As China’s leading foreign policy project, its Belt and Road Initiative (BRI) should be easy to understand. Yet since its inception in 2013, the BRI has remained remarkably opaque. The government publishes no criteria for approving BRI projects or comprehensive lists of authorized ones. Consequently, a range of Chinese investors—including some linked to organized crime—claim an association with the signature program of China’s leader, Xi Jinping. In host countries, this free-riding identification can threaten governance and stability, while further damaging the international community’s ability to check the spread of related criminal activity.

A road construction site along the Nu River in China’s Yunnan province, near the border with Myanmar, March 31, 2016. (Gilles Sabrie/The New York Times)
A road construction site along the Nu River in China’s Yunnan province, near the border with Myanmar, March 31, 2016. (Gilles Sabrie/The New York Times)

China does have policies for rigorous oversight of investments in fragile states, but the failure to extend them to the BRI has caused notable friction with host countries. Last year, after repeated scandals stemming from secret deals, environmental degradation and corruption of local officials, Beijing committed to making the BRI “clean, green, and open.” It warned companies not to misuse the BRI brand and pledged a new focus on “quality over quantity” in BRI projects. Yet, as we wrote earlier this year, Beijing was making no real progress on implementing its new BRI pledge.

Then, in August, a startling development occurred. The government, for the first time, publicly dissociated itself from a project that claimed ties to the BRI. China’s embassy in Myanmar declared that the BRI had “nothing to do with” a $15 billion scheme dubbed the Myanmar Yatai New City and the China-Thailand-Myanmar Economic Corridor. The embassy also voiced strong support for the efforts of Myanmar authorities to investigate the project for criminal activities, making clear China’s concerns about the project’s true purpose of establishing a mecca for illegal gambling.

In October, the Chinese media publicized the extent of criminal involvement in Yatai New City, publishing an expose documenting that the key investor—a man named She Zhijiang—had been on the run from Chinese law enforcement since 2012, had secretly operated a massive criminal network, and had made off with hundreds of millions of dollars generated from illegal online casino operations across the region.

It was not the first time the Chinese government sought to separate itself from projects previously described as part of the BRI. In most other cases, though, Beijing stopped short of a clear and public break. In the Kyrgyz Republic, for example, Beijing privately pressured firms to stop using the BRI label in connection with problematic projects such as the Zijin Taldybulak Levoberezhny gold mine. Meanwhile in Kenya, under tremendous pressure from local civil society and environmental groups, the Chinese ambassador publicly backed away from the proposed Lamu coalfired power plant in 2019 without formally rejecting it, saying the fate of the project was up to the Kenyan people.

Transnational Crime

The China-Thailand-Myanmar Economic Corridor, with Yatai New City as its crown jewel, was initiated in 2017 as a collaboration between a notoriously corrupt militia, which operates under the aegis of Myanmar’s national armed forces, and a group of ethnic Chinese investors with a history of transnational criminal activities in China, the Philippines and Cambodia.

The Hong Kong-registered company behind the scheme, known as the Yatai International Holdings Group (Yatai IHG), acquired 46 square miles of land with the militia’s assistance, engaged in massive construction without permits, brought in Chinese casino operators being chased out of Cambodia, and even introduced online apps to facilitate illicit financial and land transactions.

As USIP detailed previously, the company attempted to cover up this malign behavior by co-opting Chinese government and Communist Party agencies, giving contracts to state-owned enterprises and hiring government think tanks to advance the project’s planning.

From November 2019 to July 2020, protests by local community groups, media reports on the illegal activities, and pressure from the local parliament attracted Myanmar government attention to the project. In June, State Councilor Aung San Suu Kyi established a tribunal to look into the illegal activity. In the face of this growing pushback from the grassroots to the Presidential Palace, China issued its statement formally disavowing the project.

Regulatory Tools

China already has guidelines and policies on the books to prevent its investors from initiating disastrous projects like the Yatai New City, even if it lacks the political will to implement them. 

In 2017, Beijing’s chief administrative body, China’s State Council, issued the “Guiding Opinions on Further Directing and Regulating the Direction of Overseas Investments,” a document jointly formulated by the National Development and Reform Commission (NDRC), the Ministry of Commerce, the People’s Bank and the Ministry of Foreign Affairs. These opinions requested that sub-national government agencies across China introduce policy to “facilitate the continuous, orderly and healthy development of overseas investment … to guard against all types of risks, and to better meet the needs of national economic and social development.” In 2018, the opinions were codified into policy through the NDRC’s “Measures for Overseas Investment Management.”  

The measures break down Chinese-funded projects overseas into three categories: prohibited, restricted, and encouraged. Investments in war zones are restricted—a classification that should curb interest in Myanmar, which is struggling to end the longest-running and most complex civil war in Asia. Restricted investments should not be made without extraordinary approval from the NDRC, China’s key planning body. Projects are also restricted if they fail to meet local environmental standards, involve the real estate or entertainment businesses or use outdated technology.

Investments that are flatly prohibited include those that involve gambling, pornography, or any endeavors that violate China’s treaty obligations or endanger its national security. While these policies currently govern only Chinese outbound investment, they could easily be extended to any project seeking to identify itself as part of the BRI.

Unclear Policies

Unfortunately, the existence of these policies and the process through which they are implemented is not clear to host countries—and may not even be clear to Chinese investors. The same can be said for the process that companies must go through to obtain approval for an investment in the restricted category, as the government does not publicly explain the basis for its determination. The explicit mention of war zones and sensitive areas opens a space whereby Beijing might build a formal, transparent process for introducing conflict sensitivity analysis, but the authorities do not appear to be using the framework in that way. 

In Myanmar for example, a group of local experts interviewed by USIP had no knowledge of these lists, or of the fact that projects in conflict zones should be subject to extraordinary review. They were not able to determine whether such a review was carried out, and public documents offer no evidence of such a review for the billions of dollars of projects that run through Myanmar’s conflict hotspots in Kachin, Shan, and Rakhine. Interestingly, the regulatory authority for the policy—the NDRC—is also the focal point for the planning of BRI in conflict zones as part of the China-Myanmar Economic Corridor. This would seem to introduce a significant conflict of interest, as the planning and regulatory bodies are one in the same.    

Closing Loopholes

Given Beijing’s emphasis on quality BRI projects, how was a crime hub like Yatai New City able to build this association?

In short, the existing procedures contain a loophole that allows foreign-based Chinese companies and individuals to evade the prescribed oversight altogether. But these efforts can form the foundation for improvements. By following through on its 2019 commitments for a “clean, green, and open” Initiative, China can reduce the corruption, crime and conflict associated with BRI projects in the future by more strictly enforcing existing laws, strengthening regulation and oversight for any project claiming the BRI mantle, and upholding a range of other international standards for overseas projects.

BRI host countries can also play a role in improving the quality of these projects by demanding more transparency. This could include public access to the memorandums of understanding governing the projects, project lists, project plans, environmental impact assessments, and related conflict-sensitivity analyses, as well as an open and transparent bidding and procurement process. 

Continued failure to address these issues around BRI governance and oversight increasingly threatens peace and stability in fragile states around the globe. States involved in the BRI need to look carefully at lessons learned around the rise and fall of the Yatai New City Project as part of the BRI and consider whether the proposed projects will truly advance the best interests of the country.

Had there been clear guidance from the outset, a gambling city in the middle of a warzone implemented by Chinese fugitives partnering with a corrupt militia group that undermines Myanmar’s national sovereignty would hopefully not have made the cut. 

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