The fragile peace in Myanmar's Shan state bordering China could unravel as rebels driven out by the Myanmese army are regrouping and preparing to strike back. Nearly two months after fighting between government troops and a Kokang rebel group that left at least 34 people dead and sent more than 30,000 refugees fleeing into China, tension is again building up in the mountainous border region. The junta government forces won control of Kokang - a largely autonomous region ruled for decades by warlord Peng Jiasheng - after weeks of fighting. Peng, who has been identified by the US State Department as one of Myanmar's biggest drug traffickers and who once had close ties with the military junta, is now on the run. But a former aide, who spoke on condition of anonymity, said Peng was forging alliances with other ethnic groups in Shan state and planning to strike back. Peng, chief of the Kokang forces known as the Myanmar National Democratic Alliance Army, was hiding in the Wa special region of northeastern Shan state, the former aide said. In recent decades, Peng has cultivated close relations with Wa leaders through a carefully planned marriage alliance and is now lobbying them to help him retake Kokang. 'Unlike the Daai people [led by Peng], the Wa people are known for their unity and toughness. They are traditional warriors and will prove to be a much tougher nut to crack for the government army,' he said. 'Peng has won them over, and they are now preparing to strike back. They are waiting for the right time. It could be soon.' Apart from calling on traditional alliances, Peng told the Wa and other ethnic group leaders they could soon come under attack from junta forces. 'They were told that the attack [in August on Peng's base] in Laogai was not an isolated move. It was the first step [by the junta] to eliminate armed ethnic groups in the region and achieve a junta-run unified country,' the former aide said. Wa state, like Kokang, is considered self-ruled. With a population of 500,000, it is one of the strongest ethnic groups in northern Myanmar. The 20,000-strong United Wa State Army is widely feared in the region. The Wa and the Daai people share many historical roots. They have both been fighting for autonomy from Myanmar and supported the Communist Party of Burma in the past. Both are also culturally and traditionally close to China. The Wa and the Daai are two of the 55 recognised ethnic minorities in China and live in the southern part of Yunnan. Some Wa also live in Guangxi. Another factor favouring Peng and his allies was the unpopularity of junta rule in Shan state, another man familiar with the local situation said. Many people in Kokang regard the government soldiers currently occupying the area as invaders. 'The Myanmese army has occupied all strategic positions in Kokang,' the man familiar with the local situation said. 'But they have failed to get support from the residents. They can't even get their supplies locally, as many people refuse to give them food or trade with them.' Peng's former aide agreed. 'The Myanmese army is ill-disciplined,' he said. 'Because they can't get supplies from the local community, commanders allow soldiers to loot livestock from local villages. They even set the 16th of each month as looting day for the army. On that day, soldiers can take freely from villages without fear of punishment.' The former aid, who used to live in Kokang, said that while Peng's rule was despotic, most local people preferred his rule to the junta army as Peng had 'kept the street clean'. 'Peng had a simple solution for thieves. A thief who is caught will be put into a sack and beaten. After that the sack will be thrown down the slope [of a hill]. That is how we deal with thieves. We have very few of them,' he said. The armed ethnic groups in Shan state had been operating under a peace agreement with the junta government for the past 20 years. In August the government moved against Peng, previously one of the ethnic national leaders it showcased in meetings with visiting foreign officials. The reason for Peng's fall from favour is unclear. Some Western observers said the move was driven by suspicion and fear of the junta towards growing Chinese influence and presence in the northern part of the country, but a local Chinese political adviser said this was not the case. 'The Myanmese government has always wanted to get rid of these warlords and unify the country,' the political adviser said. 'In the past, they did not do so partly because they weren't sure how China would react. Now they are starting to attack these warlords because they are confident of their good relations with Beijing and they know China will not side with those people.' Myanmar is strategically important to China. Beijing is one of Myanmar's few diplomatic backers and has deflected pressure from Western governments over the junta's actions. It also provides economic aid. In return, Beijing is laying a 1,100-kilometre gas and oil pipeline through Myanmar, to carry crude from the Middle East and Africa. The pipeline is crucial to China's energy security as it would allow Beijing to have an alternative route for an oil supply should any conflict arise in the South China Sea. Beijing is also planning to build a railway and a highway across Myanmar in a move to expand its reach to the Indian Ocean. The warlords in northern Myanmar mainly rely on drug trafficking to fund their operations and China has become one of the biggest victims of the growing narcotics business. While Beijing does not want to see the renewal of conflict in Shan state that could send a flood of refugees into Yunnan and destabilise the region, it would not interfere to risk upsetting this crucial relationship, the former aide said.