Tag Archives: China

China’s economic capital in the Philippines: Problems and prospects

Over the last two decades the improved bilateral relations between China and the Philippines led to the increased inflows of Chinese economic capital—as foreign direct investment (FDI) and aid—in the Philippines. I argue that China’s foreign aid, if managed correctly will immensely benefit the Philippines.

During the Arroyo administration (2001-2010), the number of Chinese aid projects ranging from commercial and concessional loans to grants increased exponentially. Some of these projects were ultimately cancelled such as the ZTE/North Rail projects, and CHED Cyber education projects while others like the Banaoang Pump Irrigation Project, General Santos Fishing Port Complex Expansion, and Agno River Integrated Irrigation project were successful yet publicly invisible. However, after the Aquino administration (2010-2016) mounted a legal challenge to China over South China Sea claims, Beijing halted new loans and aid projects.

Today Philippine President Rodrigo Duterte is pursuing a new approach with an eye on China’s Belt and Road Initiative (BRI), which aims to centralize investment and aid inflows at crucial geographies and sectors. During Duterte’s 2016 visit to Beijing, he received $24 billion in investment pledges to complement the administration’s massive $183 billion five-year Build Build Build (BBB).

I began my field research in the Philippines in 2014, focusing on Chinese foreign investments in the mining sector. Afterwards, I moved to studying Chinese foreign investment and aid in the Philippines more broadly. As such, I’ve been conducting field research on China’s $24 billion commitment to the Duterte administration and made the following preliminary findings.

First, pundits with alarmist tendencies populate major media and popularized a “debt trap” without ample empirics. There is no doubt that Chinese aid generated debt trap crises that have plagued high risk countries. In a debt trap, a country loses its output to loan payments, costing the country an opportunity to expand its output. Overwhelmed by spiraling debt service and low growth, the host country eventually loses control of collateral assets to the lender. Using credit risk ratings and the International Monetary Fund’s debt sustainability analysis, the Center for Global Development (CGD) finds that 23 out of 56 countries show reasonable levels of risk to China’s BRI.

However, the risk of a debt trap appears to be low in the Philippines largely due to its BBB and BA1 credit ratings. Indeed, the World Bank argues that debt traps are avoided if projects generate output that outpaces debt. There is a strong domestic demand for infrastructures due to internal activities, which will surely generate a multiplier effect for the Philippine economy. A common criticism is that the Philippines could acquire Japanese Infrastructure Construction Agency (JICA) loans at less than one percent.

However, JICA or ADB loans comprise already of more than half of present loans since October 2016 while there are only 3 projects to be funded by China thus far. Additionally, Japan cannot possibly provide loans to all infrastructure projects due to borrowing limitations, expediency, and environmental requirements. While there are some concerns around Chinese loans, these must be assessed against the opportunity cost of not funding the project.

Underpinned by continued strong macroeconomic fundamentals due to structural reforms begun under Aquino, Duterte’s economic team is well-positioned to balance growth and the debt to GDP ratio. The present list of projects does not present concerns of a debt trap. One such project is the Chico River Pump Irrigation Project in Northern Luzon for which in April 2018 the Duterte administration signed a $62 million loan agreement with 2 percent annual interest maturing in 20 years and a 7-year grace period. Two China grants, which are turnkey projects built by Chinese firms and labor for free or, have been signed for two Philippine bridges valued at $73 million. The Kaliwa Dam Project has passed bidding, with stakeholders and Chinese developers currently in consultation. Other projects in the pipeline are under study, including a South PNR Project, the Philippine SAFE, and 12 other bridges.

Other projects further down the line include the renovation of the Clark Airport and the second phase of the Mindanao Rail project. Indeed, the loans of Chico and Kaliwa dam are manageable while the bridge projects are for free. The two train projects and the airport are the riskiest in the list, presenting the strongest case for the debt trap, but these have not even begun yet. However, these risks can be minimized if these projects generate enough output, which could be used to pay for the borrowed loans. Some degree of inflation and deficit spending will increase due to increased import spending. One crucial concern is that the Philippines’ growth or output depends on moderate inflation and fiscal deficits. The “debt to GDP ratio” tends to shrink when inflation goes awry, which could lead to a deficit increase and the conditions of a debt trap. Additionally, aid projects from future commitments that would not generate sufficient output should be a cause of concern. These are issues that the economic managers of Philippine currency and infrastructure projects need to watch.

Second, host state factors matter to the completion or cancellation of China’s aid projects. For China, a Palgrave Communications study that finds a 10:1 ratio exists between pledges and actualization of investments. The ratio can be explained by various sending and host state factors, which means that the actualization of the entire pledged amount is highly unlikely. While Chinese FDI failed to reach the $15 billion pledged, between June 2016 and April 2018, Chinese FDI in the Philippines reached US$1.02 billion, amounting to nearly 85 per cent of the total amount registered during the Aquino administration. In other words, media and pundit outrage at the low amounts of Chinese actualized FDI should be taken with a grain of salt given the expected rate of cancellation from foreign commitments. Nonetheless, China should be criticized for the lack of transparency of aid and investment projects, and the Duterte government should be reprimanded for marketing pledged rather than actualized amounts.

On all Chinese and non-Chinese projects in the Philippines, elite competition, regulatory red tape, and local government decisions largely account for investment cancellation and delays. Currently, these host state factors are shaping the outcome of China’s $24 billion pledged. For instance, a hydropower project by Power China Guizhou and Philippines Greenergy Development Corp encountered trouble acquiring funds because of the uncertainty regarding the recently signed Bangsamoro Basic Law (BBL), a law which grants autonomy to the Muslim areas of the Southern Philippines. Most of the major investment projects in Mindanao province have been delayed because of this new terrain as investors are trying to figure out the economic implications of the new law. In another, a deal between Global Ferronickel, the third-largest nickel ore producer in the Philippines, with Baiyin Nonferrous Group, a Chinese copper supplier that was put on hold due to a moratorium on new mining operations, which made investment in mining operations fruitless.

In other cases, the completion of Chinese projects also depends on the preferences and political sway of local elites, which often matter to project implementation, local government regulation, and popular compliance. Projects such as rail networks tend to take a long time to negotiate due to the unequal distributionary impact of the infrastructure, which will concentrate economic activity and political gain on cities with train stops. Other locations, which will only receive the rail tracks, will lose out relative to those receiving the stops. In other words, intense local elite competition typically occurs when rail projects manifest.

The foreign funder and national governments often need to distribute economic or political rent to receive elite compliance to the plans. To some degree, these issues occurred in HSR in Indonesia, the Eastcoast Railway Link in Malaysia, and the Sino-Thai Railway. This is also the reason why the PNR South Rail and Mindanao Rail projects are experiencing delays. Conversely, infrastructure projects that disburse relatively equal benefits to local elites generate compliance and project progression. Roads cut across numerous cities, airports create multiplier effects, and irrigation projects can be built across farms. As such, the road projects, the Kaliwa Dam, and the Chico Irrigation are steadily moving forward with local elite cooperation and have experienced delays on technical matters instead.

Ultimately, the improvement of macroeconomic foundations during Aquino, a high demand for infrastructures due to domestic activities, and a diversified list of funders minimize debt risk. I recommend that the Philippines and other states establish a new and independent BRI Review Board exclusively for Chinese projects. This board should receive support from international organizations and directly report to the most important institutions of the country. In addition, a review of policies by international development banks that aim to expedite the project funding process will make the banks more attractive alternatives for countries seeing infrastructure loans.

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Mahathir looks east. Abe doesn’t look him back.

 

Just one month after his surprise victory against the scandal-ridden and increasingly-authoritarian incumbent Nazib Razak in May, the new Malaysian Prime Minister Dr.Mahathir bin Mohamad landed in Tokyo for his first foreign visit, where he chatted with Japanese Prime Minister Shinzo Abe. Since then, Mahathir has aggressively courted Japan for investment, aid, and loans, visiting Japan once more in August before even announcing the dates for his much-anticipated first official visit to Beijing. Mahathir calls this Japan-focused approach as part of the New Look East policy, situating it as an attempt to revive the close Japan-Malay relations during the original Look East policy, which Mahathir pursued in his previous 22-year stint as prime minister from 1981 to 2003.

One of the critical priorities of the New Look East policy is to secure Japanese soft loans — preferential credits denominated in yen offered at exceptionally low interest rates and extended maturity periods — to retire higher interest rate loans ballooning the national debt, which has reached 65% of the Malaysian GDP. Reducing the national debt — which far exceeded Nazib administration’s self-imposed debt-ceiling — will go a long way to achieve Mahathir’s top priority of stabilizing the country’s finances.

Unfortunately for Mahathir, Japan doesn’t share Malaysia’s enthusiasm for new soft loans. Dr.Mahathir claims Abe agreed to “study the request” for financial support during their June bilateral summit. On the other hand, Japan’s Ministry of Foreign Affairs in their press release refrained from acknowledging that any discussions of a Japan-backed soft loan took place in the same meeting. A similar discrepancy was seen in the contrasting accounts of the July meeting in Malaysia between the two country’s foreign minister — while the Malaysian foreign ministry press statement said the two ministers discussed “soft credit assistance,” its Japanese counterpart issued a report that did not include such details.

Perhaps sensing Japanese hesitation to commit to concrete aid packages, Mahathir in late July adjusted expectations for Japanese credit assistance, saying he was unsure whether Japan will offer soft loans with low interest rates, but said he was still interested in taking Japanese loans even at higher rates to refinance maturing debt.

With Malaysian national debt ballooning to 65% of GDP, access to Japanese soft loans is key to Mahathir’s goal that aims to lower debt burden by switching existing debt with lower-interest rate loans while simultaneously expanding populist deficit spending to shore up domestic support. Easy Japanese credit also plays a role in the prime minister’s plan to phase out China-backed debt — which funds joint infrastructure projects — out of geopolitical concerns about the nation’s over-reliance on China in its capital accumulations: a Japanese cash infusion will provide funds that could be used to return the principles of Chinese loans.

Thus, Japan’s reluctance to finance soft-loans for Malaysia has severe domestic and geopolitical consequences. Without Japanese cash Mahathir will face difficult choices between enforcing unpopular austerity measures and taking on more debt to finance deficit spending, contradicting his promise to the electorate either way.

Japan’s reluctance may be puzzling from Mahathir’s perspective which appears unchanged from the days of his old Look East policy: why will Japan hesitate to offer soft loans now although it willingly provided them before, as Mahathir repeatedly stresses? In reality, however, what he asks now under his revived Look East policy is entirely different from what he obtained under the original Look East policy in nature and economic magnitude, explaining the divergence in Japanese response between then and now.

First, the purpose of the soft loans Japan offered under Malaysia’s original Look East policy was fundamentally different from that of the loans Malaysia recently seeks. Malaysia obtained development finance during Mahathir’s first tenure; in direct contrast, what Mahathir is requesting Japan today is effectively a bailout loan, since the Japanese funds acquired will be used to make early repayment of loans with higher interest rates and shorter maturity period rather than development projects.

In 1990 and 2000 Japan provided 40-year loans with exceptionally low interest rate (0.75%) in order to fund development projects to build the nation’s economic and social foundations.  Specifically, such loans were used to enhance the nation’s education, public infrastructure, and small businesses — not as refinancing for its debt. Even in the aftermath of Asian financial crisis of 1997, Japan opted to provide Malaysian with liquidity as the funding source of its economic restructuring, not public debt.

 

While Mahathir says that Malaysia is requesting the loans with the similar terms and conditions as those Japan once willingly extended twenty years ago, applying interest rate on development assistance loans to bail-out loans is not relevant due to the completely different nature and risk profile of these two types of the loans.

Second, Malaysia’s economic profile essentially changed from the day of its original Look East Policy.  Malaysia in 2008 ascended to middle-income country status according to the Japanese foreign ministry, disqualifying the country as a recipient of significant amounts of soft loan as financial aid. Reflecting its enhanced fund-raising capacity, Malaysia actually has not requested any soft loans since 2012: the country today is too developed for Japan to provide subsidized credit within the framework of developmental assistance.  Accordingly, Japan will have to create a new scheme in order to provides bilateral bail-out loans for a middle-income country like Malaysia; otherwise, using tax payers’ money for such loans is considered moral hazard.

Even if Abe wishes to meet Mahathir’s request by providing low-interest bailout loans under the new scheme, justifications of such loans would be the significant challenge both economically and politically.

The first obstacle is economic burden. The cumulative amount of Japan’s soft loans to Malaysia stood at about ¥976 billion ($8 billion as of 2015,) compared to Malaysia’s total debt of 1 trillion riggit ($251 billion as of May 25, 2018).  If Japan were to expand its debt to Malaysia to have meaningful influence as a major lender, additional funding will most likely far exceed its bilateral ODA disbursement to any single country, considering the fact that Japan’s total 2018 ODA annual budget amounts to ¥500 billion ($4.5 billion as of August 18, 2018.)  The Japanese government will face considerable difficulty getting political consensus to mobilize such a larger fund especially because Japan itself has been under significant pressure to reduce its large debt that now represents 251% of GDP.

Diplomatic and political disincentives for providing such loans also hinder Japan’s willingness to actively get involved in Malaysia’s debt finance.  As Japan strives to pursue a more cooperative approach with China in South East Asia, it prefer not to openly move into a vacuum left by Mahathir’s rebuff of Beijing by gaining lending share from China in Malaysia’s debt. Abe will face the risk to lose the public support by potentially abetting China’s and Malaysia’s risk-avert project finance as their financial supporter.  Also, unlike during the late 1990s when ensuring Malaysia’s economic stability was in Japan’s financial interest, it is unclear what economic benefits Japan could gain if they were to provide financial support to Malaysia.

These factors make it abundantly clear that Japan is not in a realistic position to provide the soft loans Mahathir asks. Then why does Tokyo refuse to openly rebuff Malaysia’s request, instead opting for a mysterious absence of all soft loan discussions from official communications?

Mahathir, a seasoned politician with decades of experience working with Japanese counterparts, should know his soft loan request is particularly challenging for Japan to supply. And yet, he pushes forward perhaps because he is aware that rejecting the loan request is just as tricky for Tokyo as accepting it because it is a unique geopolitical opportunity to counter China’s financial reach in South East Asia.

Make no mistake: a Japanese bailout package for Malaysia, if it materializes, will be fundamentally different in character from most bail outs —its purpose will not be to shore-up a nearly-bankrupt country to prevent a financial crisis. With Moody’s credit rating for Malaysia holding steady at the investment-grade A3 and the country’s treasury bond rates well-within historical bounds, Malaysia is a relatively healthy country financially speaking that should not require a multi-billion-dollar bail-out. That Malaysia is seeking Japanese funds anyways is indicative of Mahathir’s intention to diversify the country’s lender profile by adding Japanese loans as he moves to reduce Chinese debt.

Presented with a rare opportunity to earn influence and dilute China’s power in a country that until recently appeared to be sliding into Beijing sphere, Tokyo may not feel comfortable openly rebuffing the Malaysian request — explaining their reserved response.

The story of Sri Lanka, which fell prey to a Chinese debt trap that forced them to sign with China a 99-year port lease in exchange for debt relief, is fresh in Japanese decision makers’ minds, raising concerns if Malaysia could be next if their debt continues to grow. Moreover, despite Mahathir’s skepticism of China, he appears eager to maintain a working economic relationship with them — Malaysia has other countries it can turn to if Japan hesitates, adding to Tokyo’s insecurity.

As is often is the case in these sorts of stories, the debtors actually have the upper hand over the creditors.

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China’s solar industry is at a crossroads

This article is republished from chinadialogue.

Generous subsidies have been slashed or removed to rein in rampant growth. Liu Bin examines the changes

Solar powered photovoltaic cells are assembled by workers at a factory in Dezhou, Shandong province (Image: ​Greenpeace/Alex Hofford)

China’s solar manufacturers are unhappy with recent government policy changes that have put a brake on the sector.

“We’ve already halted work on 11 megawatts of industrial and commercial distributed solar PV projects,” says the marketing director for one solar photovoltaic (PV) module manufacturer in Guangdong province.

“Without subsidies there’s no return on investment for over a decade, so investors and property owners aren’t interested in distributed solar. With subsidies it only takes seven years to recoup the investment,” he adds.

This is one consequence of China’s “531” policy that was announced by the National Development and Reform Commission, the Ministry of Finance, and the National Energy Administration without warning on May 31(hence the “531” name). The policy is designed to control breakneck growth in the solar sector, principally by accelerating the phase-out of subsidies.

China has led the world in new solar installations in each of the past five years, helped by guaranteed electricity prices. But the cost of subsidies has been growing unsustainably, and as manufacturers have expanded rapidly to meet demand the risk of overcapacity has grown.

The new policy brings the industry to a crossroads. During the 12thFive Year Plan period (2011-2015) subsidies were paid late and there was significant wastage of both solar and wind power. Those lessons should have been learned by now, says Meng Xiangan, deputy director of the China Renewable Energy Society. To avoid a repeat, the sector can either lobby for an extension of subsidies and continue its rapid and unsustainable expansion, or accept that new capacity will face a tougher challenge on costs.

Source: IRENA

A sudden change

Under the current system, the National Energy Administration (NEA) sets annual targets for installed solar capacity, which is eligible for government subsidies. At the local level, development and reform commissions are responsible for approving projects. In theory, subsidies are limited to projects that fall within the NEA (central government) targets, although local governments may also provide subsidies.

The new policy, which came into effect immediately, has no target for the construction of solar farms, and orders local governments not to approve solar farms that need subsidising.

However, it is distributed solar projects, such as small-scale commercial and consumer rooftop installations that will see the biggest change. Previously, there was no target for distributed solar capacity, leading to strong growth in the distributed solar market.

In 2017, 19.44 gigawatts (GW) of new distributed solar was added – as much as the total for the previous three years. A further 7.68GW was added in the first quarter of this year, an increase of 217% year-on-year and 79.6% of all new installations in China. The new policy has put in place a target of 10GW of new distributed solar capacity (as oppose to solar farms), which means that the entire 2018 target was almost reached in the first three months of the year.

Alongside limiting the amount of new solar installations eligible for subsidy, the 531 policy also reduces the level of subsidy for solar farms and distributed solar, which were set through regional pricing policies in 2013.

These policies provided a huge stimulus for corporate investment in solar PV. They divided the country into three regions according to their suitability for solar generation, with prices paid per kilowatt hour set at 0.90, 0.95 and 1.00 yuan accordingly. Distributed solar installations were subsidised at 0.42 yuan per kilowatt hour.

The new policy has dropped those subsidies to 0.50, 0.60 and 0.70 yuan per kilowatt hour across the three regions, with the distributed solar subsidy falling to 0.32 yuan per kilowatt hour.

This is the second cut in subsidies in less than a year. In December 2017 the distributed solar subsidy fell from 0.42 yuan per kilowatt hour to 0.37 yuan.

“We were expecting subsidies to be cut back but this was too sudden and too sweeping, with no buffer period,” says a source at the Guangdong Solar Energy Association.

The cuts are a clear signal from government that the sector needs to become less dependent on subsidies and shift its focus from rapid scaling toward technological improvements to further bring costs down.

“The subsidy has been a major driver of new projects,” says Lin Boqiang, head of Xiamen University’s China Institute for Studies in Energy Policy.

“The idea of a subsidy is that eventually it goes away. China’s been slow to do that, it would have been better if this had happened earlier,” he adds.

A difficult transition

Many investors and project owners are waiting to see how the new policy plays out.

“Some customers immediately cancelled orders and demanded cheaper prices,” says Sun Yunlin, head of Winone Solar, which provides services such as consulting, feasibility studies and handover inspections to solar farms.

The market has dropped significantly. Wang Bohua, secretary general of the China Photovoltaic Industry Association, expects to see 30-35 gigawatts of new capacity in 2018, a drop of 43% on last year.

That drop in new installations in China means there is a risk of overcapacity in the supply chain, which has been expanding rapidly. The silicon subcommittee of the China Nonferrous Metals Industry Association calculates that China’s production capacity of polycrystalline silicon – a raw material for the solar industry – will reach 433,000 tonnes a year in 2018, growth of 57% year-on-year. Most of that new capacity will come on stream in the third quarter.

China’s percentage share of the solar PV industry in 2017 (Source: China Photovoltaic Industry Association)

report from the China Centre for Information Industry Development (CCIDWise) predicts that growth in the solar PV market will fall off or even reverse, with further price drops to come across the industry and firms facing significant pressure on costs.

Wang Bohua, secretary general of the China Photovoltaic Industry Association, said at this year’s 3rd Century Photovoltaic Conference that expansion of manufacturing capacity was still rapid, but the warnings of overcapacity caused by excessive expansion back in 2011 should be heeded.

Mind the gap 

China’s 13th Five-Year Plan (2016-2020) set a 105GW target for new solar PV capacity by 2020. This was hit two years and three months early. As of April 2018, capacity was 140GW.

One of the reasons for this runaway growth is because plans for the solar sector differ between central and local governments – particularly since the power to approve solar farms was devolved to the local level in 2013, which made it harder for central energy authorities to control the scale or rate of solar PV installations. That loss of control is why the subsidy funding gap has steadily widened.

“During the 12th Five-Year Plan the target for solar generation grew from 5GW to 10GW, then to 15GW, then ultimately from 21GW to 35GW. That was a bigger change than planned for any other industry. There was effectively no cap on total capacity,” explains Meng Xiangan.

The expansion started in 2013. The EU and US placed anti-dumping measures on imports of Chinese solar PV products, causing the overseas market to shrink. With no outlet for domestic capacity a meeting of the State Council in June that year took six measures to support the industry through the crisis: policy assistance, guaranteed purchase of solar power, improved electricity pricing policy, funding support, funding for research and design, and support for mergers and restructuring.

With guaranteed prices, solar power manufacturers and other companies started building solar farms. In December 2013 Deloitte published a report on clean energy in China that found 130GW of “queued” solar projects – three times the entire 12th Five-Year Plan target.

But the Renewable Energy Development Fund, from which subsidies are paid, had only one source of income – a renewable energy surcharge on electricity bills, which is collected by energy suppliers from customers. That surcharge has been adjusted five times and currently stands at 0.019 yuan per kilowatt hour.

Electricity prices were fixed while solar PV development costs fell

A key reason for the exponential growth in distributed solar PV installations in recent years is that electricity prices were fixed while solar PV development costs fell. This created enormous potential for profit, further encouraging investment in the sector.

This was particularly the case for distributed solar installations. The first adjustment was made in 2017 – a reduction of 11.9%, from 0.42 to 0.37 yuan per kilowatt hour. But during that same period the price of polycrystalline silicon panels (which make up 60% of the cost of solar installations) plummeted from 3.9 yuan per watt in 2013 to 2.4 yuan in 2018 – a drop of 38.5%. The cost of monocrystalline silicon panels fell to 2.5 yuan, dropping 37.8%.

That out-of-control growth left a huge funding gap in the subsidy scheme, which is now limiting the sector. Figures from the National Energy Administration show that as of the end of 2017 the accumulated shortfall in renewable subsidies stood at 112.7 billion yuan, with 45.5 billion yuan due to the solar PV sector. An extra 10 gigawatts in distributed solar means a further four billion yuan in subsidies has to be found – or 80 billion yuan over a 20-year period.

Hard to control

The National Energy Authority started trying to manage the expansion of the solar sector in 2014, but its goals didn’t align with the interests of local governments, so policies were not properly implemented.

To encourage investment, some local governments had a “first-built, first-served” policy – the first distributed solar installations to be finished were included in annual quotas, and thus eligible for subsidies.

Growth in solar has ‘been driven by business and local government’

Anhui made this explicit in a notice published in 2016, which stated that projects would be included in annual quotas in the order of their connection to the grid. This resulted in far more capacity being constructed than annual quotas allowed for – 2.55GW of new capacity was built in Anhui in 2016, compared to a quota of 0.5GW.

Wang Liguo and Ju Lei at Dongbei University of Finance and Economics have studied the roots of overcapacity in the solar sector.

They say: “it has been driven by business and local government, with the energy authorities forced to respond rather than guide and control the sector’s sustainable development.”

Better solar integration

Solar PV is still a key part of China’s low-carbon strategy, which is itself important for realising China’s commitment to reducing emissions and increasing the proportion of non-fossil fuel energy in the overall mix to 15% by 2020. But too much focus on installed capacity can come at the cost of coordinated planning across central and local government, and with the grid. This can add to the challenge of absorbing new solar capacity effectively into the power system.

This is evident in China’s north-west where 40% of the country’s total PV capacity is concentrated in five provinces (Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang). It is also where the most solar power is wasted.

Because solar installations were not coordinated with power grid construction, there grid has limited ability to absorb the extra power and connection to the grid has been difficult. National Energy Administration figures show that curtailment of solar PV was 19.81% across those five provinces – that is, one fifth of solar power capacity is being wasted.

The National Energy Administration wants to reduce curtailment to just 5% nationwide. But this will be no easy task.

Fan Bi, former head of the General Economy Department at the State Council’s Research Office, has written that the intermittent nature of solar power causes problems if large scale, concentrated generation needs to be connected to the grid. Ultra-high voltage lines can be used to carry the power 1,000 and more kilometres to eastern and central China, but energy loss through transmission and transformation makes this a hugely uneconomical option for the State Grid.

And the provinces which would receive that renewable energy aren’t keen either, as they view it as against the interests of their own utility companies.

Dafeng power station in Yancheng, Jiangsu province combines wind power and solar PV (Image: Greenpeace/Zhiyong Fu​)

Lack of a quota system

Guaranteed electricity prices incentivised the development and roll-out of renewable energy, but they didn’t create demand for that power. There needs to be a better balance between the varying interests on the grid, power generators, and consumers to ensure a atable market.

One approach to rectify this was detailed in March this year by the National Energy Administration, which plans to establish a renewable energy quota system. This would require each province to source a certain percentage of electricity from renewables, passing the cost of the quota obligation onto market actors (such as power networks, electricity suppliers and major electricity consumers).

But there is uncertainty over the quota system already. The government’s work report at this year’s Lianghui called for large reductions in the non-taxation burdens on companies, and specifically for “reductions in power distribution and transmission network charges, with ordinary industrial and commercial electricity costs falling 10%”.

Lin Boqiang says a renewable energy quota system could prevent the waste of solar power, but it would mean higher prices. With the government hoping to boost business competitiveness, it may be reluctant to implement the proposed changes.

Back to the market

Responding to questions on the new 531 policy, the National Energy Administration said that it will encourage firms to shift their reliance from government policy to the market. This is expected to help eliminate excess capacity, encourage technological improvements, end the sector’s irrational expansion, and concentrate resources in stronger firms.

After an initial panic, the industry is now calmer about the future. “At Guangdong electricity prices, solar PV is a viable investment if solar cells drop in price to 1.8 to 2 yuan per watt. We expect to see 2 yuan per watt at the end of the year,” says Sun Yunlin from Winone Solar.

Li Chuangjun, deputy head of the new and renewable energy department at the National Energy Administration agrees that the cost of solar is reaching parity with conventional technologies. He says that technological advances have seen costs fall by about 90% from 2007 to 2017, and power from solar PV may be sold to the grid at standard rates within two or three years.

Some industry insiders are even more optimistic. Four days prior to the release of the 531 policy Liu Hanyuan, chair of the Tongwei Group, said at the 12th International Solar and Smart Energy Exhibition that innovation and further economies of scale could help solar match coal-fired power on a cost basis across most of China.

Meng Xiangan says it is now time for the sector to “find its place in the overall market”.

The article was produced jointly by chinadialogue and Energy Observer. This version has been edited from the Chinese original. This article is republished from chinadialogue.

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Hydropower in Laos: An Alternative Approach

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It’s time to take another look at the future of energy in Southeast Asia.

A report published in September by the Stimson Center, a D.C.-based think tank, challenges prevailing notions about the future of hydropower in the Mekong subregion, an area including Vietnam, Cambodia, Laos, Thailand, Myanmar, and southwestern China.

The report focuses on Laos, which in years past has proclaimed itself the future “Battery of Southeast Asia,” by aggressively developing hydropower dams on the Mekong. Laos has already built 29 large dams along the river’s mainstream and tributaries, with plans for over 100 in total. The land-locked country remains the poorest in Southeast Asia, and has planned to raise cash by exporting electricity to consumers in neighboring countries.

But project developers of these dams – who are typically Thai and Chinese companies – have faced criticism from civil society groups and international observers for the myriad social and environmental consequences brought on by dam construction. The Mekong is home to an estimated 1,000 species of fish, many of which migrate along the river and replenish the region’s fisheries. By changing the hydrology of the river, these dams threaten the biodiversity of the Mekong and the livelihoods of fishermen and farmers throughout the region. In times of drought – as has been experienced this year – the dams can cause regional insecurity by contributing to water scarcity problems downriver.

While dam construction has continued apace despite these dangers, the Stimson report argues that new markets and technologies are creating an opportunity to change course.

Challenges for Lao Hydro

The report highlights new developments that could steer Laos away from further damming on the Mekong. First, following a period of economic and political liberalization, Myanmar is emerging as a competitor for energy infrastructure finance. Myanmar boasts nearly 100 gigawatts of potential hydropower capacity, far exceeding what is possible in Laos. Such a glut of potential projects in the region is likely to siphon away financing that might otherwise go towards hydropower development in Laos.

At the same time, China’s economic slowdown could signal the end for cheap and easy hydropower finance in the region. In previous years, Chinese state planners encouraged outbound investment in strategic sectors such as hydropower projects in Southeast Asia. However, the report notes that government concerns about non-performing loans on the books of Chinese banks seem to have reduced the funding available for some projects in Laos. Rising local awareness about the social and environmental costs of these dams also adds a layer of risk that financiers may find discouraging.

Perhaps most critically, it appears as if planned generation in Southeast Asia is outpacing the region’s appetite for energy. China, once envisioned as a potential market for Laos power, is already experiencing serious overcapacity in its domestic power market. Thailand, while still a major investor in Laos hydro projects, has consistently overestimated its own consumption levels – and has lots of room to cut demand through energy efficiency measures. Both Cambodia and Vietnam have planned to reduce their reliance on imported energy, with the latter investing heavily in coal-fired power plants.

A New Vision for Laos

Taken together, these signals make a compelling case for a new energy strategy in Laos and in the region as a whole.

First, the report suggests that Lao planners should invest in a backbone transmission network to connect its patchwork regional grids. This is a good idea for a variety of reasons. A nationwide transmission system would help open up markets for Lao electricity both domestically and internationally by creating a more flexible grid. It would help planners integrate renewable energy resources like solar and wind. It would also be a great step towards electrifying the remaining 20% of the country still without power.

Secondly, planners should consider ways to diversify the country’s energy mix with wind and solar. With too much reliance on hydro, the region risks facing shortages during drought conditions, which will become increasingly likely due to the effects of climate change.

It also makes good economic sense. Utility-scale solar is now nearly cost-competitive with hydro in Laos. Solar avoids the social and environmental challenges associated with hydro that have led to disruptive public protests and cost overruns, making it a safer bet.

In fact, solar already plays an important role in electrifying Laos’ rural communities. Companies like Sunlabob have pioneered low-cost solar home systems to provide basic electricity services like lighting and device charging to remote communities. A new energy outlook from Lao energy planners would also be a great opportunity to optimize plans to fully electrify the country, whether by grid connection, solar home systems, or village-level microgrids.

Lastly, greater international cooperation in energy planning is needed. The construction of a national power grid will require technical assistance from international experts. The Asian Development Bank is leading this effort, and plans to invest $400 million in a national transmission network by 2020. The US has already begun providing power planning and optimization assistance through the Department of Energy and its national laboratories.

The US is also supporting renewables in Laos. In advance of President Obama’s visit to Laos in September 2016, the US Trade and Development Agency committed to funding a feasibility study for a 20 megawatt solar farm in the country.

China, as a regional power with an abiding interest in Laos’ energy sector, can also benefit from this shift. The world’s largest solar module manufacturers are Chinese, and government support for emerging solar markets is one way to bolster domestic manufacturers while also rebranding China as a responsible stakeholder in the region.

Laos’ energy future is still uncertain. Energy planners remain convinced that prioritizing dam construction is Laos’ ticket to prosperity, despite the risks. But as the challenges for Lao hydro become ever more apparent, a new way forward could be in the making.

Read the Stimson Center’s full report here.

This article was first published here on the Pacific Observer website.

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Thailand bets on China-led AIIB to finance massive infrastructure needs

Will China's AIIB-backed 'railway diplomacy' be enough to jumpstart Thailand's lagging economy?

Will China’s AIIB-backed ‘railway diplomacy’ be enough to jumpstart Thailand’s lagging economy?

On January 26, Thailand’s cabinet approved a budget of 52.82 billion baht (US$1.47 billion) to join the China-led Asian Infrastructure Investment Bank (AIIB).

Thailand will hold around a 1.43 percent share of the bank with payments beginning in five installments of 2.112 billion baht (US$58.90 million) due by the end of 2019.

“As the country [has] aggressive plans to improve its much needed infrastructures, the AIIB would offer great opportunities in terms of more loan availability” explains Nithi Kaveevivitchai, a research economist at the Bank of Ayudhya.

Thailand’s junta is attempting to revive the country’s flailing economy with an ambitious spending program of over US$100 billion that would include large-scale infrastructure upgrades for the country’s railways and roads, as well as air and seaports. Being one of the fifty-seven founding members of the AIIB, Thailand could potentially receive cheaper loan rates and more flexible lending conditions from the Beijing-based bank, compared against the US-led World Bank or the Japan-led Asian Development Bank.

The Thai government foresees it will benefit from intensified diplomatic rivalries between China and Japan. During a speech in April 2015, Thailand’s energy minister Narongchai Akrasanee, cannily asserted that “one thing we have learned is that if we welcome the Chinese, the Japanese will come running.”

Support for the AIIB in Thailand has not been unanimous, however. Kasit Piromya, a former foreign minister and current advisor to the Democratic Party of Thailand, criticized the creation of the AIIB as “part of China’s global strategy to dominate” and argued at the Asian Financial Forum that “China will be dictating terms and that will further weaken the Asean community.”

Since seizing power, Thailand’s military generals have instead sought to deepen political and economic ties to China, which is now the country’s largest trading partner. “It has been analyzed that any related projects that could benefit the supply chain network and trading routes between the ASEAN region and China would receive great attention from the AIIB,” assesses Nithi Kaveevivitchai.

The Sino-Thai railway link, which aims to transform Bangkok into the hub of China’s ambitious Pan-Asia Railway Network, appears to be a particularly likely candidate for an AIIB infrastructure loan. After months of bumpy negotiations – during which Beijing insisted on downgrading the railway from high-speed to medium-speed – the project saw a breakthrough in January 2016 when China agreed to Thailand’s demand that it slash its interest rate from 2.5% to 2%.

The Chinese government had long insisted on a 2.5% rate, arguing that Thailand was now an upper-middle income country, notes Mr. Nithi.

“Whether [the] AIIB will be used to fund this project is still too early to say… it could be seen as a good alternative for funding, especially if the development bank can offer a more competitive lending rate,” he adds.

The railway is currently facing further uncertainties due to its estimated budget of 500 billion baht (US$13.08 billion) and the Thai government is asking China to take more financial responsibility for the project.

Thai Deputy Prime Minister Somkid Jatusripitak told the Nation (Thailand) on February 5 that “Thailand was requesting that China be responsible for civil construction and related work for the 800km-plus railway track instead of just providing trains, rolling stock and related equipment, as the scheme is mutually beneficial so profits should not be the only factor for consideration.

In addition to issues of cost, critics in Thailand have asked whether the project is actually beneficial to the country, which has no mass goods in need of rail transit.

In parallel to the Sino-Thai railway link, Thai and Japanese authorities recently announced they have launched on a trial basis a train-delivery service using 12-foot long containers at Nong Pla Duk Junction in Ratchaburi province.The aim would be to eventually connect the junction to the Dawei deep-sea port in Myanmar, where Thailand has been developing a special economic zone (SEZ) with Naypyidaw since 2012. The long-delayed project was recently joined by Japan in 2015 and has the ambitious aim to become the gateway for the Mekong region to the Indian Ocean. China, however, has also expressed interest in creating a Dawei rail link, intimating a likely point of competition in the future. 

While it remains too early to be seen whether Minister Narongchai will be proven right, using the AIIB to expedite rail infrastructure loans could significantly help China  secure its fragile ascendancy over Japan in terms of ‘railway diplomacy’, as the two countries continue to compete for contracts across Southeast Asia.

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Laos’s leadership transition raises questions over regional alliances

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Bounnhang will be the leader of Laos’ ruling Lao People’s Revolutionary Party.

Laos’ Communist Party elected vice-president Bounnhang Vorachit to be its next leader last week, after a vote by the newly formed 10th Party Central Committee.

State media announced on Friday that the congress of the Lao People’s Revolutionary Party, which is held every five years, had selected a new central committee and politburo to lead the country. The 78-year-old Bounnhang is replacing Choummaly Sayasone, 79, as secretary-general and president, who is stepping down after almost a decade in power.

Some observers believe that the change in leadership signifies a tilt away from China and closer to longtime ally Vietnam, as Laos takes on the chairmanship of the Association of Southeast Asian Nations (ASEAN) regional bloc.

The secretive nature of Lao People’s Revolutionary Party, which has ruled the country since 1975, makes its internal politics difficult to understand, but the changes in the politburo offer some indications of a slight shift in the ruling elite.

The choice of Bounnhang, a senior figure of the regime who was a prominent member of the Pathet Lao armed independence movement and has previously acted as prime minister, is an unsurprising one for the single-party state.

However, few expected the departure from the party of Prime Minister Thongsing Thammavong, 71, who had been in the politburo since 1991. Speculation in Laos is rife that his exit from power is linked to the recent arrests for corruption of Central Bank Governor Somphao Sayasith and former Finance Minister Phouphet Khamphounvong.

The 70-year-old Deputy Prime Minister Somsavat Lengsavad was also reported as not having sought re-election to the central committee, where he had been been a politburo member since 2006. Though less highly ranked in the cabinet, he was notable for being the principal pro-Beijing voice within the government.

A fluent Mandarin speaker, Somsavat has shepherded many joint ventures with China and is currently overseeing the controversial Laos-China high-speed rail project, whose ground-breaking ceremony took place in early December 2015.

The 427 km railway would connect the Lao capital to the Chinese border and is expected to cost  US$6.04 billion. A Radio Free Asia (RFA) report from January 4 mentions some government officials as criticizing Somsavat for having accepted a deal unfavorable to Laos, noting that it was not the first “high-cost investment where he gave too much away as collateral for project loans with little or no payoffs for ordinary Lao citizens.

The railroad has been mired in controversy ever since it was announced in 2010. The project was alleged to have created tensions between Laos and Vietnam, whose “own relations with China were then at a standstill,” explains Ian Baird, a Laos expert and a professor at the University of Wisconsin-Madison.

Bouasone Bouphavanh, the then-prime minister, is believed to have been removed from power and replaced by Thongsing in 2010, due to perceptions that he was favoring Beijing over Hanoi. Soon after, plans were started for a Laos-Vietnam railway, but never formalized.

In recent years, Beijing has vied aggressively for influence in Laos through aid, loans and infrastructure investment.

“China is using its economic interests to get political power” says Baird. “Politically, though, Laos remains much closer to Vietnam. Most of the country’s leaders studied or trained in Vietnam, including Bounnhang. They were already in governmental positions in the 1980s when there were strong enmities between Laos and China, who were then almost at war, with no trade or real relations.”

“What the Lao are doing now is trying to balance between the Vietnamese and Chinese. They want political support from Vietnam and financial support from China…The United States is also getting closer to Laos, but has relatively low investments in the country.”

“Ultimately”, Baird concludes, “I believe that Vietnam has more power than China in Laos.

Such diplomatic balancing was already visible this week. The Associated Press reported on Monday that Thongsing had assured US. Secretary of State John Kerry that “Laos would help counter China’s assertiveness in the South China Sea.

Xinhua, meanwhile, detailed a meeting on Tuesday between Bounnhang and Song Tao, a special envoy mandated by Xi Jinping, where the former announced “he was ready to join hands with China to further develop the relations between the two parties and two countries.” Unmentioned publicly by either government was the death of two Chinese nationals in a suspected bomb attack on Sunday in central Laos, though it remains unknown whether they were individually targeted.

As this year’s ASEAN chairman and co-convenor of the upcoming Sunnylands Summit, it is likely that Laos will be trying to strengthen its own position in the regional balance, particularly in light of mounting tensions in the South China Sea.

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What’s Old is New Again: Predictions for Southeast Asia 2016

Will there be more skirmishes in the South China Sea in 2016? Photo: Getty Images

Will there be more skirmishes in the South China Sea in 2016? Photo: Getty Images

Much can change in a year’s time. In January 2015, Singapore’s Lee Kuan Yew was still alive, Aung San Suu Kyi’s future as leader of Myanmar was quite uncertain and East by Southeast was not making any predictions about international affairs in Southeast Asia. But again, much can change in a year’s time.

2016 will be a critical period for geopolitics in the region, as new strategic relationships are formed and existing ones strengthened. Many experts talk of a growing polarization of the region as countries position themselves between the US and China, a trend due in large part to rising tensions in the South China Sea. The conflict will take center stage in 2016. Look for the the Netherlands-based Permanent Court of Arbitration to publish its initial findings on the Philippines’ case against China in the first half of 2016. Despite not ruling on sovereignty issues, the outcome of this case will likely anger China and lead to a more aggressive stance towards the Philippines and other claimants. As the Philippines and Vietnam rely more heavily on the US for security guarantees in the South China Sea, more US flyovers and naval patrols in the contested waters are to be expected. Look for the US Navy to begin to use Vietnam’s Cam Ranh Bay for “maintenance” purposes and to park its ships on a somewhat permanent basis  in the Philippines’ Subic Bay after joint military exercises finish in April 2016.

Conversely, look for the emerging Sino-Thai regional axis to be solidified in 2016. This relationship, despite not bringing much to the languishing Thai economy, will tighten the ruling junta’s grip on power. Thailand’s long drift towards authoritarianism will add further strains on ties with the US, its long-term external security power. Of course, the permanent white elephant in the room in Thailand is the king’s health. With his majesty in poor health, lese majeste cases will continue to multiply as the junta’s concern grows.  His death and the subsequent succession struggle would likely send the country into chaos, even with the army in control. Such a collapse of the Thai political structure would have major repercussions for the region’s stability.

Laos is also in for a tough year ahead. Its chairing of ASEAN will do more to highlight its shortcomings than celebrate its successes. With the opening of Xayaburi Dam, Don Sahong Dam scheduled to break ground in 2016 and preliminary studies beginning on a third Mekong dam at Pak Beng, there will be renewed calls from the international community for Laos to reconsider its hydropower plans for the Mekong River. The landlocked country’s lack of finesse in dealing with the South China Sea conflict will also draw criticism, all punctuated by continuing questions about the kidnapping of Lao activist Sombath Somphone.

In Cambodia, the political impasse between the ruling Cambodia People’s Party and the Cambodia National Rescue Party will continue through the first half of 2016. Expect strongman Hun Sen to find an 11th hour solution paving the way for opposition leader Sam Rainsy to return from self-imposed exile to begin preparing for the 2017 parliamentary elections.

Barring another major fracture in Thai politics, Vietnam’s National Party Congress will mark the region’s most significant political transition in 2016. Nguyen Tan Dung is likely to be selected as Vietnamese Communist Party chairman, with Truong Tan Sang staying on as president or similar role to balance Dung’s reformist tendencies. Dung’s leadership will be key as Vietnam implements the Trans-Pacific Partnership, a painful process that will force Vietnam to learn to run and walk at the same time. Dung’s princeling son, Nguyen Thanh Nhgi, will also be elevated to the Central Committee and has a bright path ahead if his father can lead the country into a new era of high economic growth and balanced relations between the US, China and Russia.

Corruption scandals will continue to keep a stranglehold on Indonesian and Malaysian politics. In Indonesia, President Joko Widodo’s efforts to prop up a sagging economy will be hampered by an unstable cabinet and nagging questions relating to 2015’s Freeport corruption scandal. In Malaysia, Prime Minister Najib Razak will continue to face intense public scrutiny over the 1MDB scandal. It is possible that Najib will use a new national security law to muffle Malaysian civil society’s calls for his resignation.

After refreshingly open elections in 2015, 2016 will be a year of political posturing for Myanmar. As Aung San Suu Kyi and her victorious National League for Democracy take power in early 2016, the military will position itself to retain many of its past privileges. Look for Than Shwe and the other generals to create a formal post in the government for Aung San Suu Kyi, who is legally barred from the presidency, in a bid to define and contain her power as head of the NLD. Those expecting radical change from the NLD government will be disappointed – there will be little structural political reform, the NLD’s foreign policy will be largely similar to Thein Sein’s, and the ethnic reconciliation process will still muddle along. However, look for the new ruling party to permanently shut down the Myitsone hydropower project and consider suspending the Salween river’s cascade of dams in order to push along the ethnic peace process.

Like 2015, this year will see a further intensification of the Rohingya refugee crisis. However, with the world’s eyes adjusted to seeing the plight of refugees, there will be more attention paid to the issue and Aung San Suu Kyi will receive pressure from both Western and Muslim-majority countries to solve the problem of Rohingya persecution in Myanmar. Another ethnic group that came to the forefront last year, China’s Uighur population will also stay in the news in 2016. Increased crackdowns in their home Xinjiang province will force more refugees into Southeast Asia, and lead to a handful of Uighur-related terrorist attacks, both foiled and executed, in Thailand and Indonesia.

The regional economy will see decreased growth in 2016 as a result of slowing growth and structural issues in the Chinese economy. Chinese money will still flow south as the One Belt One Road strategy is rolled out and the Asian Infrastructure Investment Bank officially opens for business. Contrary to some expectations, the AIIB’s first loan recipient will not be Myanmar, but either Laos or Cambodia.

On the other side of the coin, the US-led Trans-Pacific Partnership will begin the ratification process in a number of regional countries this year. Our bets on order of approval are Singapore first, followed by Brunei, Malaysia and Vietnam. Indonesia will likely commit to the TPP by the end of the year while Thailand’s economic struggles under the military junta will push it closer to joining. Much of the US-ASEAN Sunnylands conference in February will be centered on TPP ratification, along with South China Sea issues and counter-terrorism cooperation, and will serve to solidify relations between the US and the bloc. ASEAN leaders will be looking for assurances of American commitment to the region during the next administration and they will likely receive them. Of course the future of the TPP and the US Rebalance to Asia lies in the fate of the US Presidential elections and our prediction is that America’s first woman president will keep the Rebalance at the forefront of her foreign policy – after all it was her idea.

Last but not least, the Asian Economic Community will be the same on January 1, 2017 as it was at the head of this year – a half-baked dream with little hope of success.

To all of the East by Southeast readers and their families, we wish a you happy new year and much joy and success in 2016!

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Mekong lessons: Reflecting on October trip to Southeast Asia

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I’ve just returned from my first business trip to Southeast Asia with the Stimson Center’s “Team Mekong.”  Below are a few lessons learned and brief observations from our visits in Bangkok, Kunming, Phnom Penh, Can Tho, Hanoi, and Saigon.

Good ideas gain currency

Before I joined the Stimson team in June, I must confess that my outlook on the future of the Mekong region was not filled with optimism. I cannot begin to describe how refreshing it is to join a team that is developing pragmatic and innovative solutions to some of the region’s toughest issues. Moreover, it’s extremely satisfying to watch the deployment of an idea gain momentum among decision makers and begin to take on a life of its own. Simply put, ideas work. At public forums in Bangkok, Kunming and Hanoi and in meetings with regional government officials Stimson’s “Team Mekong” launched a more refined version of the concept of the need for a “New Narrative” on Mekong hydropower development first mooted by my colleagues, SEA Program Director Rich Cronin and Research Associate Courtney Weatherby this March. The New Narrative challenges the current narrative that the construction of 11 dams on the Mekong’s main stem is a prevailing ‘domino theory’ of inevitability based on an emerging body of evidence. Stimson’s most recent report and its main argument can be found here, but it was encouraging to hear the idea confirmed when well informed hydropower experts placed their bets on no more than five dams, all of them above Vientiane excepting Don Sahong.

So if the Lao PDR government is banking on income generated from the construction of eleven main stem dams but only gets five in the end, shouldn’t it consider alternatives? Considering the known and unknown costs of downstream effects on fisheries and livelihoods, it seems prudent for Laos to give the entire basin development plan another look.  As a sustainable, one-country alternative to relieving the pressure of hydropower development on the Mekong’s main stem along with the unbearable downstream costs related to impacted fisheries and livelihoods, the Stimson team is continuing to develop the concept of a Laos national power grid designed for both the export of hydropower and national electrification as an alternative to Laos’ current economic development plan.

The grid would be designed to optimized trade-offs related to the food- water-energy nexus on a basin wide scale. On this trip, we received much encouragement for the national power grid concept from regional government officials, but challenges still remain in convincing Laos as to why national electrification will provide more benefits than the current plan.  As a suggestion, Vietnam, as a most concerned state in regard to downstream impacts can, share the story of the benefits of rural electrification with its neighbor through the history of its own development.  Further, Vietnam’s electricity demand is increasing at 12% year-on-year prior to the TPP and could act as a major purchaser of power generated from a Laos’s national grid.

No clear trends on the China Factor.

I see no clear evidence that China’s state-owned enterprises are trending toward improving practices in Southeast Asia or that there is a concerted move from policy-motivated concessional projects to those based on financial viability. A few firms might be making improvements here or there, but even these firms are not willing to release the details and data supporting these so-called improvements. In the case of Hydrolancang’s Lower Sesan 2 project in Cambodia, the developer claims its fish passages will be successful in protecting vulnerable fish species, but will not release the research or plans for those fish passages for public observation or scrutiny. The message for Hydrolancang and other similar Chinese dam developers hasn’t changed: “We’ve conducted 100% of research relevant to these projects, and we’re confident that all problems will be solved. You only need to trust us.” But trust is built on results and transparent public relations. China simply runs a poor track record on these factors in the Mekong region.

A surprising development is that China’s firms are playing the victim when discussing their Southeast Asian projects. Officers of these firms claim Beijing put them to task on these projects while the firms have to bear the risks and interact with prickly civil society groups, unwarranted Western criticism, and unstable host governments – the Myitsone dam serves as a case in point. Yet they fail to acknowledge the unbalanced stream of benefits granted by concessional contracts or the processes through which these benefits are gained.

Further, these firms often claim to strictly follow the laws and regulations of host countries related to environmental and social impacts. Yet weak states like Laos, Myanmar, and Cambodia have promulgated little to nothing in terms of environmental or social safeguards, so these claims of being responsible legal investors are interpreted as trite and non-persuasive.

Lastly, some anecdotal evidence points to Chinese money earmarked for overseas infrastructure development drying up in this latest round of China’s economic downturn. This discovery supports emerging conversations that Chinese firms are investing in more commercially viable or “bankable” projects. However, at the same time China’s One Belt One Road initiative appears to be creating a pool for free money given out on soft terms to any firm interested in constructing a project vaguely related to the objectives of the One Belt One Road whatever they may be. When weighing whether or not China’s upcoming investment on Mekong main-stem dams in the pipeline will be based on strategic motivations or sound financial decision making, this last point is particularly concerning.

New institutional frameworks are forming to coordinate regional policy making.

It’s becoming increasingly clear that the Mekong River Commission is NOT the institution to solve the big issues rising the Mekong region, though it still constitutes the only treaty-based intergovernmental organization in the region, and its technical review of the Xayaburi dam and its anticipated critique of the Don Sahong project have caused both developers to delay the projects and spend hundreds of millions on significant engineering changes and additional fisheries research. But in terms of actual governmental engagement, other institutions and bilateral arrangements are beginning to fill this gap. The US-led Lower Mekong Initiative (LMI), for instance, in its still nascent form aims to promote higher standards on water resource management and assessment of infrastructure development within the region. The LMI brings together the line ministries of the four MRC countries and Myanmar several times a year in working groups both on functional “pillars” and cross-cutting issues like the water-energy-food nexus, and the prime ministers of the LMI countries meet in the wings of the annual ASEAN-US Leaders Meeting, where transboundary issues and impacts from hydropower dams and other major infrastructure projects can be raised to the extent that the leaders are willing to engage on them.

In response to both the US-led LMI and the waning power of the MRC, China is assembling a multi-lateral organization for joint river basin management called the Lancang-Mekong Dialogue Mechanism (LMDM). Mekong watchers should pay attention to the outcomes of the first vice-ministerial meeting of the LMDM on November 12. Further, Cambodia is negotiating a transboundary environmental impact assessment treaty with Laos and Cambodia, Laos, and Myanmar are authoring new sets of environmental and social safeguards related to infrastructure development.

These frameworks are all coming together quite quickly. Yet even the US led LMI is said to be underfunded, uncoordinated, and unsure of its product. China’s forming of its own river basin organization is a welcomed foray into multi-lateral diplomacy, a realm often eschewed by the Chinese, but the intent and purpose of this organization is unclear. Serious cooperation on the use of the water and hydropower development will be highly limited so long as China refuses on national security grounds to provide downstream countries with the results of its hydrological and water quality studies, or the operation of its dams and other water releases from its monster reservoirs.  And whether or not new safeguards in the Mekong’s weakest countries will have teeth or just pay green-washing lip-service is unknown.  These developments all deserve our close attention.

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Report: “Mismanagement” stalling building projects across China

Work continues on the Darui Railroad in western Yunnan Image credit :cr8gc

Work continues on the Darui Railroad in western Yunnan. Image credit: cr8gc

Hundreds of highway and railroad projects are facing delays or otherwise running far behind originally envisioned construction timetables. This, according to a report issued by China’s National Audit Office, is a result of local governments improperly managing infrastructure funds — actions thought to have a direct effect on the country’s stalling economy.

In total, the audit of projects nationwide looked into 815 infrastructure programs across the country. More than 20 percent — 193 in total — were found “to be experiencing significant implementation lags due to a lack of funds or poor initial planning.” Together, the behind-schedule ventures represent government investment of 287 billion yuan (US$45.2 billion).

The architects of China’s economy have traditionally relied heavily on state-funded building projects as a means to revitalize the financial system in times of decline. Therefore, those lagging behind schedule due to mismanagement or misuse are seen as harming the economy in two ways, according to the audit. Not only are funds not being spent as quickly as they are authorized, but the benefits to localities through which new infrastructure projects pass must wait idly for any expected economic uplift.

In Yunnan, this is especially true in the province’s west. A railroad from Dali — traveling through Yongping, Baoshan, Mangshi and terminating at Ruili on the Burmese border — was originally expected to be completed in 2014. It will provide some of the most populated regions in western Yunnan direct rail access to Kunming for the first time ever. However, due to cost over-runs and awkward mountainous terrain, the line is now expected to open as late as 2019.

In an effort to speed up construction along the single-track Darui Railroad (大瑞铁路), Beijing injected a further five billion yuan (US$788 million) in annual funding for the endeavor beginning in 2012. The 335 kilometer railway is 75 percent tunnels and bridges, making for difficult surveys and slow progress, especially in places where engineers must dig under theGaoligong Mountains.

The railway was first conceived of in 1938 as a way to connect Kunming with the British colony of Burma. The outbreak of World War II scuttled those plans. However, they have since been resurrected as one part of the massive BCIM trade corridor, which Beijing hopes will one day provide an overland link between Kunming and seaports on the Indian coast some 2,800 kilometers away.

This post was originally published on GoKunming and written by Patrick Scally. It is reprinted here, in its entirety, with permission from the author. 

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In China’s hinterlands, a new life for Myanmar’s Rohingya

President of Myanmar Thein Sein. Photo: Wikemedia Commons

President of Myanmar Thein Sein. Photo: Wikemedia Commons

On February 12, 2015 Myanmar President Thein Sein, prompted by protests led by Buddhist monks in Yangon, reversed a decision made ten days earlier to give voting rights to the country’s Rohingya population. The reversal, while surprising to some, was only the latest in a series of events to befall the Muslim minority who call western Myanmar’s Rakhine state home.

The Rohingya of Myanmar (also known as Burma) have lost more than voting rights in the past. Regarded as one of the world’s most oppressed peoples, the Rohingya are a distinct ethnic group that speak a dialect of Bengali and are thought to be descended from Arab and Persian traders.

Persecuted at Home

Under the military junta that ruled Myanmar for most of the latter half of the 20th century and the current, nominally civilian government, Myanmar’s Rohingya have suffered chronic poverty, food insecurity, harassment and forced labor, among other human rights abuses. Following Burma’s 1982 Citizenship Law, hundreds of thousands of Rohingya were denied citizenship and are still referred to as ‘aliens’ and ‘foreigners’ by government officials. They are neither allowed to travel outside their hometown nor marry without official approval.

Poor relations between the Muslim Rohingya and their neighbors have only made things worse. Tensions between Rakhine state’s Muslim population and the majority Rakhine ethnicity, who are Buddhist, boiled over in 2012, leading to anti-Muslim riots that spread throughout the country. In Rakhine state alone, over 200 people were killed and whole villages were burned to the ground. Conditions have not improved for Myanmar’s Rohingya population since then. The current boat crisis of thousands of Bengali and Rohingya refugees stranded off the coasts of Thailand, Malaysia and Indonesia is a consequence of awful conditions at home.

The Rohingya, however are certainly not the only group struggling in Myanmar. Despite what appears to be a nascent democracy, a civil war between the government and an array of armed ethnic groups along the country’s periphery has flickered continuously since the 1950s. The reasons for the conflicts are many, though issues of ethnic autonomy and control of precious resources like jade and timber loom large.

The conflict’s latest iteration began in February 2015 and is still ongoing. A flare up of tensions between the Myanmar Army and Myanmar National Democratic Alliance Army (MNDAA) in Kokang, Shan State, has killed hundreds and forced tens of thousands of civilians to flee across the border into China.

Many Rohingya have also left Burma in the past decades. Tens of thousands of them reside in ill-equipped refugee camps on the Myanmar-Bangladesh border, though others have escaped to new lives abroad. Their final destinations vary, but the majority resides in Saudi Arabia, Malaysia, Thailand and Pakistan. Of these Rohingya living overseas, who may number over one million, most work low-wage jobs in the construction and service industries. There are some, however, that have chosen a different path in a land closer to home.

Abdullah's storefront in Jinghong

Abdullah’s storefront in Jinghong

Eight hundred kilometers east of Rakhine state in Jinghong, China, Abedullah owns a small jewelry shop. It’s three o’clock in the afternoon he hasn’t sold a thing.

Abedullah, like almost one million of his compatriots in Rakhine state, is a Rohingya, but he has not lived there in thirteen years. Instead, he’s settled in Jinghong, the capital of Yunnan Province’s Xishuangbanna Dai Autonomous Prefecture, along with almost 600 other Rohingya. All of them sell jade.

According to Abedullah, who only agreed to give his first name, Rohingya merchants first came to Jinghong almost forty years ago. Following the end of the bloody Bangladesh Independence War in 1973, hundreds of thousands of refugees fled into neighboring Burma. Marginalized by the Burmese and eventually disavowed by the Bangladeshi government, tens of thousands of Rohingya fled overseas. A handful made it to southwest China’s Yunnan province.

Stories of Jinghong’s first Rohingya are hard to find and by all accounts, the number of émigrés remained small until the 1990s. It was then that the Chinese economy began to truly open up to the international market. As trade increased and more Chinese became wealthy, the country’s jewelry consumption level grew as well, skyrocketing over 4000% in a decade.

While all gemstones have grown in popularity in recent decades, none hold the place in Chinese culture that jade does. Regarded as a stone of mystical qualities since antiquity, jade is the king of gemstones in China and it is in Myanmar that the world’s highest quality jade is found.

As a result, jade shops are ubiquitous in dozens of towns along the China-Myanmar border. Jinghong is one of the largest. Straddling the Mekong River, this once sleepy town has grown into a city of six hundred-thousand and now hosts millions of tourists each year. Many of these tourists come looking to buy Burmese jade. As travelers have flocked to Jinghong in greater numbers in recent years, Rohingya merchants with connections to the Burmese jade trade have followed to keep up with demand.

A New Life

One of the recent arrivals is Xiao Fei, a 21 year-old who prefers his new Chinese nickname to his given name. Xiao Fei, like many other Rohingya in Jinghong, came at the behest of his family; his grandfather first arrived in the city almost thirty years ago. After saving enough money for a passport, Xiao Fei was able to leave his home in Yangon and help his grandfather set up the family’s second shop.

Xiao Fei had to save up for his passport because getting such a document is often impossible for many Rohingya in Myanmar. Since they are officially considered to be foreigners by the Burmese government, Rohingya can only obtain passports after paying expensive bribes to the right people. That is why, as Xiao Fei explains, “Only rich Rohingya can make it to China.”

Once in Jinghong, new arrivals find an environment altogether strange and inviting. The forest of newly-built apartment complexes and hotels certainly dwarfs anything found in Rakhine state, however the hundreds of established Rohingya businessmen form a tight community that provides everything from religious services to a lunchtime delivery service of halal Burmese cuisine.

It is the mosque that is the heart of the community, says Waynai, a trader living in Jinghong for six years. The Jinghong Mosque, located not far from the banks of the Mekong was first established decades ago by the city’s existing community of Hui, a distinct ethnic group of more than ten million people that practice Islam and speak Mandarin Chinese.

When the Rohingya began to move to Jinghong in greater numbers in the late 1990s, they became a part of the congregation, eventually joined by a small population of Uighurs from China’s northwest. Together, these three groups of Muslims manage the congregation. Despite disparate geographic and cultural backgrounds, the mosque is thriving with a healthy number of members, daily prayers held in Arabic and discussion groups where participants speak in Standard Mandarin.

The Jinghong Mosque

The Jinghong Mosque

However both Waynai and Abedullah agree more with the mosque’s Uighur members on theological questions. When asked whether or not he had any non-Rohingya friends from the congregation, Abedullah answers, “Yes, but not the Hui. They’re fake … they don’t have Allah in their hearts.” Instead, it is the Uighur community that he feels closer too. “[The Rohingya] are similar to the Uighurs because neither of us are free … we both have to struggle to survive.”

This struggle is why Ba Hlaing, a 31 year-old jade dealer, came to Jinghong eight years ago. At the time, his family lived comfortably in a suburb of Yangon but as he came of age, conditions for young Rohingya grew more difficult. “I would’ve liked to stay with my family, but there wasn’t anything to do, no money to make.”

“It’s because of [the government] that we’re so backwards now,” he says in a whirlwind of English, Mandarin and Jinghong dialect, slapping the table after each word.

Just then a Han Chinese couple enters Ba Hlaing’s shop. He greets them using his best Mandarin, standing, “Welcome to Ba Hlaing’s Jewelry! We have the finest jade from Myanmar! Would you like to look at a bracelet?”

After five minutes of browsing, the wife still has not decided on a piece and the husband, fidgeting, suggests heading back to their hotel. The couple leaves and Ba Hlaing sits down to light a cigarette. “That’s how it goes,” he sighs. Just like Abedullah, business is slow for Ba Hlaing, even during tourism’s high season.

Ba Hlaing believes the drop in jade sales is a consequence of Chinese President Xi Jinping’s much-publicized crackdown on corruption. Once-popular ostentatious displays of wealth, like jade pieces worth tens of thousands of dollars are now frowned upon and officials that might frequent jade shops like Ba Hlaing’s are staying away.

Burmese jadeite

Burmese jadeite. Photo: Wikimedia Commons

The jade, however, keeps flowing from Myanmar. Most of it is mined in a strip of remote jungle in Kachin State, in the country’s northeast.  Conditions in Myanmar’s jade mines are notoriously dangerous and the towns that spring up around them are known as much for their drugs and guns as they are for their jade. However bad mining conditions are though, the money can be worth it for those who can make it. Official figures from Myanmar’s government put jade exports at $1.4 billion between 2011 and 2014. Analysts from Harvard University’s Ash Center disagree, estimating jade sales – both official and off the books – at $8 billion for 2011 alone.

Once the raw jade has been extracted, it is sent to processing centers. The majority are located within Myanmar, in urban centers like Mandalay and Yangon, where the jade is polished and crafted into a final product. The next step is to get it into China, where the market is.

Most traders interviewed for this article admitted that the majority of the jade they sold was actually smuggled into Yunnan. A few well-placed bribes on both sides of the border can get shipments of jade, transported in trucks, into China reliably. Once the jade is in Yunnan, it usually makes its way to Ruili, a major border crossing between China and Myanmar.

According to Ba Hlaing, many Rohingya traders in Jinghong have a contact in Ruili, usually family, that buys the jade. Others, however, are directly connected to processing centers, most often in Yangon. For more valuable pieces, with sale prices upwards of $50,000, many traders will use air transport to ensure their safe arrival. While import taxes must be paid in these cases, the extra cost is often worth the peace of mind.

 A Tough Decision

Peace of mind, however, is getting harder to come by. With a slowdown in business and mounting issues back in Myanmar, many members of Jinghong’s Rohingya community are facing a tough decision whether or not to return home.

Ba Hlaing, for one, is planning on going back to Myanmar. Sales have decreased for the past two years and he fears that a protracted crackdown on corruption in China will keep jade sales low and prevent his shop in Jinghong from making a profit.

Despite the dire situation for the Rohingya in Myanmar, Ba Hlaing is choosing to remain positive. “I think things will get better for us,” he says guardedly. “We have [this year’s parliamentary] election and the world paying attention to us so democracy is a good thing.”

Abedullah, on the other hand, does not share Ba Hlaing’s optimism. He does not want to return to Myanmar and sees little hope for democracy delivering the Rohingya from oppression.

“Things are a mess in Myanmar right now, everything is a mess,” he says. “The economy is bad and the government and [the armed ethnic groups] are still fighting.”

When asked his thoughts on the country’s armed conflicts, Abedullah pauses before exhaling heavily. “You know, we want to go to war too. At least [the armed ethnic groups] have guns. We don’t have anything,” he laments. “The government even took the knives from our houses … But then they still call us terrorists.”

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Filed under China, ethnic policy, Myanmar/Burma, SLIDER, Trade, Yunnan Province