PANGSAN, Myanmar (Reuters) - China is extending its sway over an autonomous enclave run by Myanmar’s most powerful ethnic armed group, sources in the region told Reuters, bolstering Beijing’s role in the peace process that is the signature policy of Aung San Suu Kyi.

People dress in traditional style attend a festival in a village outside Pansang, Wa territory in northeast Myanmar October 3, 2016. Picture taken on October 3, 2016. REUTERS/Soe Zeya Tun

The “foreign policy” of the self-proclaimed Wa State is closely monitored by Beijing, senior officials in the administration run by the 30,000-strong United Wa State Army (UWSA) and its political wing said, with contact with Western governments, businesses or aid groups deemed particularly sensitive.

Official known to Myanmar as “Special Region 2”, the remote territory is the size of Belgium and home to 600,000 people. Largely closed to Westerners for decades, it was visited by Reuters in October.

China’s influence is quickly apparent, with street signs in Mandarin and Chinese businesses and banknotes ubiquitous in the self-proclaimed state’s capital, Pangsan, and other Wa towns that straddle the rugged border.

“We share the same language and we marry each other,” said the head of the Wa Foreign Affairs Office, Zhao Guo An, when asked about the Chinese influence on Wa politics. “There’s nothing we can do about it. We use Chinese currency, we speak Chinese and we wear and use products from China. Very little of that is from Myanmar.”

Delve a little deeper, and it is apparent that China’s reach extends much further than business and social ties.

EYES AND EARS

When Lo Yaku, the Wa agriculture minister, was asked about the drugs the statelet is accused of producing on an industrial scale, his secretary and a staffer from the official Wa News Bureau intervened to deflect the question. Both men are not Wa natives, but from China.

“This question was answered yesterday,” said I Feng, a news bureau reporter originally from western China.

“After the drug eradication campaign, our government encouraged agencies, individuals and Chinese investors to participate in anti-drug activities,” said the minister’s secretary, Chen Chun, originally from Zhejiang province on China’s faraway east coast.

A similar scene played out repeatedly during Reuters’ visit - the first by a major international news organization - questions on topics ranging from military funding to methamphetamine were mostly fielded not by the Wa minister but by an accompanying Chinese minder.

These and other Chinese citizens Reuters found working in the administration in Pangsan said they were employees of the Wa government and did not work for the authorities in Beijing.

But their presence hints at just how closely entwined the Wa State and its leaders are with their giant neighbor.

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“China has its ears and eyes everywhere, including in the government and business, and is wary of any deepening of ties with the West,” said one minister from the Wa government, speaking on condition of anonymity due the sensitivity of the matter.

“We take this very seriously, and act so as not to anger China,” he said, adding that all dealings with Washington and Brussels, as well as every foreigner or NGO entering Wa territory, were scrupulously reported to China.

China’s Ministry of Foreign Affairs said in response to a question from Reuters that “as a friendly neighbor” it has “consistently respected Myanmar’s sovereignty and territorial integrity, and not interfered with Myanmar’s internal affairs”.

OPENING UP

The Wa State was formed in 1989, when the Communist Party of Burma (CPB) disintegrated into ethnic armies, and has been run as an autonomous region by the UWSA beyond the authority of the central Myanmar government since.

The rare invitation to a small group of foreign journalists to visit - made at Beijing’s urging according to two ministers from the Wa government - appears to be part of a charm offensive aimed at the new civilian government led by democracy champion Suu Kyi.

Reaching an accord with the Wa and other rebels is one of Suu Kyi’s biggest challenges as she grapples with the interlocking issues of ending decades of ethnic conflict and tackling drug production in Myanmar’s lawless border regions.

While it has not fought the Myanmar army in years, the USWA - whose leaders deny allegations from the United States and others that it is a major producer of methamphetamine - has so far declined to actively participate in Suu Kyi’s peace process.

“It’s a good timing for us to open up. There’s a new political reality in Myanmar, so it’s good to engage in the political dialogue and open up to the outside world,” said Nyi Rang, a Wa government official.

China also has its own interests in play, according to analysts.

Beijing hopes Suu Kyi will restart a blocked, Chinese-financed mega-dam project, and wants to protect its extensive mineral interests in the country after the removal of U.S. sanctions has opened it up to Western competitors.

“China is playing a complex game in Myanmar aimed at safeguarding and extending its considerable economic, commercial and strategic interests while at the same time deterring any encroachment by Western or Japanese interests along its southwestern border,” said Anthony Davis, a Bangkok-based analyst for security consulting firm IHS-Jane’s.

“In this carrot-and-stick game the UWSA is unquestionably the biggest stick Beijing wields - plausibly deniable diplomatically, hugely influential as a strategic rear-base for allied ethnic factions, and itself far too powerful to be taken down militarily.”

WEAPONS SALES

The Wa mini-state relies heavily on China as a market for its exports of rubber and metals such as tin.

As well as occupying government posts, Chinese citizens, mainly from neighboring Yunnan province, dominate local markets and the Wa elite send their children to Chinese schools and elderly to its hospitals.

“We don’t make anything here. The stuff we eat, we wear and we use is all from China,” said Chu Chin Hung, district office chief in the Wa border town of Nan Tit. “Every Saturday morning there is a farmers’ market, but almost all of the vendors are from China.”

Experts such as IHS-Jane’s Defence Weekly have previously reported that China has sold a variety of weapons to the Wa. For the first time, a Wa minister, who declined to be identified, confirmed some of those reports and described the process.

“The Wa State has bought military trucks directly from China and light weapons from China indirectly through Laos,” said the minister. “Those weapons include rifles and cannons. They don’t want to anger Myanmar by selling directly.”

The Chinese Defence Ministry denied selling weapons to the Wa.

“China has consistently and strictly adhered to a military equipment export policy that benefits the recipient country’s present defense needs, does not harm regional or world peace, security and stability, and that does not interfere in the internal affairs of the recipient country,” it said in a statement to Reuters.