Event Recap: China's Economic Statecraft in Asia

May 14, 2017
Dr. James Reilly

When Beijing promotes its One Belt One Road project to the world, it always highlights the mutual benefits that this project will bring to both the host countries and China. But when Chinese investment goes abroad, does it really create a “win-win situation,” as so frequently phrased in Chinese diplomacy? At a recent Critical Issues Confronting China seminar, titled "China's Economic Statecraft in Asia," Dr. James Reilly, Associate Professor of Government and International Relations at the University of Sydney, dissected Chinese investment and trading relations with foreign countries by examining different interests and objectives of various actors in China’s vast political industrial complex, and illustrated how these divergences can undermine China’s overall strategic and diplomatic objectives. Using the framework of the principal-agent model, he analyzed China’s relations with Myanmar and commented on those with North Korea.

Due to its socialist legacy, China has a centralized hierarchical governance structure, but delegates a fair amount of authority to local governments and state-owned enterprises (SOEs) in order to incentivize them to carry out Beijing’s policies and realize Beijing’s goals. This delegation of authority creates coordination and supervision challenges for Beijing, as local political leaders can abuse this authority and divert economic resources for their own purposes, while SOEs, eager to expand their commercial outreach, often act in ways that undermine Beijing’s political and strategic objectives.

For its southern neighbor Myanmar, Beijing’s primary objectives are border security and stability, secure energy resources for Chinese consumption, and opportunities for Chinese firms to invest and operate in Myanmar. Chinese leaders presume that expanding trade and investment will advance all of these goals, while also forging a positive image of China in the hearts and minds of the Burmese, and contributing to economic prosperity on both sides: a classic “win-win” outcome. However, the facts on the ground show that the SOEs’ activities exacerbate Myanmar’s domestic problems, such as armed conflicts and income inequality. These consequences unintended by the Chinese central government worsen Burmese populist and nationalist resentment against China. Such a situation is particularly likely when the local government, Myanmar in this case, has weak governance capability over its own internal affairs.

To secure energy supply for Chinese domestic consumption, Beijing wanted to build an oil and natural gas pipeline through Yunnan, China’s southern province bordering Myanmar, while maintaining a secure border to prevent Myanmar’s internal violence from spreading into China. China National Petroleum Corporation (CNPC) won the pipeline contract and secured massive loans from Chinese state-owned banks. Other Chinese SOEs are involved in building a hydro-power dam on the Irrawaddy River, the mother river of Myanmar, or building port facilities or developing large industrial zones in Myanmar. These SOEs’ activities and behavior abroad are difficult for the central government to monitor and regulate on the ground.

Beijing’s interest in Myanmar’s energy resources is only part of its expanding economic ties with Myanmar. By 2005, China’s foreign aid to Myanmar had already reached about $300 million. Beijing has also funded opium substitution programs through cultivating alternative crops aimed at reducing smuggling of drugs out of Myanmar and into China. Many Chinese SOEs have vested interests in these expanded economic ties. The increased flow of people and goods along with these projects has made the border porous.  

Yunnan’s local government officials often have different policy priorities from Beijing. Yunnan is one of China’s poorest provinces. Eager to develop its own local economy, the local officials view cross-border commerce as a way to prosperity and therefore have a certain degree of tolerance for the illicit trade of jade, drugs and timber, all of which are extremely lucrative. They are also susceptible to corruption from such trade and so frequently fail to report the extent of these activities to Beijing. Motivated by monetary reward, Chinese business people have inadvertently become involved in all kinds of conflicts inside Myanmar. These activities have fed into the border instability, even violence. In 2015, Myanmar’s internal violence spilled over to China and caused Chinese civilian casualties in the border area.

Beijing’s efforts to curb these problems have been anemic. Part of the reason is that Chinese SOEs operating in a foreign country often refuse to respond to guidance or directives from the local Chinese embassy in the foreign country. Only when their problems in that country are serious enough to reach the Chinese Ministry of Commerce would they alter their behavior. The Foreign Ministry has no direct authority over SOEs, whereas the Ministry of Commerce does and so is better placed to try to rein in SOEs.

Myanmar’s conventional approach to foreign policy is non-alignment: its closeness to China under the military junta was really an aberration. Under its new leadership, Myanmar is trying to restore a “new normal” by finding a middle road that makes good use of Chinese investment while minimizing its negative effects. As China continues its economic rise, Myanmar has to find ways to come to terms with Beijing. Reilly cautioned that the negative impacts of Chinese investments abroad should not be over-estimated. China will continue to exert its economic, diplomatic and strategic influence in its neighboring countries.  

Reilly’s comments on Beijing’s engagement policy toward North Korea revealed a mixed picture. In the Dandong area, an ethnic autonomous prefecture in northeast China bordering North Korea, where many Korean-Chinese played the role of conduit in trade relations with North Korea, economic ties have benefited the border region on both sides. Here, Chinese SOEs and state-owned banks, with authority delegated from Beijing, play similar roles as they do in China’s southern border, while facilitating diplomatic ties. These ties are useful for creating positive changes in North Korea, through exporting market-based economic dynamism and consumerism into the secluded country. Some Chinese scholars hope that economic engagement will eventually moderate North Korea’s nuclear ambitions and development, and encourage Pyongyang to open up to negotiations with the West.

But Beijing’s “sunshine” policy has not deterred North Korea’s nuclear program. China’s desire to retain normal economic ties with North Korea has limited many rounds of international sanctions against North Korea, as Beijing has consistently insisted on various exemptions in UN sanction packages. Even China’s new “tougher” approach, adopted since November 2016, still retains these loopholes for “normal” economic interactions. Reilly inferred from this pattern that China continues to be more worried about the risk of North Korea’s collapse than a nuclear North Korea.

On China’s recent sanctions against South Korean products and department stores, triggered by South Korea’s acceptance of the THAAD (Terminal High Altitude Area Defense) system from the U.S. as a shield against North Korea’s missile attack, Reilly was not surprised at China’s economic retaliation but at the scale and the cohesion that Chinese citizens exhibited in these consumer boycotts. He interpreted it as a result of an alignment between Beijing’s policy of reprimanding South Korea and the economic interests of relevant actors, as Chinese producers enjoy reduced competition from Korean exports and retail channels in the domestic market.