Image may contain: 3 people, people smiling, people sitting and textThis post is based on a paper presented by the authors at the 2017 Myanmar Update Forum at Yangon University, a partner event of the ANU Myanmar Update.

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China’s Growing Economic Footprint

China’s global economic footprint is projected to grow exponentially through its ‘Belt and Road’ initiative, to which China initially pledged US$124 billion, but may grow to US$900 billion according to the Financial Times. Started in 2013 by President Xi Jinping, this development strategy seeks to strengthen connectivity between China, Asia, Europe, Africa and beyond, based on the construction of infrastructure along a road ‘belt’ and a maritime ‘road’, while serving to stimulate trade through harmonised regulations and reduced protectionism. This is complemented by the Asian Infrastructure Investment Bank (AIIB), a new multilateral lending institution initiated by China with 37 member states and $100 billion in capital as of late 2016. This marks a new phase in China’s economic statecraft, initiated by its ‘Going Out’ policy in the early 2000’s, which was driven by a mix of factors including the accumulation of foreign reserves in the form of US government debt, saturation of the domestic market, and better in-house know how to compete internationally. Coinciding with decreased investment by Western countries in Asia and other developing countries since the 2008 financial crisis, China in recent years has emerged as one of the largest sources of outward FDI to Asia and the rest of the developing world.

In the early stages of Going Out, given the Chinese government’s minimal social and environmental standards, overseas firms have tended to work exclusively with host governments to secure deals while paying scant attention to concerns raised by host communities. Globally, Chinese investments have earned the reputation of being efficient investors, but largely disconnected from the local contexts in which they operate. The growing economic rise of China alongside the backtracking of America’s pivot to Asia strategy with the killing of the Trans-Pacific Partnership deal, as well as the lack of other options to generate foreign exchange or capacity to regulate investments, raises concerns among developing countries that they will have few options but to continue to make political and economic concessions.

Evolving Chinese Economic Statecraft

But recent trends around the world are showing that China may be changing the way it engages with countries in which it invests. In the last 10 years, in response to growing investment-related disputes between China and host countries, it has started to modify its overseas investment policy. In November 2013 at the Third Plenary Session of the 18th Central Committee of the Communist Party of China, party leaders discussed the need for companies to actively adopt social and environmental standards. According to the UNDP, 31 regulations and guidelines had been issued by the Chinese government pertaining to FDI by 2013. The Chinese government has had to adjust its engagement particularly in countries that have host governments responsive to the pressures put on them by different interest groups concerned about issues related to the environment, labour, revenue-sharing, or larger questions about sovereignty of how resources are used. When these politics coincide with other factors including host government interest to limit China’s influence into domestic or regional affairs as well as the presence of alternative investment options that offer higher standards, this can translate into cancellation of, delays of or changes in the terms of Chinese investments. Examples include Myanmar government’s suspension of the Myitsone dam project, the Sri Lankan government’s prolonged process of approving Chinese companies’ Hambantota deep sea port project, and the Thai government’s dispute with Chinese companies about their high speed rail project. Analysts also anticipate that host countries are unlikely to take OBOR loans if too many strings are attached and host governments become too uneasy with China’s deepening political hegemony.

One defining characteristic of China’s overseas investment opens the possibility for changes in the way it will engage with host countries going forward. Until 2014 more than 53% of Chinese outward investment in stock was conducted by state-owned enterprises (SOEs), managed by the central and local governments through State-owned Assets Supervision and Administration Commission of the State Council (SASAC). The Chinese government seeks to utilise these SOEs to implement broader strategic objectives. Provincial governments also have their own SOEs, but their objectives may not always overlap with Beijing. In response to the political tensions arising from investments that have faced opposition and setbacks, many Chinese state actors are now pushing central government SOEs to follow local laws and regulations in host states, so as to ensure the effectiveness of Chinese economic statecraft. On the other hand, it is far more difficult for central and regional governments to extend the same level of oversight to private investors, either individuals or companies that often partner with local economic entities and that channel funds informally, due to the limited capacity of Chinese embassies and Ministry of Commerce.

The Case of China Investments in Myanmar

In Asia, Myanmar provides the most compelling country case study of how a convergence of factors since its military-led transition towards multi-party rule in 2011 has created a new operating environment for Chinese investments. With this transition came an opening for a wider range of social forces to engage politically, marked by public protests for a number of prominent large-scale infrastructural projects initiated in the military era (1988 to 2010). It was this period in which many land-intensive investments were approved with few safeguards for communities and their environments, notably by Chinese state-owned enterprises. Statistics from the Directorate for Investment and Companies Administration (DICA) show that the total approved amount was US$14 billion from 1988 to 2011. In what came to be interpreted as a watershed moment in Sino-Myanmar relations, after decades in which the Chinese government and its investments had a free hand in Myanmar’s economy, was President Thein Sein’s decision to suspend the Myitsone Dam project on September 30, 2011, China’s largest investment to date. Analysts have pointed to a convergence of factors: massive public pressure, desire to reduce the dominance of China in Myanmar’s economy, the instability of ongoing armed conflict, and the new government’s wish for an improved domestic and international image. Chinese investments dropped significantly in 2012 and 2013, but picked up again in 2013 for a total approved investment of US$ 4.5 billion from 2012 to 2016. However, that period, Singapore already replaced China as the largest source of FDI with US13.9 billion.

At the same time, Myanmar’s transition led to the partial easing of sanctions in 2012, which were gradually imposed from 1988 onwards, helping the country to re-access the global economy, particularly the international financial system. Since then, the country has seen a return of transnational investors, including corporations and international financial entities, many of which were absent in the last two decades. While still a small share of the total, official data show increases in investments from a more diversified group of OECD countries Average annual investment from OECD countries was US$1.7 billion from 1988 to 2011, but rose to US$5.3 billion from 2012 to 2016. In part due to the sensitivity of recent sanctions, and while not true for all transnational investors, higher social and environmental standards are now on offer to Myanmar compared to what existed pre-transition. For example, clearer land ownership and related issues of conflict arbitration and compensation guidance, are issues around which businesses can increasingly be mobilised. Many companies realise that negativly impact to reputation inevitably affects the bottom line. In preparing to set up fifteen factories in Myanmar, one apparel company expressed concerns for potential land conflicts that might arise in the process of securing land for these factories. Its corporate responsibility manager said, ‘We got burned by the media for sourcing cotton. We take the land issue seriously’.

The greater pressure to adhere to international standards is shaping the new regulatory regime promoted by the transition government, initially under the Thein Sein government, and increasingly so under the NLD government. With advice from international technical advisors, the Government of Myanmar passed several important laws to strengthen the social and environmental safeguards on investments. Prominent among them were the 2012 Environmental Protection Law, with by-laws issued in July 2014. The first application of this law involved 72 businesses in Mandalay’s Industrial Zone II. The Mandalay regional government mandated the companies to clean up the pollution in the rivers within six months or risk having their license suspended.

The developments in Myanmar in recent years have paralleled a process of gradual transformation in China. After the suspension of the Myitsone Dam, many in Beijing began to realise it had underestimated the complexities in Myanmar, not the least of which is backlash from a vocal civil society, the intractability of civil war, diversified competition, and a rising bar on investments being imposed by the host government. These changes in the relationship dynamic between the two countries has impacted on the way the Chinese government handles investments in Myanmar.

Though problems remain, the handling of the Kyaukphyu SEZ and deep seaport, central to achieving China’s vision of its OBOR strategy, gives further insights into how Chinese investments are being forced to adapt to new dynamics. Due to high insecurity in the region, earlier precedents from Myitsone, and ongoing criticism, the NLD government has been delaying project completion. Faced with this, the Chinese government and CITIC are engaging with diverse stakeholders to discuss ways to improve relationships with communities and minimise conflict. In early November 2016, a meeting under the auspices of the UNDP was organised to bring together Chinese and Myanmar counterparts for this purpose. Commenting on CITIC’s attitude, an organiser said, ‘Their Vice President participated. His attitude was open, friendly and respectful, indicating a willingness to work with NGOs. He said they want to do the best EIA and SIA’. The company is now considering ways to include local civil society actors in carrying out these studies. On the ground, learning from the experiences of one of its consortium members, CITIC implemented a US$1.5 million microfinance scheme with loans provided to 50 villages in the region. Citing the Japanese-led Thilawa SEZ, CITIC managers also remarked that Chinese companies should learn from international experiences in securing social licence to operate in Myanmar.

Implications for the Future of Chinese Investments

It is not a foregone conclusion that the expansion of Chinese investments will inevitably lead to a degradation of social and environmental standards globally. There is growing awareness among some in the Chinese government that in its drive to expand its overseas investments in the last two and a half decades, it has lost a degree of control over these investments, in turn causing political tensions with a number of trading partners.

Where host countries, such as Myanmar, have governments that are responsive to pluralistic views and civil society that is organised enough to made demands, as well as alternative investment options, China is showing its willingness to constructively engage with diverse stakeholders in an attempt to increase acceptance for its investments. Of course, this also depends on a large extent on a government’s capacity to enforce regulations and to create a more equal playing field—something that can be resisted by elites that may have previously benefited from operating in favoured circles and in non-transparent ways. Support to host governments’ design and enforcement of regulations, together with the promotion of responsible business within China, are necessary to raise the standards of Chinese investments overseas. Alongside improving and enforcing higher standards for foreign investors, Myanmar and other developing countries also need to create a stable investment environment to attract and maintain desirable foreign investors. These may include better infrastructure and more simplified and consistent approval process for investments.

Ultimately, China should be called upon and encouraged to play the role of a more responsible world leader. The global community including host governments, the diplomatic community, transnational investors, development agencies and most importantly, local communities, must work together to ensure that minimum standards are upheld in order to prevent a collective race to the bottom.

SiuSue Mark is a PhD Candidate at the International Institute of Social Studies in the Hague, Erasmus University..

You Yi Zhang is a PhD Candidate at the School of Government, Cornell University.

Image from Global New Light of Myanmar available here.