With China’s signature international economic engagement strategy, the Belt Road Initiative (BRI) coming under increasing scrutiny, Myanmar needs to take a considered look at the level of economic involvement by China, in the nation. This requires not just a balanced look at the current geo-political tensions between China and Myanmar’s neighbouring SE Asian countries. It also requires an assessment of the impact of the current debt stress levels being felt by other participants along the BRI.
Irrespective of the reasons given for the BRI to have essentially stalled, China now finds itself exposed to an increasing level of debt. Much of this debt is found in what is politely termed, emerging economies, particularly in Africa and South Asia. Myanmar, as likeminded emerging economy in the South Asian region, should be looking at these debt developments with a view to manage their own circumstances to limit the potential economic and sovereign risks that may occur. It would also enable a reasoned approach that requires a separation of the economic and political issues in play.
Firstly, some context around China’s BRI ambitions within Myanmar. In the initial phases of the BRI, China had proposed the China-Myanmar-Bangladesh-India economic corridor. With India expressing concerns around the BRI, this corridor has morphed into the China Myanmar Economic Corridor (CMEC). The corridor plays a central role in China achieving energy and trade security as it allows it to bypass the Malacca Straits. The strategic importance of this route is found in the US$100 billion earmarked by China to develop the necessary infrastructure along this corridor. There are 38 proposed projects, with two major projects having been agreed to. These two are the Kyauk Phyu deep-water seaport and Yangon City. By way of comparison, the China Pakistan Economic Corridor (CPEC) involves a lower capital outlay of US$62 billion.
It is understandable that ministers in the civilian government have taken a closer look at the CPEC and Sri Lanka and expressed concern with China’s socio-political inroads into Myanmar. Furthermore, they have expressed reservations regarding the structural relationship changes between China and these two countries. In a Myanmar context, this is highlighted by the US$400million special economic zone project in Myitkyina, the capital city of Kachin State. The structural inadequacy of this agreement is found in the agreement whereby no other similar project is allowed to be built within the next 70 years, giving China exclusivity of a key entry point into Myanmar and access to west coast maritime facilities.
So, what does all this talk of debt and risk have to do with Myanmar?
In previous articles I have highlighted that COVID-19 has exposed the soft underbelly of the BRI.
China is currently restructuring debt in 140 cases, particularly involving borrowers that have signed up to the BRI, with current BRI-related debt being approximately US$142 billion. With almost US$28 billion of China’s overseas lending still under renegotiation, and likely to rise, how Beijing handles renegotiations will be crucial to emerging and frontier markets such as Myanmar recovery in 2021. This has forced China to reconsider its financing arrangements and is currently rationalizing future funding flows.
The size of the debt exposure severely limits the ability for Chinese banks to cancel debt. It is also unlikely that we will see asset seizures by China, as the focus is on how to attract multilateral institutional investment into these projects to commercialize these investments. Furthermore, whilst
China has been able to write off small zero-interest loans, the scale of their investment in Myanmar would suggest that it would not be possible, particularly if Pakistan is seen as an example. It is likely, as found in 77 agreements in Africa, there will be debt deferrals/suspensions and conversion to zero-interest loans. However, in return there will be a number of ad-hoc bilateral processes that will enable Chinese owners to be actively engaged in the management of these projects – pointing to the changed structural relationship.
In a sense, this is not a “debt trap” as such, but it does require the likes of Myanmar to be careful. It needs a balance between required investment for sustainable development needs with the risk of losing its national sovereignty. With Myanmar becoming increasingly internationally isolated it needs to be careful that it does not allow China to exploit this.
Steps that can be taken include engaging with India, particularly in the Kaladan Multi-modal Transit Transport project that connects India and Myanmar. Furthermore, it would be wise to look at the East-West economic corridor that connects India, Myanmar, Laos, Cambodia and Vietnam. This is not to distance Myanmar from China, their biggest source of FDI, but to allow greater balance in the level of financial and political exposure. This is particularly important when one considers that most of the BRI work will be undertaken by China Communication and Construction Company (CCCC), currently under economic sanctions by the USA. This would impact on Myanmar’s ability to attract other FDI to monetize these projects and bring about an economic return. Other foreign entities may well be turned off by these sanctions, further isolating Myanmar internationally as well opening the possibility that these developments become owned, managed, and controlled by Chinese entities.
Consider that only 6% of the current investment in BRI projects is by non-Chinese entities. Investors need to have some degree of comfort that find they are not partnering with Chinese state-owned companies but with a local entity. The Yangon City project has the potential to allow straightforward investment via the construction of apartment blocks or warehouses in 100% ownership models. This will only be achieved by opening the tendering process, outside of the scope of the CCCC.
International investors would be more secure in the knowledge that these investment opportunities do not have to deal with the complexities associated with a Chinese partnership.
In a sense, Myanmar is at an important inflection point with China and the BRI. It is not a question of falling victim of a “debt trap”. China has proven on many occasions that claims of a debt trap are ill-founded. However, over exposure to China’s debt can result in a changed structural relationship that could allow undue influence in the socio-economic affairs of the country. Myanmar should seek a balance in FDI that reduces this risk but at the same time addresses the sustainable growth needs of her citizens.
