|May 18, 2017
China is scared of the United States, loathe as it is to admit it. China may be powerful, but its power is built on trade. Its trade, in turn, depends on maritime transportation, and the United States, with its powerful navy, controls the seas. And no matter how hard China tries to modernize its military, its navy will be weaker than the United States’ for some time. This is why China is looking for overland trade routes to circumvent its eastern ocean. To that end, however, it has to build the requisite infrastructure.
Enter Southeast Asia, the gateway to the Indian Ocean and a region that is ripe for the kind of infrastructure investment Beijing can provide. Perhaps no country in the region stands to gain more from Chinese investment than Myanmar, which is struggling to find its footing after its transition from military to civilian rule. In the following report, we will look at the ways in which China has already bolstered regional infrastructure, and we will check the pulse of China’s relationship with its neighbor to the southwest.
Over the past few decades, China has become famously prosperous, but it has some problems it needs to solve if it wants its prosperity to continue. Its wealth was built on trade, and even though it’s trying to create an economy that relies more on domestic consumption than it does on exports, there’s only so much Beijing can do, considering it still imports at least as many commodities – commodities it needs to fuel its economy – as it produces. And, large and vast as China is, the only viable option for trading its goods has been through the waterways off its eastern coast. But this brought Chinese trade into waters that have long been dominated by the United States, which could, in theory, blockade the sea lanes Beijing depends so much on. (For context, roughly 80 percent of China’s oil imports pass through the Strait of Malacca. Cutting that off would cripple the country.) Beijing could build a navy to challenge U.S. naval power, but doing so takes a lot of time and a lot of money.
Maritime trade also, meanwhile, enriched the cities of the east while leaving many interior regions behind. This was tolerable so long as China’s economy grew at high rates. But as growth slows, the risk of instability in these interior regions rises, a dynamic we wrote about in our 2017 forecast. And so Beijing is in an unenviable position. On the one hand, it needs to encourage long-term economic health by implementing tough reforms. On the other hand, it is forced to protect short-term growth to maintain social stability.
Beijing has a solution to both these problems: developing land-based trade corridors that traverse China’s interior. These corridors could help redistribute wealth to otherwise impoverished provinces and limit China’s exposure to maritime chokepoints. One way this can be done is with direct access to the Indian Ocean, and direct access requires infrastructure development through Southeast Asia.
The continental portion of Southeast Asia, often referred to as Indochina, comprises Myanmar, Laos, Thailand, Cambodia, Malaysia, Vietnam and Singapore. Its geography, which features natural borders such as hills and mountains, lends itself to disunity, depriving its constituent countries of shared histories and forcing them to trade more with outside powers than with one another. Put differently, there was no incentive for regional integration.
One thing Southeast Asian countries do share, however, is proximity to China, which has at various times throughout its history exerted influence over them. When China isn’t unified, as was the case in the mid-19th century, China tends to look inward, retracting its reach and giving peripheral states room to assert themselves. When China is unified and strong, as it is now, it tends to project power into its periphery to insulate itself from external threats.
Today, China’s economic performance is central to its security, and Southeast Asia is central to its economic performance. The region’s importance is due in large part to its access to the Indian Ocean, which brings Chinese trade much closer to markets in the Middle East and Africa. China is keenly aware of its geographic challenges, of course, so it has made Southeast Asian infrastructure development a priority – first with the “string of pearls” strategy announced in 2005 and more recently with the One Belt, One Road initiative announced in 2013.
And it has used a variety of tools to advance this development. Since 2002, for example, it has, through its participation in the Association of Southeast Asian Nations, or ASEAN, pushed forward a regional transportation plan that increases connectivity between countries in the region. In the early 2000s, moreover, China implemented its “going out” strategy, which encouraged Chinese companies to invest abroad. Beijing also created the Asian Infrastructure Investment Bank, in which all ASEAN members participate, liable as they are to be chosen for the projects it finances. Last, Beijing founded the Silk Road Fund to help finance the infrastructure projects.
These initiatives have received a lot of media coverage but have notably funded only a few actual projects. For all of One Belt, One Road’s transnational ambition, the kinds of projects it means to fund are usually developed on a bilateral basis. In fact, much of the funding for some of the One Belt, One Road projects has come from the China Development Bank, one of the country’s most important financial institutions, and other Chinese commercial banks. These projects include railways in Laos and Thailand. Both of these railways are part of the so-called Pan-Asia Railway Network, which consists of three main routes linking the Chinese city of Kunming, Yunnan province, to Bangkok, Thailand: the western route via Myanmar; the central route via Laos; and the eastern route via Cambodia and Vietnam. The rail lines eventually reach Singapore too. Once completed, the project will more closely tie these countries together, putting China one step closer to the maritime trade route it needs.
But constructing this kind of infrastructure is politically and geographically difficult. Not only does China need to secure cooperation with Southeast Asian countries, it needs to make sure those countries also cooperate with one another. Neither are easy tasks. Southeast Asia has virtually no history of economic codependency, which Beijing will have to create from scratch. More important, however, is that some Southeast Asian countries are hesitant to sign on to projects that would enhance Chinese influence. Building infrastructure means that national land is used for roads or railways. People and businesses that have used the land previously could get displaced – which, in turn, could put socio-political pressure on the countries’ governments. In other words, China cannot make these countries do anything they don’t want to do.
A Bilateral Basis
This is why China tends to work with individual countries on a bilateral basis. And it has set its sights on Myanmar, through which the most direct route to the Indian Ocean passes. Geographically, the country dominates the Bay of Bengal and is home to the Irrawaddy River, an important vein that provides arable land for Myanmar’s residents and an avenue for transporting goods to the ocean. The river stretches more than half of the country’s territory and hosts most of Myanmar’s commercial activity, the majority of its population and its three main cities: Yangon, Mandalay and Naypyidaw. The river was part of the Silk Road, China’s ancient trading network, and more recently in World War II, it formed part of the Burma Road, which brought Allied supplies from Lashio to Kunming.
Mountains form a natural buffer between the lowlands and the valley. To the west, the Arakan Mountains separate India from Myanmar. To the north, along the border with China, the mountains split into two regions. The 9,800-foot (3,000-meter) Hengduan Mountains — the source of the Salween, Irrawaddy and Mekong rivers — comprise the northern and tallest portion of the border. Farther south, these mountains slope down into a plateau called the Shan Hills through which passage, while difficult, is possible. From there, the mountains descend south along the Thai-Myanmar border, into the Karen Hills and then the Tenasserim Hills. This is why whoever controls the Irrawaddy valley controls the country, while the mountains, difficult as they are to govern, are a source of instability.
Given its geography, Myanmar is uniquely suited to serve China’s interests – interests that require a fairly meaningful economic partnership. Beijing has already set the country up as an alternate avenue for energy imports. A 1,500-mile oil pipeline, which links China to the new deep-water port located on Maday Island, came online in April. And though the pipeline is delivering only 261,000 barrels per day to a refinery in Kunming (the refinery’s maximum capacity), it could deliver as much as 400,000 bpd, or roughly 5 percent of China’s daily import demand. A separate pipeline, meanwhile, has transported methane sourced from the Middle East to China via the sea port of Kyaukpyu.
China has also invested in Myanmar’s energy sector. Beijing has stakes in oil and natural gas production, but it is particularly active in the country’s hydroelectric power industry. Twenty-six Chinese companies participate in about 44 hydropower projects in Myanmar. In 2016, China invested $1.3 billion in five projects alone. (Here is a good example of the limits of Chinese influence: One project, known as the Myitsone Dam project, was to produce energy not for Myanmar but for Yunnan province. Local opposition essentially forced the project’s suspension in 2011.)
The economic relationship between the two countries likewise established in sectors such as natural resources. Myanmar is awash in oil, natural gas, coal, zinc, copper, precious stones, timber and some uranium. It doesn’t export much – exports account for only 20 percent of its gross domestic product – but China is its top buyer. Beijing invests in mining operations as well as oil and natural gas exploration operations. (Obtaining specific figures is difficult, considering that Myanmar’s economy has been so closed off and that such different Chinese entities are involved. But various external reports corroborate a degree of Chinese participation.) The government in Naypyidaw hopes to diversify foreign investment into agriculture and light manufacturing, since these sectors got less attention than extractive industries.
There are, however, political factors that constrain Chinese policy. The infrastructure it means to build takes it through restive and violent regions. The highlands, for example, are notoriously difficult to govern; the rugged terrain makes it hard for Naypyidaw to project power there. Political power in the area is therefore characterized by small groups divided along ethnic lines. The central government has fought rebellions with these groups nearly continuously since it became independent in 1948.
In years past, when China focused on securing its land borders, it backed certain rebel groups to reduce Naypyidaw’s control over its borders. But now that it cannot afford to ignore access to the Indian Ocean, China has attempted to broker peace. In March, while still supporting some rebel groups in the north, the Agricultural Bank of China cut funding to the Myanmar National Democratic Alliance Army (MNDAA) – an ethnic Chinese rebel group based in the Kokang Self-Administered Zone in the northeastern part of Shan state in response to an attack that MNDAA had conducted earlier against the government. The same month, China hosted a meeting between two other groups Beijing supported – the Kachin Independence Army and the United Wa State Army – and Myanmar’s government.
China has played both sides off each other for years, and it will continue to do so as it tries to achieve its newer goals in Myanmar. Beijing will keep either side from fully controlling the border with China. And as Myanmar opens its economy to the world, it will get preferential political and commercial treatment from its much more influential neighbor.
Myanmar is a case study in Chinese pragmatism. First, it shows how Beijing approaches a country that is vital to its interests: It incentivizes cooperation as an essential economic and political partner, and it can apply just the right amount of pressure to discourage the government in Naypyidaw from courting other foreign backers such as India and the United States. Second, it shows how China approaches a regional dilemma: It sets a list of priorities needed to achieve its strategic interests – namely, avoiding a potentially risky dependence on eastern maritime trade. Myanmar is at the top of that list, and Beijing has crafted a policy that mixes cooperation and compulsion to achieve its strategic interests.