[This article was first published on Young China Watcher’s blog] __________________________________________________________________________________
Southeast Asia has become an important region for China’s global ambitions, with increasing economic support and investment provided to Southeast Asian countries under China’s Belt and Road Initiative (BRI). Chinese foreign direct investment (FDI) in Southeast Asia grew by nearly 7 percent from 2004 to 2010, with Malaysia as the fourth-largest recipient of China’s total FDI in 2017. For many economies in the region, China is their biggest trading partner.
Yet while the region as a whole is often perceived as heavily reliant on Chinese money—be it through traditional aid or other financing instruments—the reality among Southeast Asian countries is diverse, and recently several countries are re-evaluating their relationship with China.
Large international financial institutions such as the Asian Development Bank and the IMF have repeatedly voiced concerns over unsustainable debt in the context of the BRI, and several projects have attracted media scrutiny over delays in progress, financial corruption, or concerns over sovereignty.
At the same time, tensions over China’s expanding military presence in the South China Sea persist: Malaysia, Brunei, the Philippines, Taiwan, and Vietnam all have conflicting claims in the area, while Indonesia announced in 2017 that it would rename a part of the South China Sea falling under its claimed exclusive economic zone as the “North Natuna Sea“. Collective action towards China via the Association of Southeast Asian Nations (ASEAN) is often hampered due to these tensions.
Moods across the region
While many countries look towards China to accelerate infrastructure development, this does not mean that they are not wary of economic dependence or potential military conflicts with China. In some cases, particularly for smaller and less developed countries such as Laos, the picture might be rather grim due to a heavy reliance on Chinese financing; China is Laos’ biggest foreign donor, primary investor, and second-largest trade partner. By contrast, recent demonstrations in Vietnam reflect the deep-rooted distrust towards China and a common fear of economic dependence.
Such sentiments are also widespread in Indonesia, where the government, while welcoming Chinese investments in the country to upgrade patchy infrastructure, is cautious to engage in open courtship. The Indonesian government has repeatedly demonstrated its resolve to diversify its economic partners. For instance, while China has won the contract for the troubled Jakarta-Bandung high speed rail, Japan is building the Jakarta-Surabaya line as well as the Jakarta metro. Most recently, Indonesia has granted India access to its Sabang port in Aceh, along the sea route of China’s BRI.
The more economically developed countries are taking stock of their relationship with China and actively seeking alternatives. In Malaysia, recently re-elected Prime Minister Mahathir Mohamad has announced a review of Chinese projects in the country to assess their value and financial conduct in the country. This review may extend to the strategic partnership formed between Malaysia and Chinese e-commerce company Alibaba, which opened its first Southeast Asia office in Kuala Lumpur in June 2018. Alibaba also established its first Electronic World Trade Platform outside China in Malaysia, functioning as a digital free trade zone for e-commerce.
Thailand, which has also experienced difficulties in the development of a Chinese-built high speed rail, has just announced plans for a regional investment fund managed jointly with Cambodia, Laos, Myanmar and Vietnam to lessen reliance on China and other large Asian powers, such as Japan, Korea, and India, in order to seek financing from sources within the region itself.
The upside of Chinese engagement
These examples demonstrate the differences between Southeast Asian countries in terms of attitudes towards Chinese funding and their ability to reject Chinese propositions. While China will remain a powerful partner and the focus of media on its growing financing in the region, Japan to date remains the largest investor in Southeast Asia.
Across the region, policymakers are increasingly making use of financing alternatives, as well as initiating their own funds. While these options will not be able to match the volume of Chinese funding, competition between Japan and China over infrastructure projects in the region could also have a positive impact on projects if governments expand assessment criteria to include project quality in addition to pricing, which is often perceived as more favorable from China.
While Beijing continues its outreach towards Southeast Asia, it may be increasingly met with resistance from domestic stakeholders in the region. This does not constrain China from trade, investment and the pursuit of its infrastructure drive, but could—in a best-case scenario—result in better and more sustainable projects for the countries involved.