Beijing is Brunei’s new best friend

The fuel-rich sultanate has looked to China for trade and investment at a time of economic need

Originally published by Asia Times (June 11, 2017)

 

When Saudi Arabia’s King Salman bin Abdulaziz arrived in Brunei earlier this year in a highly touted tour of Asia, the two oil-rich nations’ dynastic leaders exchanged diplomatic pleasantries but did not announce any new major economic or investment initiatives.

Receiving less attention, however, was a new investment deal signed a few weeks later between China’s Zhejiang Hengyi company and a Brunei partner for a US$3.5 billion integrated oil refinery and aromatic facility that is expected to begin producing eight million barrels of oil, 1.5 million tons of paraxylene and 500,000 tons of benzene annually in 2019.

The contrast in Chinese and Saudi Arabian commitments revealed a significant shift in the sultanate’s economic direction. The strict Islamist Sultanate once looked largely to the Middle East or elsewhere in the Muslim world for trade and investment ties but now relies increasingly on China. The Hengyi deal represented one of the largest foreign investments in Brunei in recent years.

In the first quarter of 2016, as the dip in global fuel prices started to bite in Brunei, Chinese investments surged to US$86 million, compared to just US$9.6 million for all of 2015. Total consolidated Chinese investment in Brunei is now estimated at around US$6 billion and scheduled to rise as Beijing cranks up its One Belt, One Road initiative.

In February, Yang Jian, China’s ambassador to Brunei, said the sultanate is an “important” country in the US$1 trillion infrastructure scheme. Brunei, ranked recently by Forbes magazine as the world’s fifth wealthiest nation due to its extraordinary oil and gas wealth, is strategically positioned for China’s scheme near the geographic center of Southeast Asia and overlooking the strategic South China Sea.

Bilateral economic ties to date have centered on energy shipments. Although China’s petroleum demand fell last year – growing at just 2.5% compared to 3.1% in 2015 – it was the world’s largest purchaser during the first quarter of this year. China imported 9.21 million barrels of oil a day in March, up 11% from February.

Those ties are now rapidly growing beyond petroleum trading. In April 2016, China Telecom Global, one of the country’s largest telecom operators, partnered with Telekom Brunei to expand local networks and improve connectivity.

Three months later, Hiseaton Food Co Ltd, based in China’s Guangxi region, joined with a government-linked company to create an offshore aquaculture farm. As part of the scheme, China agreed to send scientists and experts to establish a Brunei-Chinese aquaculture research center.

Shenglong New Energy Automobile, a China-based electric vehicle manufacturer, meanwhile, committed in September to build an assembly plant in Brunei for electric and renewable-energy fueled vehicles, including cars, mopeds and buses.

In line with China’s growing strategic investments in regional ports, Guangxi Beibu Gulf Port Group began operating Brunei’s largest container terminal in February in conjunction with a local government-linked firm.

In December, Bank of China opened its first office in Bandar Seri Begawan, the capital, a move into the local finance industry expected to facilitate trade and provide funding for Brunei’s small-to-medium enterprises, many of which need new investment to achieve the economies of scale necessary to compete globally.

China’s investments come at a time Brunei is desperate to diversify its economy away from energy exports and into more manufacturing and services. In recent years, more than 60% of gross domestic product (GDP) was derived from oil and gas. Fuel shipments account for around 95% of Brunei’s total exports and as much as 90% of government revenue, according to official statistics.

The oil price slump that started in 2015 and has endured to present has taken a sharp economic toll. Lower export revenues have forced the government to slash spending and cut back on traditionally generous public services that have contributed to making the country’s half million or so residents some of the world’s richest people on a purchasing power parity basis.

Ruling Sultan Hassanal Bolkiah is considered by many to be the world’s wealthiest monarch. He has ruled in absolutist fashion since 1967, the year his father abdicated from the throne. But recent cutbacks in state benefits and a lurch towards strict Sharia law have generated rare political ripples in the sultanate.

China has strategically leveraged into Hassanal’s “Vision Brunei 2035”, a long-term state-steered plan launched a decade ago to reduce the nation’s dependence on fuel exports and reposition the country as a new “Islamic Singapore.” Brunei and China later reached a “five point” consensus on cooperation in line with the development strategy.

In 2014, the government of China’s Guangxi Zhuang Autonomous Region signed a memorandum of understanding with Brunei to establish the so-called “Brunei-Guangxi Economic Corridor”, an infrastructure agreement worth an estimated US$500 million, according to reports. Last year’s opening of a Chinese Enterprise Association office in Brunei is expected to facilitate the scheme.

For China, Brunei has distinct advantages as an outpost for its regional interests. Unlike nearby Malaysia and Indonesia, Brunei’s politics are not beset by the same issues of race and religion. Indeed, Kuala Lumpur’s recent shift towards Beijing has led to rising anti-China sentiment, fueled by nationalistic opposition parties who claim recent overtures and deals have sold out national interests. Indonesia has a long history of repressing its small but influential Chinese minority.

Roughly 10% of Brunei’s population is known to have Chinese ancestry – though they, too, have often faced constraints in the Muslim majority country. But while Western countries and the United Nations have strongly criticized Hassanal’s imposition of harsh Sharia law, Beijing has typically remained silent on the rights-related issue.

US President Donald Trump’s withdrawal in January from the Trans-Pacific Partnership (TPP) multilateral trade agreement, of which Brunei was an original signatory and strong proponent, has further underscored the importance of Chinese trade and investment to the sultanate’s future economic prospects.

Brunei had hoped TPP would spur economic diversification and new foreign investment in key targeted sectors, namely biotechnology, agri-business, information technology and high-end services. While Brunei has recently moved up in the World Bank’s “Ease of Doing Business” survey, TPP negotiators had noted the sultanate’s lack of labor rights and a liberal competition policy as major impediments to free trade.

Brunei has notably repaid China’s silence on its imposition of Sharia law and persistent trade barriers with its own reticence on boiling disputes in the South China Sea. Brunei’s main claim in the maritime territory is the Louisa Reef – also contested by China, Vietnam and Taiwan – but the sultanate has ruffled few feathers on the issue at Association of Southeast Asian Nations’ summits or other fora.

That soft stance, from China’s perspective, has mitigated the political risk of doing business, one that has arguably constrained capital commitments to other regional countries like Indonesia, the Philippines and Vietnam. And while Brunei has reached out to other potential patrons for economic assistance in a time of need, only China has answered with rich and seemingly no-strings-attached deals.

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