China’s full endorsement of Myanmar’s military regime has acted as a green light for moving ahead with border trade and investment in the politically fragmented, multi-ethnic, and conflict-ridden Shan state. Shan state occupies the eastern chunk of Myanmar’s border with China, abutting Yunnan province.

A senior Shan analyst observed that China’s priority is “to stabilize the borderlands, and create an enabling environment for a border trade boom to deliver economic growth for their poorest provinces in their northwest, led by Yunnan.”

China’s decision to provide full backing of the military junta was made clear in early April at a lavish reception hosted by Foreign Minister Wang Yi. That engagement ushered in a new phase of economic cooperation between Beijing and Myanmar’s junta, including moving ahead with the China-Myanmar Economic Corridor (CMEC), based on agreements signed with the previous Aung San Suu Kyi-led government.  

Multi-billion-dollar investments were at stake, including the grand cross-border corridor providing rail and road links from Kunming, the Yunnan capital, to the deep-water port of Kyaukphyu in Rakhine State, offering access to the Indian Ocean.

China’s decision to make do with the junta will also move ahead the Chinese strategy to boost border trade and investment in the volatile borderlands of Shan State. But that goal may pose a major challenge. Can the chronic instability of Shan State, revolving around a motley variety of actors – feuding Shan ethnic armies, pro-government militias, and army battalions – be transformed into the stable business-friendly environment that China is seeking?

China’s border diplomacy is based on decades of building up the United Wa State Party’s Special Autonomous Zone in eastern Shan State, and supplying weapons to its estimated 30,000-strong armed wing, the United Wa State Army (UWSA). 

Forging strong ties with the UWSA and other ethnic armed organizations in the area is a key component of China’s efforts to create a climate of safety and security for its investments. Ethnic armies belonging to the Northern Alliance from Shan and Kachin states have all gained access to Chinese arms from across the Yunnan border.

But this approach comes with drawbacks. The United Nations Office for Drugs and Crime (UNODC) and the U.S. Drug Enforcement Agency have accused the Wa army of being a major producer of yaba or amphetamine pills, now said to be flooding Thailand and Laos.

After the 2021 coup, most of the fighting conducted by Shan armies was not directed at the Myanmar military. Instead, their bullets were expended in fighting each other in a more prosaic and sectarian turf war.

In spite of peaceful anti-coup rallies last year in their capital, Taunggyi, the Shan armed ethnic groups have never engaged in anti-coup actions. Only the Ta’ang National Liberation Army (TNLA) has been supportive of the anti-coup Peoples Defense Forces (PDFs) aligned with the National Unity Government, which seeks to return Myanmar to democracy.

Among the members of the Northern Alliance, only the Kachin Independence Army strongly condemned the coup, inflicted heavy losses on the Tatmadaw, Myanmar’s armed forces, and provided back-up to the nationwide protest movement.

In Shan State, other ethnic armies sided with the formidable Wa army and, together with the Shan State Progressive Party (SSPP) and the TNLA, inflicted  major blows on the rival Restoration Council of Shan State (RCSS). The territorial gains that pushed the RCSS southwards conveniently dovetailed with the ambitions of policymakers in Yunnan. In November, Li Chenyang, an academic with close ties to the Myanmar army, was appointed director of the Yunnan Department of Commerce to boost CMEC and also new cross-border projects. 

Impacts on Shan State

Before the 2021 coup, Myanmar’s people had organized many protests against proposed environmentally destructive mega-projects, such as China’s proposed gigantic Mong Tong dam on the Salween River in Shan State. The dam – and all hydropower projects on the mainstream of Salween, one of the few undammed rivers in East Asia – was halted by the previous government after a major environmental assessment.

Civil society organizations fear  that the door is open again for Chinese companies to revive mega-dam projects on the precious free-flowing river. And with the junta in place, there will be little room for popular protests this time.

Sai Khur Hseng the coordinator the Sapawa Environment Organization, told The Diplomat: “This is a big challenge. People at all levels of Shan society are suffering from economic crisis. They are hungry for money. A lot of BRI projects will be in place and people will accept them.” (BRI refers to China’s Belt and Road Initiative, of which CMEC is part.)

Border Economic Zones and Criminal Connections 

The grand cross-border corridor CMEC – based on providing rail and road links from Kunming through Shan State and connecting  to the deep-sea Indian ocean port in Rakhine State – is now on track again. But Chinese investment comes at a time when many companies have pulled out of Myanmar entirely in response to the February coup. China’s decision to double down will inevitably exacerbate anti-Chinese feelings in Myanmar.

Sai Khur Hseng explained China “has assigned various armed groups to secure BRI projects located in their area.” The China-aligned UWSA, SSPP, and TNLA, who control northern Shan State, will provide security for controversial investments in the territories they control. 

These moves toward establishing a Chinese economic  stranglehold will further isolate Shan State from the war against the junta encompassing most other parts of Myanmar, from the central plains of Burma to the remaining ethnic states.

China may well feel that this assures strategic investment prospects stability, security, and success, in spite of the wave of anti-Chinese sentiment. However, opposition to Chinese mega-projects is not the only potential hurdle for BRI projects in Myanmar.  

In northern Shan State, a Cross-Border Economic Zone in Chinshwehaw has been approved, linking the Shan township of Laukkai, the capital of the Kokang Special Autonomous Zone, to Lincang in Yunnan province. Transit through this route also provides the shortest path from Kunming to the deep-water port of Kyaukphyu on the Bay of Bengal.

However Laukkai, with its 30 casinos and 50 hotels, has gained a reputation as a violent and crime-ridden frontier town. China and the junta have both become dependent on the operations of a Myanmar-Chinese mafia in control of the small self-administered zone bordering Yunnan.

As Jason Tower, the country director Burma at the U.S. Institute of Peace, told The Diplomat, “China is doing business with the Kokang Special Autonomous Zone, an ethnic Chinese community under the control of Kokang clans that are involved in transnational crime,” including drugs and fraud based around casinos in Myanmar, Cambodia, and the Philippines.

Across the border from the Kokang zone, these same clans are involved in trade negotiations with Yunnan’s local government and Chinese Communist Party officials, meaning the Kokang are playing a key role in organizing the strategic border crossing between Yunnan’s border town of Lincang and the Myanmar side.

The Kokang bosses play another critical role in funding counter-insurgency operations by Myanmar’s Border Guard Forces (BGFs). The BGFs are critical to the junta’s control of trade and transport corridors in northern Myanmar. Chinshwehaw and Kunlong – two regions controlled by the Tatmadaw – are adjacent to the Kokang Special Autonomous Zone and home to one of the key Cross-Border Economic Cooperation Zones.

The Kokang have come to play a key role in CMEC, but they come with a dark side. Rampant gambling, extortion, fraud, and trafficking inside the Kokang fiefdom has triggered campaigns by the Yunnan police to crack down on cross-border crime, which impacts Chinese citizens. 

China has publicly taken a very strong stance on criminal activities with the arrests of minor players, while turning a blind eye to the Kokang syndicate bosses, who are simultaneously the facilitators of the border trade. 

In recent years, the Chinese government has been deeply embarrassed by overseas Chinese crime syndicates. The scandals involving Kokang-run casinos eventually triggered an intervention to shut down their casinos in the southern Cambodian town of Sihanoukville. In Myanmar, the most notorious example is the case of Shwe Kokko Yatai New City in Myawaddy township, close to the Thai border in Karen State.

This was the first project in Myanmar that claimed to be associated with the BRI, but it was publicly disavowed by the Chinese government in a public statement saying that “this is a third-country investment and has nothing to do with the Belt and Road Initiative.”

Yatai New City is an example of how globalized Sinophone criminal networks take advantage of the BRI brand and engage in illegal activities in geopolitical “black spots” in the Global South. 

How will working with these criminal groups affect China’s prime objective of creating a stable, China-friendly business climate for these vast  investment plans? According to Tower, “As these activities are rampant in Kokang, it is hard to see how China can control these contradictions; once again the Belt and Road Initiative risks being co-opted by criminal actors.”

But while the Kokang syndicate bosses pose a major headache for the BRI’s credibility, they have become an indispensable source of illicit income for Myanmar’s increasingly desperate generals. The Kokang clan leaders also fund the regime’s BGFs, composed of deserters from various ethnic armies. 

Conclusion

Amid a sinking economy, the Tatmadaw’s generals are dependent on China – and, by extension, its Kokang allies – for their survival. But will China’s complex and disparate web of clients, rebels, business partners, drug traffickers, and Myanmar generals really serve Beijing’s long-term interests?

It is still far from clear that the feuding factions in Shan State and general hostility to China will melt away to provide a trouble-free reception for BRI projects. Dr. Paul Chambers, an expert on Southeast Asia’s international relations at Naresuan University in Thailand, is far from convinced. “Shan State is indeed convoluted and unpredictable,” he told The Diplomat. 

“The continuing pandemonium, a multiplicity of international sanctions, anti-China sentiment, economic devastation, and the rise of an illicit economy are all making the Shan borderlands even more destabilized and marginalized than before the 2021 coup.”