Chinese President Xi Jinping made his first official visit to Brunei this week, a diplomatic tour that underscored blossoming bilateral ties as the oil-rich sultanate pursues economic diversification plans to reduce its oil dependency.

The tiny Muslim majority nation has been a key recipient of multi-billion dollar investments for China-backed projects in recent years. Xi’s visit represented the first by a Chinese leader to the country in 13 years.

China’s big-ticket investments have recently become a source of controversy elsewhere in Southeast Asia, with rising complaints Beijing’s checkbook diplomacy ultimately aims to ensnare strategically important regional countries into sovereignty-eroding “debt traps” through lop-sided and often opaque financing deals.

With a heavy reliance on the energy sector and a population of just 420,000 situated on two territorial enclaves in Malaysian Borneo, some view Brunei as especially susceptible to a so-called Chinese debt trap. Yet there are few outward signs of unease or compelling indications to suggest the sultanate is being strong-armed into unfavorable deals.

Even as Brunei moves to strategically orientate itself as an important link in China’s US$1 trillion Belt and Road Initiative (BRI), it has simultaneously deepened its robust and long-standing defense ties with the United States, seen in recent joint naval drills in the South China Sea – where Brunei and China have competing claims to islets and atolls.

Map-Southeast Asia-South China Sea-Facebook
Brunei has smaller South China Sea disputes with China than others. Map: Facebook

In an article attributed to Xi published in Brunei’s newspapers in conjunction with the visit, China’s leader appeared to offset allegations of Beijing loading small countries with debt by hailing ties with the sultanate as “a good example of relations between countries of different sizes based on equality and mutual benefit for common development.”

Economic cooperation and trade between the two nations has rapidly expanded in recent years, with two-way trade reaching US$1 billion in 2017. China’s investment in Brunei is worth US$3.4 billion, including outlays for the first phase of construction of the Muara Besar refinery and petrochemical complex, the largest foreign investment project in Brunei’s history.

Hengyi Industries International Pte Ltd, a privately run Chinese company based in Brunei’s capital city, is constructing the facility, which was expected to be completed by end-2018 but was delayed to the second quarter of next year. The refinery will produce gasoline, diesel and jet fuel and require a second phase of construction estimated US$12 billion.

China’s total investments in Brunei are estimated at US$4.1 billion, making it one of the largest investors in the country alongside the United Kingdom and Japan. A Chinese company, the China State Construction Engineering Corporation (CSCEC), is also constructing the 30-kilometer long Temburong bridge, Brunei’s largest ever infrastructure project.

The bridge, estimated to cost US$1.6 billion, will link the capital Bandar Seri Begawan with Bangar, a forested sliver of land known for its rare wildlife and pristine national parks. Expected to be completed in November 2019, Temburong is expected to boost eco-tourism and help to diversify the former British protectorate’s economy away from its dependence on hydrocarbons.

Photo: Getty Images
An offshore drilling platform off the coast of Brunei. Photo: Getty Images

Though Brunei is among the region’s least-visited countries, China has already emerged as its largest tourism market, with Chinese nationals including those from Hong Kong topping arrivals to the country in the first quarter of 2018, more than visitors from neighboring Malaysia, according to official data.

A Chinese company, Sinohydro Corp, is also part of a joint-venture constructing Brunei’s largest dam, the Ulu Tutong Golden Jubilee Dam, at a cost of US$85.5 million. Xi relayed his support for the development and diversification of Brunei’s economy during his trip, while the sultanate said it welcomed more foreign direct investment (FDI) from Beijing.

Sultan Hassanal Bolkiah, the ruler of Brunei’s absolute monarchy, referred to Xi’s visit as “a significant one in expanding and strengthening the historical ties underpinned by strong friendship, trust and goodwill towards one another.”

Both sides upgraded ties to a “strategic cooperative partnership” and agreed to align their respective national development strategies.

Diversification of the economy is central to Brunei’s national development plan, “Wawasan 2035”, or Vision 2035, which aims to transform the country into a regional trading and financial hub within the next two decades. Depleting oil and gas reserves have added impetus to diversification efforts by promoting entrepreneurialism and easing regulations.

According to various research projections, Brunei’s reserves will be depleted within two decades at the current pace of extraction unless new sources are discovered. Hydrocarbon revenues have until now financed generous subsidies and welfare policies, including free education and healthcare for the sultanate’s largely ethnic Malay Muslim population.

Brunei's Sultan Hassanal Bolkiah salutes the royal guard of honor during his 65th birthday celebrations in Bandar Seri Begawan. Photo: Reuters/Ahim Rani
Brunei’s Sultan Hassanal Bolkiah salutes the royal guard of honor during his birthday celebrations in Bandar Seri Begawan in a file photo. Photo: Reuters/Ahim Rani

The World Bank’s latest global ranking for “ease of doing business” lists Brunei at 55 out of 190 countries, impressively jumping 50 places from its 2015 ranking of 105, a positive sign of the country’s efforts to streamline its business systems while it continues negotiations for regional trade deals in an attempt to attract more FDI.

“The Brunei government knows that it needs to diversify the country’s economy and is already taking steps towards that goal. As the world de-carbonizes, the price of oil and gas is going to fall precipitously and leave the country with a fiscal crisis,” says Bill Hayton, associate fellow at the Asia-Pacific Program at Chatham House.

“Brunei’s population is less than half a million, which makes its domestic market too small to attract major investors,” Hayton told Asia Times. “It, therefore, needs to position itself as a base for exporters, but that will require investment in its port and industrial zones. The country is currently reaching out to as many potential sources of investment as possible.”

After years of recession and contracting energy sector profits caused by low global crude prices, Chinese investment and economic cooperation is apparently viewed in Brunei less as a debt trap and more as a necessity to advance its diversification goals. Hayton, however, points out that the relationship is not without reservations.

“Chinese companies are welcomed as investors in Brunei but there is a degree of caution about Beijing’s domineering approach to its neighbors. China’s predatory behavior in the South China Sea is perceived as a direct threat to their economic interests,” he says in reference to Beijing’s assertive posture over sweeping claims to the resource-rich sea.

Brunei, as the smallest of the claimant states, is arguably the quietest in pressing its claims, favoring instead consultation and an openness to joint-development. When both leaders met this week, they agreed on the importance of “exercising self-restraint” and pushing toward an effective code of conduct that parties to the territorial disputes will abide by.

A skyline view of Bruneis capital city Bandar Seri Begawan. Photo: Getty Images
A skyline view of Brunei’s capital city Bandar Seri Begawan. Photo: Getty Images

When the sultanate took part in the US Navy’s Cooperation Afloat Readiness and Training (CARAT) exercise earlier this month, Brunei’s official account of the drill tellingly omitted mention of the South China Sea, where a sea phase of the exercise took place, according to news reports.

Brunei’s defense ties with Washington – which has attempted to win more regional support for China-containment policies, including through freedom of navigation operations in the South China Sea strongly opposed by Beijing – showed indications of expansion this year with the first ever bilateral army-to-army training exercise in August.

Though Brunei’s increasingly important commercial relations with China appear to have deterred its willingness to strongly assert its territorial claims, it announced earlier this year a 12.9% increase to its defense budget after previous years of military spending cuts owing to economic difficulties.

“Brunei needs to find ways to invest more in its own defense over time despite the economic constraints it may face periodically,” says Prashanth Parameswaran, a Washington-based editor for The Diplomat magazine.

He notes that Brunei has long maintained defense partnerships with the US, Japan, Singapore and the UK, the latter of which has sustained an ongoing military presence in Brunei since it achieved independence in 1984.

“China is certainly a key economic partner for Brunei as it looks out into the future,” he says. “The key will be how Brunei manages to balance the opportunities and risks inherent in China’s greater economic role in the country, which will be a negotiated process that will happen more quietly as it often does.”