China and Myanmar Our friends in the north

KYAUKPHYU February 7, 2008 From The Economist print edition

Shunned by the West, Myanmar is developing ever closer commercial links with its neighbours, especially China

MOST locals, who are lucky if they enjoy two hours of electricity an evening, are unaware of their region's bounty: South-East Asia's biggest proven gas reserve lies in the Shwe field, just off the coast of Ramree Island. This year work will begin on a pipeline to carry these riches to China. From perhaps as early as late 2009, a parallel pipe will carry Middle Eastern and African oil from a new deep-water harbour at Kyaukphyu, bypassing the Strait of Malacca and fuelling the economy of China's south-west.

The site of the harbour, like the former fishing grounds where the gas lies, is now strictly out of bounds to locals. Despite a small poster campaign by underground activists, few people here know much about it. Those who do are worried. According to one, farmers fear losing their land. They have good reason for concern, judging from the mass dispossessions and human-rights abuses that surrounded the construction of earlier pipelines from the south to Thailand. Residents of nearby Baday Island have already been told that they must leave.

China is not the only country in the region nervous about its “energy security” and thus hungry for Myanmar's energy resources. India also hoped to buy the Shwe (“golden”) gas, offering the government soft loans and other inducements. In August India signed a $150m contract for gas exploration further south in the Gulf of Martaban. One day India hopes to build its own pipeline into its poor, remote, insurgency-ridden north-eastern states.

Until the Shwe gas comes on stream, Myanmar's biggest export market will remain Thailand. In purchases worth $2 billion a year, Thailand's electricity authority imports gas from the Yadana and Yetagun fields. But China offers the Burmese junta particular advantages. As a permanent member of the United Nations Security Council, it can veto threatening resolutions, as it did a year ago (just three days before it secured exploration rights to three more offshore blocks near Ramree).

There are even reports that Myanmar may soon start conducting all its Chinese trade in the Chinese currency, the yuan. This sounds odd, since it is not fully convertible and Myanmar expects soon to have a large trade surplus. The rationale would be to avoid Western banking sanctions. American measures introduced after the crushing of monk-led protests last September hurt Burmese financial interests in Singapore. This week, America tightened sanctions on the ruling junta's families.

Chinese trade extends beyond energy. The new pipelines will follow the route of the old British-built Burma Road, which still carries timber, gold, gemstones and other Burmese raw materials north to China and brings in cheap manufactures. Around 20 Chinese companies are working in Myanmar on scores of projects including hydropower, mining and road-building as well as oil and gas. Ruili, the main border-crossing between northern Myanmar and China's province of Yunnan, has become a seedy boomtown.

Under construction, and soon to eclipse the Burma Road is a new “Southern Silk Road”, linking India to China across northern Myanmar. Parts of the long-derelict route were first opened by the Allies during the second world war to supply Chiang Kai-shek's Chinese army in its war with the Japanese. Today it gels neatly both with India's determination to develop the north-east and with China's plans to close the gap between its booming east coast and the laggardly western interior. Yunnan needs energy supplies and markets, and its businesses and officials are little bothered by the human-rights concerns that have led some Western governments to impose limited sanctions.