The Balancing Act: Myanmar Between China and the U.S.

After half a century of isolation, Myanmar’s seeks to sustain its reform momentum. It is a challenging balancing act amidst Chinese rebalancing and America’s pivot to Southeast Asia.

As U.S. Secretary of State John Kerry arrived in the ASEAN Regional Forum in Naypyitaw, he wanted the “people of Myanmar to know that they have the support and the friendship of the U.S.”

Yet, Kerry’s visit was overshadowed by concerns in the Capitol Hill and human rights watchdogs about stalled political reforms, and violence against ethnic and religious minorities in Myanmar.

Meanwhile, China’s Ambassador Yang Houlan said that “although there are some differing views on the relationship between China and Myanmar, it won’t impact ties between the two countries.”

Yet, the bilateral ties between China and Myanmar have been strained by Chinese setbacks in some investment projects.

In turn, Myanmar seeks to hedge its bets between the East and the West. Inadvertently, it has become a testing ground between Chinese and U.S. spheres of influence in Southeast Asia.

Rapid growth performance

Since taking office, President Thein Sein has introduced a slate of reforms and significantly improved Myanmar’s ties with Washington and European countries.

Economically, Myanmar lost half a century of progress, due to its geopolitical insulation. In the 1960s, it was still a major rice exporter, with average prosperity 10 percent higher than in China, as measured by GDP per capita. By the global crisis of 2008, Myanmese prosperity had fallen 55 percent below that in China.

Nearly every fourth of some 62 million Myanmese live below the poverty line.

In 2012/13, Myanmar’s economy grew at 6.5%. Fueled by increased gas production, services, construction, foreign investment and strong commodity exports, the country is on track to grow 6.9% in the medium-term.

Amidst its rapid growth, Myanmar is struggling to improve its business environment with multiple parallel reforms underway. The parliament has approved new FDI regulations. The requirement for import and export license has been removed from hundreds products. A more autonomous Central Bank is being created. A Securities Exchange Law has been passed. An anti-corruption law has been enacted.

However, given high reliance on the abundant natural resources and low productivity in agriculture, the economy is vulnerable to shocks and external risks, including a decline in commodity prices, potential slowdown in Chinese growth, adverse developments in Japan, slower recovery in the U.S., and Eurozone crisis.

Washington’s hopes

Until the 1988 military coup, Japan had provided Burma with some $2.2 billion in foreign aid and reparations. The close bilateral relations were due to General New Win who had been trained by the Japanese in 1940 to assist in the overthrow of the British colonial rule.

Despite U.S. protests, Burma got half of all foreign aid from Tokyo. When Ne Win resigned, the new military rulers consolidated power and Japan had to cope with its own economic challenges, Tokyo stopped economic assistance and focused more on aid to Myanmar.

That’s when China filled the vacuum. Beijing’s investments were focused on hydropower dams, mining projects, oil and gas.

After years of diplomatic isolation, economic and military sanctions, Washington relaxed curbs on foreign aid to Myanmar and the relations were normalized in 2011. The EU has followed in the footprints.

Today, both Washington and Tokyo are intensifying their respective investment drives in Myanmar. Japan agreed to cancel $2.7 billion in debt and pledged $900 million to support a new foreign assistance program. Not so long ago, China was scheduled to upgrade a rail track from Yangon, Myanmar’s commercial capital, to Mandalay. However, Japan won the contract and is now also hoping to modernize Yangon’s crumbling urban transit system.

While Myanmar’s economic reforms are accelerating, U.S. Congress has expressed concerns about Myanmese human rights, intimidation of journalists and violence against the Rohingya Muslims.

Washington would like to see political reforms, democratic institutions, human rights, freedom promotion. But as of yet the U.S. has proved less eager to actually invest in Myanmar, except for bold globalizers, such as Coca Cola and some other businesses.

President Obama visited Myanmar in 2012, but the administration has not fully lifted sanctions.

Chinese setbacks

Nevertheless, Chinese FDI in the country remains high. By October 2013, some 60 percent of all realized foreign investment in Myanmar was from China and Hong Kong. These capital flows were followed by those from Korea, Thailand and UK, not from the U.S.

In the first half of 2014, the cumulative investments of China and Hong Kong accounted for some 45 percent of total investments.

Not all major projects have been smooth, however. In two major FDI setbacks, China’s critics have made reference to environmental issues and dislocations of local population, while the Myanmar government has tried to be responsive to citizen appeals, mindful of the impending elections.

First, President Thein Sein suspended the Myitsone dam project in September 2011. Myanmar will have by-elections in late 2014 and general election in late 2015. As the leader of the incumbent USDP, President Thein hopes to contain popular criticism, which tends to fuel Aug San Suu Kyi’s opposition party NLD.

In the end, pragmatism may still prevail. After all, the actual termination of the Myitsone dam project could have more extensive legal, political and economic implications. Myanmar needs functional infrastructure.

The second high-profile setback is the Kyaukphyu-Kunming rail project, which the Myanmar government put on the back burner in July, allowing the memorandum of understanding (MoU) to lapse.

Soon thereafter in early August, Thailand gave approval for two Chinese high-speed rail projects that call for rail links from Thailand to Kunming. In other words, China, too, has other available options.

However, China is also moving ahead with plans to create an 18-mile rail tunnel through the border mountains with Myanmar to serve as the entry point to Kunming. In Myanmar, almost 40 percent of the imports are from China. In Beijing, the assumption is that Myanmar wants to hedge its bets, but not at the cost of Myanmese livelihood.

So the cooperation option remains on the table. However, the critical decisions may follow only after political consolidation in 2014-15.

Hedging or bandwagoning – that’s the question

According to U.S. observers, the rail project, which would pass through Myanmar’s northeast mountains to the coastal plains on the Indian Ocean, would give China a shortcut to the Middle East and Europe. It would also serve as an alternative to the longer trip through the contested South China Sea.

In Beijing, the rail project is seen to belong to the grand Chinese effort to build thousands of miles of rail track to interconnect Laos, Cambodia, Thailand and Malaysia all the way down to Singapore. It is part of the extensive trans-Asian rail accord, which almost 20 Asian countries signed some eight years ago.

In Beijing, Myanmar is seen as an emerging economy led by President Thein Sein, which has opted for economic reforms and opening-up policies, as China did in the 1980s. In Washington, Myanmar is perceived as a nation, which has been inspired by the opposition leader Aug San Suu Kyi’s struggle for democracy and human rights.

In turn, Myanmar’s policymakers are struggling to hedge their bets. They know only too well that a balancing act is one thing, but bandwagoning – or even the perception of bandwagoning – is something very different.

The original version was released by China-US Focus on August 15, 2014