest investor in Myanmar based on annual FDI and the second largest foreign investor in terms of cumulative FDI. Its investment in 2016 ($3.82 billion) was nine times that of China. With Singapore’s vigorous investment push in Myanmar, it most likely will surpass China as the largest cumulative FDI contributor in 2017. Merely three years ago, Singapore’s cumulative investment in Myanmar was only $8.8 billion; it climbed up to $13 billion in 2015 and $16.7 billion in 2016. China might try to maintain its largest cumulative investor status by counting in FDI from Hong Kong. However, moving the numbers around does not negate the fact that the level of Chinese investment interest in Myanmar is not in line with the rhetoric that Myanmar is a key country for China’s BRI.

On the trade front, the figures don’t inspire optimism either. The past two years have witnessed the continued decrease of bilateral trade, especially in Myanmar’s exports to China. In 2015, bilateral trade dropped 38.8 percent from the previous year, including a 63.9 percent drop in Burmese exports to China. In 2016, the bilateral trade volume further decreased by 18.6 percent, which included a 24.8 percent decrease in Burmese exports to China. During the first six months of Myanmar’s current fiscal year (April to October 2017), border trade dropped by 10 percent, or about $260 million. Decreasing Chinese demand for raw materials, agricultural products, and the freezing of accounts of Burmese businesses are believed to be the primary factors contributing to the downward spiral of bilateral trade.

Behind the Sluggish Economic Ties

The lukewarm economic ties between China and Myanmar are inconsistent with both China’s enthusiastic push for the Belt and Road Initiative in the region and China’s official position of emphasizing economic cooperation and promoting economic development in Myanmar.

Using one of Myanmar’s neighbors as a comparison, China’s investment to Laos since the beginning of the BRI has skyrocketed, elevating Laos to the second largest destination of Chinese FDI in Southeast Asia since 2016, according to statistics from China’s Ministry of Commerce. During the first three months of 2017 alone, China invested $335 million in Laos, making Laos the eighth largest destination of Chinese FDI globally. Compared to Laos, Myanmar enjoys far more abundant and diverse natural resources, as well as a much more convenient and direct location for land and water transportation networks. Myanmar also offers unique Indian Ocean access, which is essential to China’s foreign economic and strategic blueprint. For Myanmar to be sidelined in the BRI, then, there must be indisputable and compelling reasons.

The most important reason for the tepid economic ties lies in the uncertainties associated with Myanmar’s domestic and foreign policies. With the recalibration of Myanmar’s democratic reform and foreign policy since 2011, China sees itself, its investment, and its influence as the largest victim of Myanmar’s political process. The close ties China forged with the military government and the massive investment China poured into the country before 2011 created major concerns and anxiety in Burmese society about China’s overwhelming, and potentially harmful, influence. Such anti-China sentiment led to the suspension of the Chinese-backed Myitsone dam project, which remains an unresolved, thorny issue between the two today. China has worked assiduously in the past six years to rebuild its image and regain its influence in Myanmar. However, more Chinese investment could once again agitate the same rejection, rational or not, from Burmese society.

China’s sense of uncertainty and, consequently, its reluctance to invest in Myanmar is also rooted in a perceived Burmese self-complacency and arrogance. Myanmar takes pride in the strategic location it occupies in the region and has hoped that political reform would open the door for a massive inflow of foreign investors competing for its favor. While such aspirations may not be entirely groundless, in China’s eyes, they have translated into an inflated sense of self-importance and unrealistic expectations for foreign investors to cater to Myanmar’s every demand. China is discouraged therefore not only by the anti-China sentiment lingering from the previous era, but also by underlying Burmese arrogance toward China. Even though China is keen on pushing forward with the Belt and Road Initiative, there is little appetite from the Chinese to let Myanmar endlessly exploit Chinese enthusiasm based on unrealistically high demands and expectations. Instead, China would rather let Myanmar test its investment appeal with other foreign investors and come to grips with reality as to what investments are available.

Besides this macro-level, almost psychological propensity against rushing into more investment in Myanmar, China’s investment zeal has also been deterred by the uncertain domestic political and economic environment in Myanmar. The conflict in northern Myanmar has been ongoing since 2011 and the peace process as it currently stands inspires little confidence for prompt success. Without a peaceful border, any Chinese economic endeavor heading southwest through the border region will be threatened by turbulence and armed conflicts. The Burmese reaction might be that China should then help Myanmar “solve” its ethnic problem. However, such a simplification does not take into account the potential strategic utilities many in China see in the ethnic groups, should Myanmar move against China again.

The Myanmar government’s inability to rein in domestic political flashpoints is further manifested in the Rakhine crisis. Rakhine state, which spans much of Myanmar’s west coast, has been a primary desired location for Chinese investors. Two of the most important Chinese strategic investment projects in Myanmar, the Sino-Myanmar oil and gas pipelines and the Kyaukpyu Special Economic Zone, are based in Rakhine state. However, since the Rakhine security crisis intensified this past summer, the Myanmar government has demonstrated little capacity to stabilize the situation, leading to major international condemnation and a political crisis. Although most of the security threats are located in northern Rakhine and do not directly impact the Chinese projects down south, the unstable environment and the negativity associated with Rakhine inevitably undermine investors’ confidence.

Last but not least, since 2012, Myanmar had been categorized under the BCIM Economic Corridor in terms of China’s regional economic development framework. However, while China and Bangladesh were enthusiastic about pushing forward with this regional infrastructure network, India’s reaction to the expanding Chinese presence and influence in South Asia has been largely negative and hostile. The lack of regional partner interest in BCIM may not be the essential factor in China’s reluctance to invest in Myanmar, but it does affect the overall assessment of such investments’ future and impact. As China has proposed the China- Myanmar Economic Corridor to replace the stagnant BCIM, the hope is that there will be a renewed push focused on Myanmar alone.

The Question of Kyaukpyu

Among all the Chinese projects in Myanmar, none is more significant than the Kyaukpyu Special Economic Zone (SEZ). Located on the west coast of Rakhine state, the Kyaukpyu SEZ is one of three large SEZs the former Thein Sein government had decided to pursue as a key component to its domestic economic growth strategy. Plans for the Kyaukpyu SEZ include three components: a deep-sea port, an industrial park, and a housing development project. The Myanmar government opened the bid to investors in the autumn of 2014 and selected a CITIC-led consortium for the development of the deep-sea port and the industrial park in late December of 2015. The land use plan for the SEZ was approved around the same time. The total investment from China for the SEZ is calculated at around $10 billion. CITIC plans to follow a DBFOT business model for Kyaukpyu, meaning that the CITIC Group is responsible for the projects’ design, building, financing, operation, and transfer. The consortium is to receive a 50-year entitlement for the development and operation of the project, with a potential extension of another 25 years.

Since its approval, the Kyaukpyu SEZ has been criticized as one of a host of last-minute deals that the Thein Sein government approved and granted before stepping down. There have been questions about whether the deal was approved in a hasty manner to appease China, without sufficient public discussion and debate. Concerns about the Kyaukpyu SEZ apparently persist within the NLD government, the military, and society; two years after its approval, the Kyaukpyu SEZ has shown little progress toward a formal commencement.

One of the main concerns of Burmese officials, at least in private conversations, is that the size of the Kyaukpyu SEZ is exceedingly and unnecessarily large. If the Burmese government is unable to provide the financing, as people fear it cannot, it will most likely have to resort to Chinese government loans to pay for its share. In that scheme, if Myanmar is to assume a 50 percent stake in Kyaukpyu, the required investment could amount to $5 billion, which is about 7.5 percent of the country’s annual GDP ($67 billion in 2016). Whether this will create a debt trap for Myanmar is a good question. But the bigger question is whether the project is too large and could or should be downsized to meet the needs of Myanmar, rather than those of China. The core of the issue lies in the gap between China’s overwhelming ambition and capacity and Myanmar’s more moderate aspiration and much more limited capacity. The Burmese wonder why Myanmar should borrow money from China to support an ambitious Chinese project designed primarily to serve China’s political and economic agenda.

A deeper concern from Myanmar about the Kyaukpyu SEZ is centered on the possibility that China could turn Kyaukpyu into a naval facility, or at a minimum, a dual-use facility in the Bay of Bengal as a part of China’s Indian Ocean strategy. Myanmar, especially the Burmese military, is hyper-sensitive about the sovereignty, territorial integrity, and national security of the country. The 2008 Constitution clearly states that “no foreign troops shall be permitted to be deployed in the territory of the Union.” China’s track record in the Indian Ocean on dual-use ports is not the most exemplary. It is widely believed in the region that the Gwadar port in Pakistan has already offered military utilities for the Chinese People’s Liberation Army. In the case of Sri Lanka’s Hambantota port, in which China owns a 70 percent stake, a requirement by the Sri Lankan government was specifically signed earlier in 2017 to prohibit China from using the port for military purposes.

As China and Myanmar slowly sort out their diverging interests and agendas on Kyaukpyu, the project serves to illustrate the fundamental problems in Sino-Myanmar economic ties. While Myanmar desires economic development and Chinese investment, it cannot resist the deeply embedded, instinctive fear of rising Chinese influence and penetration. Coming to real policies, although Myanmar openly aspires to participate in and benefit from the Chinese Belt and Road Initiative, specific plans and projects have been hindered by domestic debate in government and society over whether they will eventually serve Myanmar’s national interests. Myanmar’s hesitation and reservation are well-observed and well-absorbed by China. And Beijing would rather let the country stew in its own juices than rush in with money and alienate Myanmar with too much love.

Will the China-Myanmar Economic Corridor Make a Difference?

The most eye-catching development on the economic front is the recent Chinese proposal to develop an upside-down Y-shaped economic corridor between China and Myanmar, linking Kunming with Mandalay then extending southeastward to Yangon and southwestward to Kyaukpyu. The proposal partially reflects Chinese frustration with BCIM’s slow progress and its hope to stimulate economic cooperation with Myanmar under a more comprehensive and coordinated framework. As the NLD government struggles with the international community’s disapproval of its handling of the Rakhine crisis, the Chinese proposal came as a much-needed sign of support and confidence.

The idea of building a cross-Myanmar network to link China’s Yunnan province with South Asia, Southeast Asia, and the Indian Ocean is nothing new. Besides the BCIM blueprint, an even earlier version proposed a land and water coordinated transportation network from Kunming to Bhamo then down to Yangon via the Irrawaddy River. That idea was proposed by China as early as the late 1990s but was blocked by the Burmese objection to basically granting China the freedom of navigation across its territory.

It remains to be seen how the new proposal from China could miraculously dispel long-standing Burmese suspicion of Chinese intentions. If the development and implementation of specific projects have been blocked, it’s fair to wonder how a comprehensive framework of interlinked projects will somehow be welcomed and proceed smoothly. Perhaps understanding the challenges ahead, the Chinese official statement is carefully worded and calls for “scientific and specific exploration about the Sino-Myanmar economic corridor by experts and related government agencies from both sides.” China promised to take into consideration Myanmar’s specific needs for development and start with the areas and projects needed most by Myanmar and its people.

What Myanmar needs most urgently may not be fully in line with Chinese priorities in building the transportation network through Myanmar. To truly honor Myanmar’s needs, China might have to temporarily curtail its enthusiasm in penetrating Myanmar and focus instead on local development projects that facilitate employment, industrial growth, and agricultural development. Debt traps created by China will be resented by the Burmese. Plans to penetrate Myanmar with a Chinese transportation network will stir up renewed Sinophobia and anti-China sentiment. How to strike a balance between Chinese and Burmese national interests, which do not always align, will be key to the success of the China-Myanmar Economic Corridor, or any Belt and Road Initiative blueprint in Myanmar.