BURMA AND CHINA: TRUE FRIENDSHIP OR MARRIAGE OF

C O N F I D E N T I A L SECTION 01 OF 05 RANGOON 000675 SIPDIS STATE FOR EAP/BCLTV, EAP/CM, INR COMMERCE FOR ITA JEAN KELLY TREASURY FOR OASIA JEFF NEIL USPACOM FOR FPA E.O. 12958: DECL: 05/20/2014 TAGS: PREL ECON PGOV MARR BM CM SUBJECT: BURMA AND CHINA: TRUE FRIENDSHIP OR MARRIAGE OF CONVENIENCE? REF: A. STATE 90967 ¶B. RANGOON 647 ¶C. RANGOON 528 ¶D. RANGOON 501 ¶E. RANGOON 417 ¶F. RANGOON 165 ¶G. RANGOON 125 ¶H. 03 RANGOON 1604 ¶I. 03 RANGOON 1598 ¶J. 03 RANGOON 1568 ¶K. 03 RANGOON 1232 ¶L. 03 RANGOON 116 ¶M. 02 RANGOON 1585 ¶N. 01 RANGOON 1906 ¶O. USDAO RANGOON IIR 6 812 0110 04 Classified By: COM Carmen Martinez for Reasons 1.4 (B,D) ¶1. (C) Summary: Burma's ruling SPDC views China as its key bilateral partner and seeks to use the relationship as evidence of its legitimacy and to offset pressure by the international community, particularly the United States, for concrete movement toward national reconciliation and democracy. The Burmese regime's engagement with China has resulted in significant political gains in this regard. The PRC has been particularly effective in accessing Burma's government elites. China's ability to influence regime leadership, however, seems to be more limited. The PRC is the dominant economic force in Burma and is a regular provider of tied aid via grants and low interest loans. Large-scale and freewheeling border trade lends a lifeline to Burmese consumers and businesspeople suffering from GOB trade policies. It also provides an important outlet and source of foreign exchange to the Burmese government, blocked by U.S. sanctions from using the international banking system for U.S. dollar-based international commerce. ¶2. (C) It is the Burmese military, particularly those officers with direct experience confronting the PRC-supported Burmese Communist insurgency, which remains the most wary of China's motives. Nonetheless, senior-level contacts between the two governments and Chinese economic largesse will continue. However, the GOB will seek to balance China's increased influence by expanding its bilateral cooperation with India in an effort to maximize its "bennies" from both neighbors. End Summary. Political: ¶3. (C) Burma, specifically the ruling State Peace and Development Council (SPDC),views China as its key bilateral partner. In addition to regarding China as a reliable provider of grants, training, and low interest loans, the regime seeks to use the deepening, supportive relationship as evidence of its legitimacy and to offset political pressure by the international community, particularly the United States and the European Union (EU),for concrete movement toward national reconciliation and democracy. While we assess that the Burmese military harbors a lingering wariness about Chinese motives and influence, we can note no criticism of China by regime officials, either in private or in the press. Although the GOB remains reluctant to provide concessions on issues of past import to China, such as development of the Irrawaddy River transport route to the sea (ref L),our interlocutors on both sides focus on the positive mutual benefits of the current relationship. In addition, we have no evidence that the regime considers China either a regional "hegemon" or a potential neighborhood bully. ¶4. (C) Economic assistance aside, the most obvious indication of the emphasis the Burmese regime places on the relationship is the well-publicized access Chinese central government and provincial officials, especially those from Yunnan province, routinely have to Burma's three top leaders, SPDC Chairman Senior General Than Shwe, SPDC Vice Chairman Vice Senior General Maung Aye, and Prime Minister General Khin Nyunt. Beginning with Chinese President Jiang Zemin's trip to Burma in December 2001 and culminating most recently with the March visit of Vice Premier Wu Yi (ref D),there has been a steady stream of high-level visits back and forth, most of which have an economic/business focus. Besides Wu Yi's trip, highlights in 2004 include a visit by the Deputy Minister of the PRC Ministry of Economy and Commerce in January and the Vice-Chairman of the Chinese People's Consultative Conference (CPPCC) in late February (he met with Than Shwe). Vice Senior General Maung Aye went to China in August 2003. These visits, as well as those by local Yunnanese economic officials and representatives of Chinese state-owned enterprises, and businessmen, garner extensive coverage in Burma's government-controlled newspaper as well as GOB press releases/information sheets. Even the Chinese Ambassador's April 21 call on Khin Nyunt, who ws identified on the occasion as General rather than Prime Minister, merited a front-page article in the government-controlled newspaper. (Note: PM Khin Nyunt is the Chairman of the Leading Committee for implementation of agreements on economic cooperation between Burma and China. End Note.) ¶5. (C) As a result of its policy of engagement with China, the Burmese regime has achieved public political gains on an issue of primary concern to the Burmese regime -- international legitimacy. China has not publicly criticized Burma and has given the regime key public support on issues such as U.S. sanctions and Burma's human rights situation. In this regard, we note public statements by Chinese State Councilor Tang Jiaxuan in August 2003, immediately after the United States imposed more stringent sanctions, in which he said he opposed any moves to isolate the Burmese regime. Another more recent public relations success for Burma was a comment by the Chinese ambassador to Geneva during debate on a U.N. Commission on Human Rights resolution critical of Burma's human rights record, in which he said Beijing regretted that the resolution did not fully and accurately reflect the human rights situation in Burma. Locally, we point to consistent efforts by the Chinese ambassador to urge the United States and other like-minded nations to reduce pressure on the regime and, in the specific case of the United States, to withdraw sanctions. This despite assurances from the Ambassador to us in several meetings that transition to democracy is inevitable, necessary, and must include the primary opposition group, the National League for Democracy (NLD). However, we assess that the overall Sino-Burmese relationship has not been tested to any degree in recent years. In addition, this public posture of lauding relations between the two countries belies at least some wariness on the part of military and economic elites who remember the Chinese-sponsored Burmese Communist insurgency and fear a potential impact on local businesses (see para 8), respectively. ¶6. (C) Though the PRC has been particularly effective in accessing government elites, its ability to influence regime leadership seems to be more limited. Nonetheless, the continued outpouring of soft loans and debt forgiveness and willingness to participate in Burmese-hosted and reciprocal high-level visits, such as the delegation to China led by Maung Aye, suggest China takes the relationship equally seriously, albeit for different reasons. Looking at China's motivations from a local perspective, China's key objectives are tied to its concern with potential political and economic instability in a bordering country; a belief that economic development is key to and a necessary prerequisite for political development; an interest in reducing the spread of drugs from Burma to China's Yunnan province and beyond; and growing demand for consistent, and nearby, sources of natural resources. While our Chinese interlocutors are always "on-message" in their acknowledgment of progress in all areas of cooperation, we judge that Sino-Burmese counternarcotics efforts have had limited success; that Chinese efforts to secure access to needed natural resources, such as timber, are becoming more successful (though often through informal means); and that there is growing frustration with the Burmese regime's perceived inability to develop and follow sound economic policies. On the question of stability, we view the Chinese as being pragmatic -- for as long as the current regime maintains power, the PRC will focus its efforts on deepening relationships with current political and economic elites. Should Burma's domestic political situation change, the PRC will respond by building relationships with the new elites. We do not expect the Chinese Embassy to develop ties with political opposition leaders at this time, as they consider doing so would compromise current influence/access for no apparent gain. In fact, the Chinese ambassador has made this point explicitly in all our meetings with him. Economics: ¶7. (C) The PRC is the dominant economic force in Burma. Large-scale and freewheeling border trade lends a lifeline to Burmese consumers and businesspeople suffering under bizarre GOB trade policies. It also provides an important outlet and source of foreign exchange to the Burmese government blocked by U.S. sanctions from using the banking system for U.S. dollar-based international commerce. China's small investors and traders are omnipresent in Burma's large cities and in the mines and forests of Kachin and Shan States. Finally, the PRC government provides an almost endless stream of soft loans and grants for Burma's "economic development" and to promote exports of Chinese (usually Yunnanese and Sichuan) products and services. Chinese companies are the primary foreign participants in most, if not all, of Burma's largest public works projects: roads, bridges, and power plants. Burma's ethnic Chinese, sometimes with far closer ties to China than Rangoon, are among the most powerful "domestic" businesspeople in Burma. ¶8. (C) Though there is a long history of a Chinese merchant class in Burma, economic ties between the two countries were sour until the mid-1990s due to the PRC's support until 1989 of the Burmese Communist Party, a once powerful insurgent group. In a capital-starved nation, consumers and some businesses welcome the current influx of Chinese money (both from the PRC and from ethnic Chinese) and products. However, many cash-poor ethnic Burman, Kachin, and other businesspeople criticize the "invasion" for crowding them out. The Burmese garment sector also fears that it will not be able to compete with China in exporting to Europe and other nations once textile quotas are removed in 2005. However, the poor state of the industry - due to the GOB's economic policies and a U.S. import ban - is eroding its competitiveness even before the deadline. ¶9. (C) Alongside continued PRC tied aid comes forgiveness or rescheduling of unpaid debt. During a January 2003 visit to China by Than Shwe the PRC agreed to forgive $80 million (ref L),and in a March 2004 visit to Burma by Vice Premier Wu Yi, the PRC rescheduled $120 million in overdue debt from $560 million worth of tied aid (ref E). Though the PRC seems willing now to be flexible on debt repayment, we are concerned with potential future consequences of Burma's massive build-up of Chinese debt. Depending on how the political winds blow, this debt service will either cement a colonial bond or become a huge burden for a democratic regime that may favor the West. ¶10. (C) For China, it appears the closer economic ties and millions of dollars of state money invested (with little likely to be repaid) are aimed at propping up regional exporters and developing preferential access to Burma's vast natural resources. The Chinese ambassador here recently told us his government was keen to "reduce China's trade surplus" with Burma (ref D). An agreement signed during the Wu Yi visit more explicitly spelled out China's interest in getting preference for investments in Burma's natural gas and oil, and in named copper and nickel deposits (ref C). Discussions with MOFA's China hand also revealed a PRC interest in getting unfettered access to the sea via Burma's Irrawaddy River. ¶11. (C) According to official Chinese media sources, bilateral trade in 2003 was $1 billion, up from about $860 million in 2002. During the Wu Yi visit, the two sides inked a bilateral agreement that, among other things, pledged to expand trade volume to $1.5 billion by 2005 (ref C). According to Xinhua-cited data, $900 million of the current trade volume is Chinese exports while $170 million is Burmese exports. Media-cited PRC data asserts that $490 million of the trade volume is between Yunnan and Burma (border trade). None of these figures presumably include the significant smuggling in both directions. To China go timber, gems (mostly jade from Kachin State),and drugs (opium, heroin, and methamphetamines). To Burma come all variety of consumer goods, which GOB import restrictions categorically forbid. The majority of legal exports from Burma are agricultural products, while the largest Chinese exports are machinery, raw materials for Burma's piecework textile factories, and metals. ¶12. (C) Border regions, especially in Shan State where roads are better than in Kachin State, look to China more than Rangoon for investment and economic growth. Often transportation links are better between peripheral cities and the Chinese and Thai borders than between the cities and Rangoon. Opium poppy substitution projects in northern Shan State hinge on developing reliable export markets in China for the new rubber, fruit, and grain being grown. To this end the PRC promise to reduce tariffs for the poorest ASEAN members is a boon. The RMB is freely used in Burmese border towns for trade transactions and is also the currency of choice for local consumers and shopkeepers in these areas (ref F and I). Chinese (Mandarin) is also the language of choice in local schools and for the growing local commercial class. ¶13. (C) Chinese investment: according to notoriously unreliable GOB statistics, as of the end of FY 2002-03 (April-March) the PRC ranked only 15th in the level of "approved" FDI with 13 projects worth $64.15 million. Hong Kong was 10th with 29 approved projects worth $162.72 million. (Note: The GOB only counts historically approved FDI, not actual or remaining foreign investment.) This official number is clearly absurd. Xinhua cites Yunnanese officials who claim investment in Burma for their province alone is between $200 million and $400 million. GOB statistics seem not to take into account the innumerable small investments by Chinese merchants in Rangoon, Mandalay, and north and east of Mandalay to the Chinese border. The numbers also don't account for illegal Chinese investments in gold and jade mining projects in the rivers and hills of Kachin State. These latter investments in particular are made by PRC Chinese through a local cut out, by PRC Chinese who buy phony Burmese ID papers, or by ethnic Chinese Burmese citizens -- many of whom have amassed significant capital in the drug trade (ref M). Military: ¶14. (C) It is the military, particularly those officers with direct experience confronting the PRC-supported Burmese Communist insurgency, that remains the most wary of China's motivations. Nonetheless, this wariness has not impeded the strengthening of this aspect of the Sino-Burmese relationship nor led to efforts to decrease reliance on Chinese-supplied armaments. The Chinese military attach (milatt) appears to have the same kind of access on the military side that the Ambassador has on the political side; the newly arrived milatt, who has had multiple tours in Burma, was received by Vice-Senior General Maung Aye in late April, soon after his arrival. (See ref O, "Burmese Military Intelligence Officer Comments on PLA Efforts to Expand Military Influence in Burma.") Comment: ¶15. (C) We anticipate continued senior level contacts between the two governments and continued Chinese economic largesse, albeit tied to specific companies and heavily oriented toward Yunnan Province, as China further consolidates its position as Burma's key partner. For its part, we expect the GOB will continue to pander to China, at least on the surface, allowing consistent access to the "top three," accepting tied aid, and continuing the ongoing positive public relations campaign in the local press. However, the GOB also will seek to balance China's increased influence by expanding its bilateral cooperation with India in an effort to maximize its "bennies" from both neighbors. End Comment. Martinez