Why does China care so much about stalled dam project in Myanmar?

China’s national prestige and energy security among factors behind pressure being put on Aung San Suu Kyi

PUBLISHED : Thursday, 25 August, 2016, 2:37pm
UPDATED : Tuesday, 03 July, 2018, 7:22pm

Relations between China and Myanmar took a positive turn this month during Aung San Suu Kyi’s five-day visit to China as Myanmar’s de facto leader.

But both sides have yet to work out their differences over the deadlocked Myitsone dam project, which strained bilateral ties five years ago when it was suspended by the Myanmarese government, casting fresh uncertainty over efforts to put bilateral ties back on track.

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If they value their relationship so much, why is a single China-backed project allowed to stand in the way of the improvement of bilateral ties?

Here are some key factors that could help unravel the myths surrounding the Myitsone project.

Firstly, China’s national prestige, or “face”, is at stake.

The suspension of the US$3.6 billion project, one of China’s biggest investment projects in Myanmar, plunged bilateral ties to freezing point.

But even worse, the halting of the dam by Suu Kyi’s predecessor Thein Sein on the eve of China’s National Day in 2011 was seen as “a slap in the face” for Beijing, which “deeply hurt the feelings of the Chinese people”, according to Chinese state media.

Why? Because Chinese leaders, including President Xi Jinping and his predecessor Hu Jintao, had personally thrown their weight behind the project.

As part of a cascade of seven mega dams on the Irrawaddy, Myanmar’s largest river, with investment totalling up to US$20 billion, the Myitsone dam was initiated by Hu and Myanmar’s then junta chief, Than Shwe, in 2005. It was given the green light in early 2009 during former propaganda tsar Li Changchun’s visit to Myanmar.

Xi was also heavily involved in pushing China’s dam-building ambitions abroad. During his visit to Myanmar in December 2009, Xi, then vice-president, agreed to help tap into the hydropower potential of Myanmar’s second-largest river, the Salween, where a cascade of six dams has been planned.

The fate of the Myitsone dam is strikingly similar to a series of dams planned on the headwaters of Salween in China, where it is known as the Nu River. Due to fierce public opposition and environmental concerns, Beijing had to halt the dam building plan on the Nu River for more than a decade. But with China’s economic growth slowing and investment in large infrastructure projects seen as a short cut to tackling economic woes, rumours have been rife that dam building may be resumed on the Nu River.

Secondly, the Myitsone dam controversy has posed fresh challenges to China’s energy security.

Resource-rich Myanmar has long been viewed as a viable alternative for China to solve what Hu termed the “Malacca dilemma” in 2003, according to energy and diplomatic observers.

While China is reliant on oil imports from the Middle East and Africa for more than 60 per cent of its energy consumption, nearly 80 per cent of those imports have to pass through the narrow, congested Malacca Strait.

China’s dependence on the Malacca Strait has stoked fears that the country is vulnerable to a maritime energy blockade by the West through the control of vital waterways such as the Malacca Strait and South China Sea.

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Such deep-rooted worries may be behind China’s unusual assertiveness in territorial disputes in the South China Sea. It certainly explains why China has invested so heavily in Myanmar to help build roads, bridges, ports and dams in a bid to tap into the country’s extensive oil and gas reserves.

“Unlike most other Southeast Asian nations, Myanmar is rich in natural resources such as precious minerals, oil and offshore gas reserves, all of which China badly needs for its own development,” said Du Jifeng, from the Chinese Academy of Social Sciences. “Its geographically strategic position, providing China access to the Indian Ocean, makes it even more important in China’s energy diplomacy landscape.”

Thanks to China’s special friendship with Myanmar, the result of years of political patronage, especially after economic and military sanctions were imposed on the country in 1988, China has been Myanmar’s biggest investor and top trade partner.

Myanmar became independent from British rule in 1948. The junta came to power after a coup in 1962 and began its five decades of authoritarian rule. The US and other Western nations imposed sweeping economic and military sanctions on Myanmar after the military’s bloody crackdown on an uprising in 1988. Despite Western isolation, China increased its economic and military aid to the junta, making Beijing Myanmar’s closest ally for the past two decades.

China’s top three oil companies have been operating in Myanmar on dozens of lucrative contracts for the past two decades. China National Petroleum Corp (CNPC) has built a gas pipeline project linking Myanmar’s west coast, on the Bay of Bengal, with Yunnan province. After the multibillion-dollar project was completed in 2013, China imported 1.87 billion cubic metres of gas from Myanmar in its first year of pipeline operation.

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But Myanmar’s democratic transition, which started five years ago, has dealt a big blow to China’s business interests, with many major dam and energy projects put on hold.

“China has so many unfinished projects in Myanmar and it is simply not possible for China to give up those strategically important ones simply because the honeymoon period in bilateral ties is over,” Du said.

Analysts say the failure of flagship projects such as Myitsone dam – which would have sent 90 per cent of the electricity it generated to power-hungry China – could cast a long shadow on Beijing’s ambitious efforts to expand its diplomatic and economic clout in the region.

Chinese leaders, including Xi and Premier Li, urged Suu Kyi during meetings in Beijing to properly handle the disputes over the Myitsone dam, warning of spillover effects for other Chinese-invested projects, which would further hamper a recovery in bilateral ties.

Thirdly, Myanmar, on the frontline of China’s geopolitical rivalry with the United States and Asian powers such as India and Japan, looms large in China’s quest for dominance in the region.

Myanmar, which shares a 2,200km long border with China, has been a strategic buffer zone between China and India since the 1950s.

While Myanmar has become a corridor for China to enter the Indian Ocean, India has seen its traditional ally Myanmar as a bridgehead in its “Look East” policy towards East and Southeast Asia.

Indian media have also expressed concerns over Suu Kyi’s decision to choose China as the destination of her first major trip as Myanmar’s de facto leader, saying that warming ties between China and Myanmar would inevitably undercut India’s security interests.

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Japan, which cut its aid to Myanmar under US pressure in 2007, has been catching up very quickly in both diplomatic and economic terms since a civilian government was installed in Myanmar.

The Global Times, a nationalist tabloid controlled by the Communist Party mouthpiece People’s Daily, said early this year that Japan’s value-oriented diplomacy, a strategy adopted in 2006 with the aim of supporting the “universal values” of democracy, freedom, human rights, rule of law and the free market, but which has also seen Tokyo seek to counter China’s regional influence through chequebook diplomacy, had gained a strong foothold in Myanmar since 2011.

Japan’s aid and investment have been steadily rising in recent years, with the number of Japanese companies operating in Myanmar increasing about sixfold to nearly 300 firms over the past five years.

Although China remains the biggest foreign investor in Myanmar, with more than US$15 billion of direct investment in 126 business projects by February, China’s share of total foreign investment in Myanmar has dropped from more than 80 per cent during the junta era to 50 per cent this year.

With the bulk of US economic and military sanctions still in place, Singapore, serving as a conduit for foreign investors, including Americans, has been Myanmar’s second-biggest foreign investor, with more than US$12 billion of foreign direct investment in 199 business projects, according to official statistics from Myanmar.

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China’s rivalry with its Asian neighbours has been on full display since Suu Kyi’s government took office early this year.

Tokyo was upset this year by a decision by Suu Kyi’s government to grant a Chinese company the contract for a long-planned US$3 billion refinery near a special economic zone in Dawei, southeastern Myanmar, partly sponsored by Japan.

There have been reports that Japan and India, which have recently increased diplomatic and security cooperation due to shared concerns about China’s growing regional influence, are considering the joint pursuit of strategic interests in Myanmar, which would look beyond the energy and infrastructure sectors and might see them focus on soft power aspects, such as institution-building and developing cultural assets.

Last but not least, the Myitsone dam controversy also underlines the vested interests of China’s dam building and energy companies and mirrors their dilemma in ambitious overseas expansion efforts.

According to sources familiar with the Myitsone project, powerful vested interests, especially large Chinese state-owned enterprises, have tried hard over the years to lobby both the Chinese and Myanmarese governments to push ahead with their ambitious dam building plans.

They are also clearly behind Beijing’s vigorous campaign to see the suspended dam project revived.

The dam was to have been built by China Power Investment Corporation (CPI). Former premier Li Peng’s daughter, Li Xiaolin, served as vice-president and chief executive of its Hong Kong-listed unit between 2004 and 2015 and her father was known as a staunch advocate of dam building, including the controversial Three Gorges Dam.

According to state media, the Myitsone project was to have been jointly financed by China Three Gorges Corporation and several mainland banks, most notably China Development Bank, which helps support government-linked projects around the world.

It is believed huge financial losses were incurred as a result of the suspension of the Myitsone dam project.

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A People’s Daily report in early 2014 said China had invested at least 700 million yuan (HK$815 million) in the project by the time it was halted. It said interest on loans for the project ran as high as 300 million yuan a year and CPI also had to spend tens of millions of yuan on equipment maintenance and other expenses.

China’s ambassador to Myanmar, Hong Liang, visited the dam site in June and proposed several solutions to the deadlocked project.

Myanmar’s The Mirror newspaper, reported that he said Myanmar would be liable for US$800 million in compensation if the project was scrapped and would need to pay US$50 million in interest a year before construction was resumed. Hong also suggested that if the dam was allowed to go ahead, Myanmar would be able to earn US$500 million a year in revenue when it was operational.

But observers say growing nationalist sentiment in Myanmar makes it very unlikely the Myitsone dam project can be revived. They noted said anti-Chinese protests that broke out in Myanmar during Suu Kyi’s China trip would make it impossible for her to cave in to pressure from Beijing.

The Myitsone dam is only one of more than a dozen hydropower projects in Myanmar that have been suspended since 2011.

Apart from CPI, other major Chinese dam builders, including China Huaneng Group, China Datang Corporation, China Southern Power Grid Corporation and Sinohydro Corporation, have also been hit hard.

Observers also say that while it is worth noting that Chinese companies, mostly large, state-owned enterprises, have been the victims of growing anti-Chinese sentiment in Myanmar, they are also the ones to blame for deteriorating bilateral ties in the first place.

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While those powerful state-owned enterprises have seldom, if ever, met strong opposition in China and other undemocratic countries due to strong government connections, their vested interests have often led them to encounter snags elsewhere.

Chinese companies often pay too much attention to forging ties with governments while ignoring environmental and social costs and public opinion.

Such insensitivity to local needs and environmental concerns, as well as a lack of transparency about dam construction projects on rivers that cross China’s borders and in political hot spots, have not only provoked hard feelings that threaten to ruin their business opportunities but have also made China the unwanted focal point of numerous controversies in recent years.