Rising China’s Diplomatic Strategy

China’s External Economic Cooperation: Ties to the Mekong Region

Politics Economy

China’s rapid economic development has been matched by its increasing overseas assistance to Asia and other parts of the world. Kitano Naohiro of the Japan International Cooperation Agency takes a look at China’s international economic ties, focusing on its cooperation with countries in the Mekong region.

In recent years the economic ties between China and its neighboring countries and regions have been deepening rapidly. Their governments have been using the frameworks of bilateral and regional economic cooperation to improve “connectivity” with each other, both through construction of physical infrastructure like motorways, railways, electric power transmission lines, and oil and gas pipelines, and through improvements in institutional arrangements, such as the conclusion of cross-border transport agreements, while also promoting economic ties at the corporate level. In this article I outline China’s external economic cooperation, particularly with the countries of the Mekong region (Cambodia, Laos, Myanmar [Burma], Thailand, and Vietnam), focusing on the use of foreign aid.

China’s Foreign Aid Policies and Implementation Structure

Within the Chinese government, the Department of Aid to Foreign Countries of the Ministry of Commerce (MOFCOM), is responsible for foreign aid policy and operations; and the Chinese Academy of International Trade and Economic Cooperation under MOFCOM, the Chinese Academy of Social Sciences, and researchers from universities and other institutions are also involved in the policymaking process. China’s foreign aid menu includes grants for construction projects (with Chinese companies doing the construction work), provision of goods and materials, dispatch of experts, training in China, dispatch of medical teams, emergency humanitarian aid, dispatch of volunteers, and debt relief (including extension of repayment periods and cancellation of obligations).

China also offers interest-free loans from MOFCOM, concessional loans in yuan from the Export-Import Bank of China (China Exim Bank), and—though not included in the official statistics for foreign aid—preferential export buyers’ credits in dollars extended by China Exim Bank on basically the same favorable terms as concessional loans. In addition, the corporate business section of China Exim Bank and the China Development Bank are involved in economic cooperation outside of the foreign aid framework.

Because the aid implementation structure involves a variety of governmental organs, in February 2011 a structure for meetings at the vice-ministerial level was established to coordinate their activities. At the second of these vice-ministerial meetings, held on March 2012, 33 organizations participated, including MOFCOM, the Ministry of Foreign Affairs, and the Ministry of Finance.

In the white paper on foreign aid published in April 2011, China set forth the basic features of its foreign aid policy as follows: (1) Unremittingly helping recipient countries build up their self-development capacity. (2) Imposing no political conditions. (3) Adhering to equality, mutual benefit, and common development. (4) Remaining realistic while striving for the best. (5) Keeping pace with the times and paying attention to reform and innovation. In addition to citing the building of self-development capacity as the top item in their list, China is focusing on the least developed countries and island nations as aid recipients, and devoting its efforts to the improvement of living standards, as well as to food security and infrastructure development. China’s priorities may also reflect their consideration for international public opinion with regard to developmental assistance. And the third item, “equality, mutual benefit, and common development,” may be taken as representing a “win-win” approach of promoting other countries’ development while seeking to further China’s own development, including the enhancement of its enterprises’ overseas activities.

Bilateral Cooperation with Mekong Region Countries

China has been promoting external economic cooperation on a comprehensive basis, combining trade, investment, and aid, making use of bilateral cooperative frameworks as well as regional ones, such as the Forum on China-Africa Cooperation and the Shanghai Cooperation Organization (consisting of China, Russia, and four Central Asian countries).

China’s bilateral undertakings have also involved the countries of the Mekong region. For example, during the visit of Thai Prime Minister Yingluck Shinawatra to China in April 2012, China and Thailand signed pair of bilateral agreements: an action plan for strategic cooperation for the five years through 2016 and a five-year development plan for economic and trade cooperation. China and Vietnam concluded an agreement establishing a Joint Committee on Economic and Trade Cooperation in 1994, and its seventh vice-ministerial meeting was held in April 2011. The two countries also have a high-level Steering Committee for Bilateral Cooperation, which held its fifth meeting in September 2011, and in October of the same year they concluded a five-year development plan for economic and trade cooperation.

China and Myanmar concluded an agreement establishing a joint working committee on economic, trade, and technological cooperation in 1997, and the two countries held vice-ministerial meetings in 2005 and 2008. China also signed an economic, trade, and technological cooperation agreement with Laos in 1997 and established a bilateral committee, which held its fifth vice-ministerial session in 2012. China signed an agreement with Cambodia in 2000, setting up an economic and trade cooperation committee that held vice-ministerial meetings in 2001, 2004, and 2007. Meanwhile, China has concluded bilateral investment protection agreements with the Mekong region countries, and it has signed treaties with Thailand, Vietnam, and Laos for avoiding double taxation.

Bilateral Trade and Investment

A timber truck in the Laotian village of Bopiat heading toward China. (Photo: Hoang Dinh Nam/AFP/Jiji; March 2011)

The value of China’s trade with the Mekong region countries surged from $10 billion in 2000 to $80.3 billion in 2010, and China’s share of these five countries’ total trade grew from 5.9% to 14.2%. On a country-by-country basis, the value of trade with China in 2010 came to $46.0 billion for Thailand, $27.3 billion for Vietnam, $4.7 billion for Myanmar, $1.3 billion for Cambodia, and $1 billion for Laos. Except for Thailand, these countries’ trade structure with China basically involves exporting resources and importing manufactured goods.

As of 2010, the Mekong region countries had received $7.6 billion in investment from China (authorized or committed), with Myanmar accounting for some 70% of the total. China’s investments in Myanmar, which exceed $10 billion if funds from Hong Kong are included, have been directed mainly at oil, gas, and electric power development. Meanwhile, China’s overseas construction orders in 2010 (on a contract basis) included $4.41 billion from Vietnam, $3.49 billion from Myanmar, $1.34 billion from Cambodia, $830 million from Laos, and $730 million from Thailand.

Economic Cooperation with ASEAN

China has traditionally stressed bilateral relationships, but in 1991 it launched dialogue with the Association of Southeast Asian Nations (ASEAN), and since 1997 it has been taking part in regular ASEAN-China summits. At the sixth such summit, held in Phnom Penh in 2002, the assembled leaders concluded a Framework Agreement on Comprehensive Economic Cooperation, identifying five priority sectors for strengthened cooperation: agriculture, information and communications technology, human resources development, investment, and Mekong River basin development. The priority sectors under the agreement were subsequently expanded to include energy, transport, culture, public health, and the environment.

At their seventh summit the following year, they signed a Joint Declaration on Strategic Partnership for Peace and Prosperity and agreed to hold China-ASEAN expositions. Following up on these commitments, a plan of action for 2005–10 was formulated to implement the framework agreement, and China-ASEAN expositions have been held every year since 2004 in Nanning (in China’s Guangxi Zhuang Autonomous Region). And following the entry into force in December 2008 of the ASEAN Charter, which established ASEAN as a regional institution with legal status, China appointed its first ambassador to ASEAN.

At the twelfth ASEAN-China summit in 2009, China proposed the creation of a China-ASEAN Investment Cooperation Fund (CAF) and committed itself to lending $15 billion to ASEAN members, including $6.7 billion in loans on concessional terms. The Chinese government also announced the provision of 270 million yuan in special grants to Cambodia, Laos, and Myanmar. In connection with these commitments, for example, China Exim Bank has extended concessional loans and preferential buyers’ credits for road construction projects in Cambodia.

The CAF was established as a private equity fund based in Hong Kong, with China Exim Bank as the main investor. The fund aims to reach a total of $10 billion. The first $1 billion tranche of investment, made in April 2010, was directed toward such areas as transport infrastructure, public facilities, communications networks, oil, natural gas, and mineral resources. In May 2010 the International Finance Corporation, which is part of the World Bank Group, joined the fund. The CAF has already decided to invest in a number of businesses and projects in the Mekong region, such as a Chinese fiber optic communications firm in Cambodia, a Chinese firm working to develop a potassium mine in Laos, and the port of Laem Chabang in Thailand.

Chinese and ASEAN leaders announce the establishment of the China-ASEAN Center at the ASEAN-China Commemorative Summit to mark the twentieth anniversary of ASEAN-China dialogue (Photo: Mast Irham/EPA/Jiji Press; November 18, 2011)

In January 2010 a free trade agreement between ASEAN and China came into effect, and tariffs were scrapped on approximately 90% of the items they trade with each other. At the fourteenth summit in November 2011, dubbed the ASEAN-China Commemorative Summit to mark the twentieth anniversary of ASEAN-China dialogue, the assembled leaders agreed on a new plan of action for 2011–15 to implement their Joint Declaration on Strategic Partnership, and China committed itself to an additional $10 billion in lending to ASEAN members, including $4 billion in loans on concessional terms. In addition, a China-ASEAN Center was established in Beijing. In advance of this summit, China’s Ministry of Foreign Affairs issued a report titled China-ASEAN Cooperation: 1991–2011 presenting an overview of the cooperative relationship.

At their ninth summit in 2003, the leaders of ASEAN agreed to work on the building of an ASEAN Community based on three institutions, including an ASEAN Economic Community, or AEC. The member countries are aiming to establish these community institutions in 2015, at which point tariffs on intraregional trade are to be reduced to zero in principle. In preparation for this, the participants at the thirteenth ASEAN summit in 2010 adopted a Master Plan on ASEAN Connectivity, the goals of which China is also supporting.

The Greater Mekong Subregion Program

Next I would like to discuss the Greater Mekong Subregion program, which is a regional cooperative development initiative launched in 1992 and coordinated by the Asian Development Bank. The GMS program initially involved the countries of the Mekong region plus China (Yunnan Province), and later China’s Guangxi Zhuang Autonomous Region was added.

The name “Greater Mekong Subregion” relates to the fact that the program encompasses a broad area; for example it targets all of Myanmar, not just the part of the country in the Mekong River basin. The first GMS summit was held in 2002, scheduled to coincide with the sixth China-ASEAN summit. The 10-year GMS Strategic Framework for 2002–12 adopted at this summit identified nine priority sectors for cooperation: transport, communications, energy, the environment, tourism, trade systems, investment, human resources development, and agriculture.

At the fourth GMS summit, held in Nay Pyi Taw, Myanmar, in December 2011, a new 10-year strategic framework was adopted for the years through 2022. In advance of the summit China published the “Country Report on China’s Participation in Greater Mekong Subregion Cooperation.” China has been releasing such reports on the occasion of each GMS summit since the first one. It can be inferred that the government in Beijing values the GMS framework as a means of linking the development of Yunnan and Guangxi, which have lagged behind other parts of the country, to the economic development of the Mekong region countries. Also, the GMS program offers China a forum in which it can learn about the international norms in the field of development assistance.

Advancing Cooperation in Transportation, Energy, Etc.

According to the most recent report prepared for the GMS summit, work is underway on upgrading the roads linking Kunming (Yunnan) and Nanning (Guangxi) with the Mekong region. In the North-South Economic Corridor, extending from Kunming to Bangkok, the portion of the road link running through Laos has been completed with funding from the ADB, Thailand, and China. Work is currently in progress on a fourth bridge across the Mekong on the border between Thailand and Laos, scheduled for completion in 2012; this project is also part of the GMS program. The Thai government is providing the funding for the Thai side of the project, while the Laotian side is being funded by grant aid from China. The enterprises handling the consulting and contracting for the project are Thai-Chinese joint ventures. China is also actively participating in the GMS Cross-Border Transport Facilitation Agreement (CBTA) process, which aims to facilitate customs and border-crossing formalities; it has concluded bilateral agreements with Vietnam and Laos, and in 2002 signed a multilateral agreement. Meanwhile, work by China, Laos, Myanmar, and Thailand to improve the shipping lanes in the upper and middle stretches of the Mekong River has also progressed, so that the river is now basically navigable year round.

With respect to the improvement of GMS railway connections, China’s medium- to long-term railway network plan (as revised in 2008) includes the building of new lines to connect Yunnan with Laos, Myanmar, and Vietnam, and that construction is currently underway. One of the new railway lines stretches from Kunming to Vientiane in Laos; this project involves extending the existing Kunming-Yuxi line (whose capacity is now being increased) from Yuxi to Mohan on the China-Laos border and building an additional 421-kilometer railway line from Boten on the Laotian side of the border to Vientiane, via Luang Prabang. In line with this project, China Railway Eryuan Engineering Group Co. opened an office in Vientiane in December 2010 and used funds from the Chinese government to complete a feasibility study in 2011 for the Laotian section of the railway. According to newspaper reports, however, the July 2011 high-speed rail accident in China has led to a change of plans, and even the work that was just started on the new line in Laos has been suspended.

Meanwhile, in April 2011 China entered into a memorandum of understanding with Myanmar on a joint rail construction project linking Myanmar’s port of Kyaukphyu to Muse, a town on its border with China. When Vice President Xi Jinping visited Thailand in December 2011, he expressed China’s readiness to cooperate in the construction of a high-speed railway between Bangkok and Chiang Mai. The decision has been made to set up the Railway Coordination Office as part of the GMS program to regionally coordinate railway development and operation.

In the energy sector, China is actively participating in electricity trading through international links between power grids in the GMS. Newly constructed transmission lines are being used to export power from China to Vietnam and Laos, where demand exceeds the domestic supply. And China is importing power from hydroelectric power stations in Myanmar, which have been constructed through the participation of Chinese state-owned electric power companies like the China Huaneng Group (Huaneng Lancang River Hydropower Co.), China Datang Corporation, and China Power Investment Corporation, introducing measures such as build-operate-transfer, or BOT, schemes. In addition, Sinohydro Corporation, China Huadian Corporation, and China Guodian Corporation have entered the hydroelectric power generation business in Cambodia, and the China Three Gorges Corporation has done the same in Laos. Aside from such undertakings under the GMS framework, the China National Petroleum Corporation is participating in the development of oil and natural gas fields in Myanmar and construction of pipelines linking Kyaukphyu and Kunming.

Let me also touch briefly on human resources development. China has conducted training programs of various sorts in Beijing involving people from the Mekong region, conducted at institutions like the China-ASEAN Environmental Cooperation Center in Beijing and the China-ASEAN Women’s Training Center in Nanning. Over 400 people so far have participated in the Mekong Region Youth Leader Training Program. And as of 2010 about 8,000 students from Mekong region countries were enrolled at institutions of higher education in Yunnan.

Sino-Japanese Dialogue and Cooperation for Mekong Region Development

As China steps up its external economic cooperation activities, international institutions like the ADB, along with bilateral aid organizations and international nongovernmental organizations, are actively working to build their ties with the responsible Chinese organs in connection with the Mekong region. Japan has also been forming a relationship with China in connection with the region. Since 2008 the two countries’ foreign ministries have been engaging in policy dialogue on Mekong region. Dialogue is also being conducted within the region—for example, between JICA Overseas Offices and the economic and commercial sections of the Chinese embassies in Cambodia and Myanmar. Meanwhile, Japanese companies have been building global partnerships with their Chinese counterparts in locations around the world, including joint undertakings in Vietnam for thermal power plant and cement plant construction.

Friendly Rivalry for the Benefit of All

As described above, China has been undertaking a broad range of economic cooperation activities with the countries of the Mekong region. These activities have been contributing to the economic development of the region, but at the same time they have been facing various challenges. Recent media reports and other sources have noted friction between Chinese companies and local communities in the region over land acquisition and environmental issues, along with imbalances in the trade structure.

Japanese firms have accumulated a variety of experiences in the area of corporate social responsibility in Southeast Asia, and Chinese officials involved have shown great interest in this track record. Meanwhile, the Japanese, who have deepened their ties with the Mekong region countries in the field of economic cooperation, including dialogues through the Mekong-Japan Summits, can learn from China’s speed in implementing such cooperation. As the members of ASEAN progress toward their 2015 community-building goal, Japan and China should deepen their dialogue and engage in a healthy sort of rivalry, combining cooperation and competition, so as to improve the quality of their respective economic cooperation undertakings, thereby benefiting the overall Mekong region.

(The content of this article reflects the individual views of the author, not those of any organizations to which he belongs or is affiliated.)

(Originally written in Japanese.)

Myanmar ASEAN Cambodia Laos Thailand Vietnam Greater Mekong Subregion People’s Republic of China economic cooperation Kitano Naohiro foreign aid Mekong Burma GMS Asian Development Bank ADB