China’s New Economic Priorities Offer ‘Exit Strategy’ on Myitsone Dam

By William Boot 1 May 2014

New financial constraints imposed by Beijing to deal with China’s bloated economy could lead to the controversial Myitsone hydroelectric dam project in northern Burma being quietly abandoned.

The Naypyidaw government has been under pressure from China Power Investment Corporation (CPI) to lift a suspension of construction imposed in 2011 by President Thein Sein, but new Chinese financial priorities could deal the dam a death blow, analysts suggest.

“Until recently China Development Bank and to a lesser extent China Export Import Bank were the best friends the emerging markets ever had,” said London’s Financial Times.

“They lent money to companies and governments in places where the availability of capital was low, the tenure short and the cost high. But the two Chinese policy banks are now stepping back.

“As the Beijing government puts pressure on its banks generally, mainland credit is being tightened both at home and abroad. While speculation about credit tapering continues in the US, it is already happening in China big time.”

Analyst Sean Turnell, an experienced Burma watcher, thinks it highly possible that Beijing’s lending curbs could lead to a quiet ending for the US$3.6 billion Myitsone project on the Irrawaddy River in Kachin State.

“The Myitsone dam is such an irritant to the bilateral relationship,” said Turnell.

“As it stands, one side must lose face. [However] the pressure within China for banks to rein in lending is surely the solution to the Gordian knot.”

President Thein Sein has ordered work on the dam to remain suspended until the end of his presidency in 2015, while CPI has been making noises about restarting work sooner. Turnell, a professor at Macquarie University in Sydney, Australia, and co-editor of Burma Economic Watch, said a Chinese curb on loans for overseas investment by state-owned enterprises offered a “highly plausible exit strategy” for the problem.

“The Burma government can breathe a sigh of relief that this highly symbolic sign of reform [suspension of the dam] can remain so, and China can exit the project without losing face. Everybody wins, seemingly.”

The tougher financial policies emerging in Beijing possibly also explain why Chinese investment in Burma has slowed down.

In early April, China Radio International reported that investment in Burma in 2013 had “plummeted” to only US$20 million or 5 percent of the value invested in 2012.

The 2013 figure was only 1 percent of the value of Chinese investment in Burma in the peak year of 2010, the radio station said.

The China Business News newspaper said China lost the leading position among foreign investors into Burma for the first time in four years and dropped to around 10th place.

“It is important to be realistic about the risks now confronting emerging markets in general now that China is focusing much more on its own internal problems and needs,” commented John Richardson, an energy analyst writing in the industry magazine ICIS.

Cutbacks will affect infrastructure developments funded by China, notably hydroelectric projects in Cambodia, Laos and Burma, Richardson said.

Three Chinese state-owned companies—Sinohydro Corporation, China Three Gorges Corporation and China Southern Power Grid—were reported to be planning to finance and build several hydroelectric dams on the Salween River in eastern Burma.

It is unclear whether any of these will now proceed.

Analyst Yun Sun of the Washington-based Stimson Center said in February that since the suspension of the Myitsone dam development, China had “suspended almost all new major investment in [Burma].”

“Beijing needs to reconsider whether it is wise to let the destiny of one commercial project sway and affect the future of broader Sino-Myanmar bilateral relations,” she wrote.

However, the much bigger issue of China’s economic clean-up now seems to have dwarfed Myitsone.

“Real GDP growth in China slowed to 1.4 percent quarter over quarter for the three months to the end of March, while imports rose a mere 1.6 per cent for the period compared to a year ago,” the Financial Times said.

“In the month of March, imports fell 11.3 percent compared to March 2013.

“All this suggests China’s role as the engine of growth for the world, and particularly for emerging markets, is likely to diminish in the future.”