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Myanmar risks falling into a China debt trap

To understand China’s top priority in Myanmar, forget Beijing’s involvement in the country’s sputtering peace process, or efforts to restart its backed but now suspended US$3.9 billion Myitsone hydroelectric dam, or even securing rights to extract copper at the locally resisted Letpadaung mine outside of Mandalay.

Those are all subordinate interests to what China really wants in Myanmar: economic and strategic access to the Indian Ocean through a deep-water port at Kyaukpyu in Myanmar’s western Rakhine state, a crucial link in Beijing’s US$1 trillion Belt and Road Initiative (BRI).

But as China’s intentions come into clearer view, concerns are rising about the terms of the US$10-billion project, with top government economic advisor Sean Turnell recently saying the US$7.5-billion price tag on the project’s port component was “crazy” and “absurd.”

Recent reports suggest that the project is now under government review. The plan to build a port at Kyaukpyu was first announced in 2007, before Myanmar became sensitive about being indebted to China for badly needed infrastructure and other economic ventures.

While some work has been done at Kyaukpyu, the massive deep-sea port that China envisions is more than a decade later still very much on the drawing board.

In 2015, China’s state-backed Citic Group won a tender to take 70% of the project, with the remaining 30% going to the Myanmar government. But for Naypyidaw’s cash-strapped government to pay its share of the project, economists estimate it would need to externally borrow around US$2 billion, most likely from Chinese sources.

That may have seemed feasible with previous high hopes of a foreign investment bonanza as the country emerged from decades of military-ruled isolation.

But as those high economic hopes have fast faded with the country’s poor rights record again deterring Western investors, Myanmar is now arguably at risk of falling into China’s so-called “debt-trap diplomacy”, where countries are pressed into making sovereignty-surrendering concessions when they are unable to service their BRI-related debts.

A textbook example is the seven-year-old Hambantota port in Sri Lanka. When Colombo was unable to service its China-held debts for the project, a deal was struck in 2016 to sell an 80% stake in the port to China Merchants Port Holdings, a state-owned entity.

China’s share was eventually lowered to 70% due to trade union and political opposition. But while the port is now referred to as a “joint venture” with the Sri Lankan government, Beijing now exercises de facto sovereign control over the strategic facility.

The same pattern can be seen in Djibouti, where China opened its first overseas military in August last year. Strategically located on the Horn of Africa and at the entrance to the Red Sea and Suez Canal, tiny Djibouti has become a vital link in the chain of ports China is building or upgrading along the coastal region of the Indian Ocean.

To be sure, the lease for China’s base — and other foreign military bases as well, among them American and French — provides Djibouti with badly needed foreign exchange.

But the small, developing country now also has to repay enormous amounts of money it has borrowed from China to pay for a new port, a new railroad linking that port with the Ethiopian capital Addis Ababa, a new airport, as well as a pipeline for bringing fresh water from Ethiopia.

According to figures released by the International Monetary Fund (IMF), those loans amount to at least US$1.1 billion, which risk analysis firms say is more than Djibouti could ever dream of repaying.

Even when it comes to a long-term friend and ally like Pakistan, Chinese investment is tied to loans and credits. China often requires Pakistan to buy Chinese equipment for use in China-led projects, which Islamabad pays for with Beijing-extended loans.

As a result, Pakistan’s overall debt level is US$91.8 billion, with a public debt-to-GDP ratio of around 70%. About two-thirds of the early loans from China were extended at what Indian analyst Mihir Sharma has described as a “usurious rate of interest” of 7%. China and Pakistan may be close allies, but this is not, as another Indian commentator put it, “what friends do to each other.”

In Pakistan, Chinese companies are involved in building a mega-port at Gwadar, which is China’s other outlet to the Indian Ocean. But because of the long and difficult route over the Karakoram mountains to Kashgar, it is doubtful whether it can be used to transport oil from the Middle East. Given the treacherous, mountainous terrain and the remoteness of Kashgar, even bilateral trade would be limited.

The importance of the port at Gwadar lies in its location, as it will firmly position China on the shores of the Arabian Sea. Although both China and Pakistan have denied it, China’s access to the port could in future include docking rights for Chinese naval vessels. Gwadar, as well as the so-called “Pakistan Corridor”, have greater strategic than economic importance despite the construction of a free trade zone near the port.

Of China’s two corridors to the Indian Ocean, the one through Myanmar is more important for trade and at least equally important when it comes to long-term strategic influence, which China needs to secure its oil imports from the Middle East and trade routes to and from Africa and Europe.

It is through Myanmar, not Pakistan, that China has built oil and gas pipelines, an important strategic hedge that allows it to bypass the potentially vulnerable chokepoint at the Malacca Strait.

As much as 80% of China’s energy imports pass through the narrow Malacca channel between Malaysia and Indonesia, which Beijing fears the US could block in a conflict scenario. It is not entirely clear how much oil and gas the pipelines linking Myanmar’s Rakhine coast to China’s southern province of Yunnan can carry, but they were designed from the start to hedge China’s Malacca exposure.

Indeed, the establishment of a strategic corridor through Myanmar is a policy that predates Chinese president Xi Jinping’s ambitious BRI, that was launched in 2013 to provide Chinese assistance and loans to upgrade infrastructure in the Asia-Pacific region and beyond.

On Myanmar’s northern border with China, a giant monument showing four figures wheeling a circular object between them, their determined faces pointing directly south, stands where the road on the wide concrete bridge that spans the Ruili river leads into Jiegao, a tiny Chinese piece of territory on the other side.

The Chinese characters on the base of the monument say “Unite, Blaze Paths, Forge Ahead!”, which some living in the border area have interpreted to mean: “Southeast Asia, here we come!”

What’s exceptional about the monument is not where it can be seen. Jiegao, a roughly two-square kilometer large enclave completely surrounded by Myanmar, is a thriving commercial center and the gateway to the markets of Myanmar and beyond.

But it was placed there with remarkable foresight in 1993 when the bridge had just been built and Jiegao consisted of little more than paddy fields with a few scattered bamboo huts. Twenty five years later, there are high-rise buildings, luxury hotels, well-stocked stores and a huge jade market where buyers from all over China come to shop for the precious stone.

Every morning, caravans of trucks laden with Chinese consumer goods drive through the border gate at Jiegao and into Muse on the Myanmar side of the border. They are destined for Lashio, Mandalay, Yangon and other Myanmar cities and towns, and even as far as Tamu on Myanmar’s border with India.

From Tamu, the goods are then brought into Moreh on the Indian side of the border and sent on to Imphal, Dimapur, Kohima and Guwahati. Not only Myanmar, but also northeast India is now being flooded with cheap Chinese merchandise.

It is also the location where the oil and gas pipelines start on Myanmar’s western coast into China as well as where Beijing aims to build a high-speed railway to Kyaukpyu. In 2011, China and Myanmar signed a Memorandum of Understanding to build the railway at an estimated total cost of US$20 billion.

Wary of China’s intentions and a potential debt trap, the previous Myanmar government under President Thein Sein let the MoU expire in July 2014, almost three years after he has also suspended the US$3.9 billion dollar Myitsone hydroelectric project.

Even so, Myanmar may have to repay the US$800 million the state-owned Chinese developer says it has already spent on the dam project. Critics in Myanmar say Beijing could dangle this potential penalty as a negotiating stick to have its way at Kyaukpyu.

In a similar vein, China extended a loan of close to US$200 million to Myanmar in 2013 to purchase “agricultural machinery and implements” from China. But, as a Myanmar-based economist told Asia Times, “not a single dollar actually crossed the border. All of it had to be used to buy equipment from China, which in the end turned out to be useless.”

That debt is still being repaid. If the much larger Kyaukpyu project goes ahead as planned — and China appears ready to do whatever it takes to ensure that it does — Myanmar will be even more indebted to China for a project that critics say will more clearly serve Beijing’s than Naypyidaw’s interests.

And while officials say they are now reviewing the project’s terms and pricing, it’s not altogether clear the government has the leverage or will to wiggle free considering China’s already strong economic and strategic hold on the increasingly indebted country.

Source: Asia Times

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