Kyaukpyu: Connecting China to the Indian Ocean

The Issue

  • Chinese state-owned firms have reached agreements with Myanmar to construct a $7.3 billion deep-water port and $2.7 billion industrial area in a special economic zone at Kyaukpyu along the coast of the Bay of Bengal. The strategic town is the terminus of a $1.5 billion oil pipeline and parallel natural gas pipeline running to Kunming in China’s Yunnan Province.
  • Despite fears that the project could eventually be used for Chinese military access, political and legal restrictions in Myanmar make this unlikely. The project is aimed mainly at helping China avoid the vulnerable Strait of Malacca and aid the development of its southwestern hinterland.
  • Like many major projects under the Belt and Road Initiative, there are well-founded fears that the project could grant China a dangerous level of economic leverage over Myanmar, especially if the government in Naypyidaw is forced to turn to Chinese loans to fund its share of the port and SEZ, which combined could amount to 5 percent of national GDP.

Kyaukpyu is a coastal town along the Bay of Bengal in Myanmar’s western-most state of Rakhine. In 2016, subsidiaries of China’s CITIC Group Corporation, including China Harbor Engineering Company, won contracts for two major projects in the town—the dredging of a deep-sea port and the creation of an industrial area in an accompanying special economic zone (SEZ). The port project is valued at $7.3 billion and the SEZ at $2.7 billion. Under the terms of the deal, CITIC will build and then run the project for 50 years with a potential extension of another 25 years.

Negotiations on Kyaukpyu predate the Belt and Road Initiative—CITIC signed initial memorandums of understanding (MOUs) for the harbor project and a railway connecting the SEZ to southern China in 2009. However, they languished amid political sensitivities in Myanmar surrounding Chinese investments following the 2011 suspension of the Myitsone dam project and violent protests starting in 2012 over the Letpadaung copper mine. The railway MOU was canceled in 2014 while the port and SEZ industrial area projects are moving forward, but slowly and with considerable pushback within Myanmar. Only in October 2017 did the two sides reach an agreement on ownership of the port project after CITIC agreed to drop its stake from 85 percent to 70 percent. Ownership stakes in the SEZ have yet to be finalized.

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