Cari: China and Myanmar — friends with benefits

This article first appeared in Forum, The Edge Malaysia Weekly, on March 6, 2020 - March 12, 2020.
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The state visit of Chinese President Xi Jinping to Myanmar in January could not have been better timed.

Just weeks before, in early December 2019, Myanmar’s leader Aung San Suu Kyi was in The Hague to defend her government against accusations of genocide of its Rohingya Muslims. And in late January, the International Court issued the equivalent of a restraining order on Myanmar’s treatment of the minority group, ruling in effect that the charges, which the country strongly denies, are credible.

China seized the moment. As Myanmar’s leaders stared into the abyss of international isolation and sanctions, along came the president of the world’s second biggest economy on the first state visit to the country in almost two decades. He arrived bearing not just economic gifts but also tacit reassurances that China will be in Myanmar’s corner should the issue be taken further at the UN Security Council.

The commercial side of the visit, however, hogged the headlines, and understandably so, given the impact of multibillion-dollar developments on Myanmar’s tiny US$68 billion economy. Even Indonesia, which boasts US$1.1 trillion in economic output, has been enthusiastically courting China’s Belt and Road investments.

The balance of power in the bilateral relations is weighted heavily towards China. Not only is it Myanmar’s largest trading partner by a wide margin but it is also an important source of foreign investment. On the economic front, Myanmar has hardly any leverage with its giant neighbour.

 

Location, location, location

But this Southeast Asian lightweight has geography on its side. It sits strategically at the heart of Asia — with China to the east, India to the west, the rest of Asean to the south and the major shipping lanes of the Indian Ocean off its coast. A friendly Myanmar has much to offer a security-conscious China.

Consider the much-lauded 33 agreements signed during the visit. They are really about four key developments:

•    Building a high-speed rail link from Kunming in southern China across central Myanmar to Rakhine State off the Bay of Bengal in the southwest;

•    Reviving the stalled Kyaukpyu project, a deep-sea port on the Bay of Bengal;

•    Establishing a mega city next to Yangon, the country’s commercial hub; and

•    Setting up an economic zone straddling the China-Myanmar border.

These are not new deals so much as renewed deals to expedite or revive previously agreed projects that had stalled or had been scaled down by the Myanmar government over costs or political issues.

The developments are part of the multibillion-dollar Economic Corridor project stretching from Kunming to Kyaukpyu port, the respective terminals of the China-Myanmar oil and natural gas pipelines.

Kyaukpyu connects China to the sea lanes of the Indian Ocean through the Bay of Bengal. This access is important. About 80% of China’s oil imports from the Middle East is shipped across the Indian Ocean through the Straits of Malacca to the South China Sea. The Malacca choke point is a major vulnerability in the event of a blockade-level confrontation with another country. The Kunming-Kyaukpyu link offers China an alternative route.

Not only could the small Southeast Asian nation play an outsized role in China’s energy security but it could also help advance and strengthen China’s strategic position in the region.

The Kunming-Kyaukpyu link would reduce Beijing’s reliance on Pakistan’s Gwadar Port for Malacca-free access to the Indian Ocean and give it more leverage over Islamabad.

A friendly Myanmar also means Beijing would have its allies sandwiching a geopolitical rival and potential adversary, India. That subcontinent is flanked by Pakistan to the west and Myanmar to the east.

Myanmar belongs to the 10-member Association of Southeast Asian Nations, as does Cambodia, which is one of China’s most loyal supporters. Two friendly members in the bloc could increase Beijing’s influence over Asean policies.

And then, there is the rare-earth connection. These minerals are critical to modern technology and are used in products from cell phones to aircraft engines to the anti-counterfeiting mechanisms embedded in banknotes.

China is the world’s biggest rare-earth producer. Less well known is that it has become a major importer as well. Manufacturers in China have been facing shortfalls in feedstock due to government restrictions on upstream output. The cutbacks are in response to a shift in the national strategy to consolidate China’s global dominance by further developing value-added downstream manufacturing, such as producing the high-tech specialised magnets that are the single biggest end users of the minerals.

Myanmar meets China’s needs. In 2018, it supplied 60% of all Chinese imports of rare earth oxides and oxide equivalents.

 

Money talks

But on the economic front, there is no question that Beijing calls the shots.

China accounted for 33% of Myanmar’s exports in 2018. This compares with 18% for Thailand, 8% for Japan and just over 3% for both India and Hong Kong. In that period, China provided 32% of Myanmar’s imports against Singapore’s 19% and Thailand’s 14%.

Even more important for Myanmar is Chinese investment, particularly with the Rakhine conflict and the looming threat of international sanctions dampening business and investment sentiment.

Official data ranked China as the country’s second largest investor after Singapore, contributing a quarter to overseas inflow for the financial year ended September 2019. But in today’s globalised world of transnational businesses with their many local affiliates, conventional record-keeping likely understates the size of Chinese investment.

Both Hong Kong and Singapore are international financial centres where companies set up regional headquarters. Hong Kong, itself a part of China, is an important gateway for large fund flows to and from the Chinese mainland. The actors and funds behind investments booked through these centres could be from any jurisdiction.

Further blurring the picture are ubiquitous cross-border ownerships and partnerships. Chinese-owned CNPC, for example, is expanding its investment in petrol stations in Myanmar. But it is making its foray through Singapore Petroleum Company — a wholly owned refinery based in the city state that it acquired last year — under the SPV brand rather than PetroChina.

Myanmar is also heavily in debt. Of its estimated national debt of US$10 billion, about US$4 billion is owed to the Chinese. With foreign exchange reserves at only US$6.35 billion (2018), a lawmaker recently suggested in all seriousness that his country repay China with rice rather than dollars.

Myanmar’s edge is that China is keen to have it for an ally. Beijing has been wooing the strategically positioned Southeast Asian nation since before the Suu Kyi government. Its overtures to develop the port and rail link predate the Belt and Road Initiative with the first memorandums of understanding going back to 2009.

The China-Myanmar relationship is, and has always been, transactional and driven by mutual self-interest. For all the media hype, the January meeting is not about the blossoming of true love. It is about securing friends with benefits.

Pauline Loong is a senior fellow at CIMB Asean Research Institute and managing director of Asia-analytica

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