Beijing increases pressure on Myanmar to open up economically amid Western disinterest

Beijing increases pressure on Myanmar to open up economically amid Western disinterest

Larry Jagan,

China is increasing its pressure on the Myanmar government in an effort to consolidate its strategic position in Beijing’s march westward. China is also trying to capitalise on Myanmar’s increasing disaffection with the West, and the opportunity offered by the latter’s own cautious realignment and recently developed strategic vision, with the newly launched ‘Look East’ policy.

A number of high-power senior Chinese government officials have visited the capital Naypyitaw, all with the same mission, to encourage the Myanmar government to commit fully to their regional vision, encapsulated in President Xi Jinping’s One Road One Belt, now dubbed the Belt and Road Initiative (BRI), or new ‘silk road’.

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Myanmar and China have signed an agreement on a controversial deep-sea port project on the Bay of Bengal, allowing Beijing to press on with its strategic plan to access the Indian Ocean. It signifies a strengthening of bilateral ties between the two neighbours and places Myanmar firmly in the Chinese orbit.

For the Myanmar government, it serves to underline their strategic vision and gives substance to their recently announced ‘Look East’ policy. But it also assures Beijing a key jigsaw piece in its outward thrust or the BRI. The planned port is central to China’s development plans and is an integral part of the recently signed agreement to develop the China-Myanmar Economic Corridor (CMEC) that will link the port to other key commercial centres in Myanmar through a labyrinth of roads and rail lines.

The Kyaukphu framework agreement for the development of the first phase of the port project—also part of the planned special economic zone—was signed last month between Set Aung, the deputy planning and finance minister, and Chang Zhenming, chairman of Beijing-based CITIC Group, which is the project’s lead developer.

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“This will benefit Myanmar and will boost the country’s development, now that the conditions have been reconfigured to meet its need and priorities,” Aung San Suu Kyi’s chief economic advisor, Sean Turnell, told the South Asian Monitor. Earlier this year, Turnell was one of the first to openly voice concerns about the project’s financing, though many in government shared his reservations at the time.

The final agreement comes after months of tough negotiations between the two sides on the Kyaukphyu Special Economic Zone Deep Sea Port project, led by Set Aung. The project has been in the works for nearly 10 years. But talks stalled in 2016, after Suu Kyi’s democratically elected government began pressing for a higher stake in the project for Myanmar and sought guarantees there would be debt burden on the government – a ‘white elephant’, according to a senior source involved in the negotiations.

The Myanmar government was alarmed by the fate of similar Chinese projects across Asia, notably in Pakistan and Sri Lanka. Earlier this year, Colombo found itself in financial trouble when it borrowed around $1 billion from China to build the Hambantota Port and was forced to hand over operating rights to the Chinese for 99 years when it could not repay the loan. A top-level government team then studied the Kyaukphyu port project carefully and told the Chinese company in charge that they would only consider a substantially smaller project and budget at this initial stage.

“Many negotiations were conducted to make the project sustainable and to avoid a debt burden for Myanmar, both at present and in the future,” Set Aung told reporters at the signing ceremony in Naypyitaw.

“We estimate the total cost of the first phase of the project will be $1.3 billion,” he said, though sources involved in the bilateral negotiations said the actual costings are still under review, and yet to be agreed. “A detailed feasibility and operational study is being conducted,” said the source.

Myanmar’s previous quasi-military government under President Thein Sein had awarded CITIC right to develop a deep-water port and a special economic zone in 2015—after a tender bid—which put the combined price tag for the whole project at around $10 billion. At the same time, it was agreed that the port aspect of the project would be shared on an 85-15 percent basis.

This has been drastically revised, according to the source involved in the negotiations, with the Myanmar government’s share in the project now increased to 30 percent. But the government also plans to allow Myanmar companies to participate in this shareholding – and offer up to 50 percent of Myanmar’s share, according to a source involved in the continuing negotiations. Some 50 local firms have expressed interest in investing in the project.

“We will implement the project phase by phase, step by step,” Set Aung said, instead of the continuous development that was originally envisaged. He promised that the project would be “transparent and according to international standards”. International experts would be involved in environmental and social impact assessments, he added.

The framework agreement sets out plans for the port development, which is divided into four phases. The first phase, which has now been agreed, is to build two berths. Further development steps will be considered at a later stage and is estimated to take about 10 years to for completion. Still further development will depend on the progress of the previous stage, and its use and profitability, according to a senior government official.

Of course, under the revised framework, Myanmar will also have to provide its share of the necessary investment capital. This hoped to be borne by the local companies that will invest in the project. “The important thing is that the Myanmar government will not provide a sovereign guarantee for any project loans,” said the source. “It’s no longer being talked about.” But any future offshore loans would need to be approved by the Myanmar Central Bank, in accordance with the Foreign Exchange Management Law, which necessitates MCB’s permission.

The port project, according to CITIC, will bring a total of $6.5 billion in tax revenue and the industrial zone will bring $7.8 billion over a 50-year period. When the industrial zone operates at full capacity, an annual $3.2 billion earning is expected. Some 100,000 local workers are expected to be hired, with some 90 percent of the managerial positions being filled by Myanmar citizens.

But according to the Chinese company’s confidential plans for the fully operational port and industrial zone, some 400,000 staff will be needed. The plans also include establishing about 400 garment factories, though this could be scotched if the European Union goes ahead and withdraws Myanmar’s special trade privileges—Generalised System of Preferences (GSP)—in the future. Eighty percent of Myanmar’s textile exports go to the EU.

The Kyaukphyu port framework is the first concrete and practical step under the recently signed bilateral agreement to establish the China-Myanmar Economic Corridor, which covers a network of projects, including a highway linking China’s landlocked Yunnan province with Kyaukphyu. In this, a road would be built through the mountains in Magwe, linking the port to Mandalay and the rest of Myanmar, and further east to Thailand and the rest of mainland South-east Asia.

During the signing ceremony, the CITIC boss emphasised that the BRI would link Myanmar with regional transport networks. So, the port will be connected to western China and through China and the Pacific, as well as to the “East-West Economic Corridor”, joining Myanmar with other ASEAN economies.

“Myanmar cannot be isolated from the BRI. Even if we have divergent views in terms of the debt threat, we cannot ignore this initiative,” said Dr MaungMaungLay, Vice President of the national employers’ group, the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI), told the South Asian Monitor recently, on his return from investment roadshows in China, Japan and Hong Kong.

There is no alternative in the current international investment climate, he added. The Chinese are expected to provide the investment necessary for the country’s main needs that remain an impediment to all other Asian investment at present – electricity and transport infrastructure.

The controversial Chinese-backed Myitsone dam, and the hydro scheme based on it, was suspended by the previous Thein Sein government. Talks to resurrect it remain stalled because of local resistance to the potential environmental damage it would cause and the displacement of local villagers. Although part of the CMEC, it has yet to get the green signal from the Myanmar government.

There are already some Chinese proposals on the table that could be helpful, including developing a China-Myanmar-Bangladesh power grid, said Aung Naing Oo, Director General of the Directorate of Investment and Company Administration (DICA), who was intimately involved in the discussions and negotiations with China. The CMEC MoU—signed in September—outlines the framework and intentions, he said. Myanmar is now conducting joint surveys and drafting a master plan. And these projects will not be limited to Myanmar and Chinese participation, he added.

Part of the plan is to develop industrial zones, to compliment the special economic zones that have already been established, the DICA boss said. Work has begun on the first of three planned trade zones on the Myanmar-China border – in the strategically crucial border city of Muse, in Shan State.

The other two border zones are in Kanpiketee in Kachin State and Chinshwehaw in the Kokang Self-Administered Zone. The CMEC envisages these three centres being linked further south by road and rail to Mandalay—Mynamar’s second largest city—in central northern Myanmar and then to Yangon and from Mandalay to Kyaukphyu by road to the west to Naypyitaw.

In October, China and Myanmar signed an MoU (between China Railway Eryuan Engineering Group Co Ltd and Myanmar Railways) to conduct a feasibility study for a rail link from Muse, directly on the Chinese border, to Mandalay. The feasibility study will be conducted within next two years, including environmental and social impact assessments. The planned railway would be 431 km, with an estimated speed of 160 kmph.

The proposed rail and road network would establish transport links across the country’s north and connect economic hubs to Mandalay and Yangon and to the Kyaukphyu port on the Bay of Bengal.

“The CMEC offers Myanmar enormous development opportunities but needs to be carefully reviewed to ensure the proposed projects fit the government’s Myanmar Strategic Development Plan and doesn’t burden the country with unwanted indebtedness,” Turnell told the South Asia Monitor.

The key projects under the CMEC rubric must be agreed by Myanmar, and the benefits to the country clearly identified. All projects will be allocated by open tender and open to all developers – not restricted to China and Myanmar businesses. Financing will not come from China, but there will be an option to borrow from any financial institution or donors. “It’s means three wins for Myanmar,” said Turnell.

Now the Myanmar government has taken the next step to ensure it is in control of developments that stem from the CMEC plans. Last week, the government formed a steering committee for the implementation of the BRI. It will be chaired by Suu Kyi and include Vice-President MyintSwe, besides other relevant ministers and regional chief ministers.

This underlines the government’s strong political commitment to roll out the CMEC and press ahead with the Kyaukphyu port project. But it also reflects the government concern to remain on top of the developments and that they meet Myanmar’s interests, and not just China’s.