13 February 2017

China and ASEAN forge new links

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In the wake of more isolationist political thinking in the West, with many developed economies turning inward, China is reaching out, seeking stronger trade and investment links with its economic partners.

China’s Belt and Road initiative is a prime example. China aims to trigger demand for materials and goods at home by investing in strategic infrastructure projects abroad, growing economic ties along its old Silk Road to Europe and along newer maritime links in and around Asia and Africa. 

Given the economic importance of the Association of Southeast Asian Nations (ASEAN) to China, and its geographical proximity, ASEAN’s burgeoning economies are a key focus of the Belt and Road initiative.

Formed in August 1967, the ASEAN region is one of the most developed economic zones in Asia. Economic relations with China are strong. Bilateral trade increased from USD8 billion in 1991 to USD472 billion in 2015.

ASEAN and China are now seeking to double their trade value, setting a target of USD1 trillion by the end of 2020.

The Belt and Road initiative will bring the two closer together. For ASEAN member countries, this initiative will help address an infrastructure deficit and lift industrial development. For China, it will provide a platform to develop ties with neighbouring Asian countries while fostering the development of its own extensive high-speed rail network as a means to export high-end technology and services. 

Efforts to boost ties have already led to practical achievements. Among the ASEAN countries, Malaysia, Thailand, Laos and Indonesia have joint Belt and Road deals with China, mainly in railway construction. There will be a new high-speed rail line running from southern China through Laos to Thailand’s industrial eastern coast, for example; a 7,000-kilometre Singapore-Kunming Rail Link is already taking shape; and Beijing has won the contract to build Indonesia’s first national high-speed rail link, a 150-kilometre connection between Indonesia’s capital Jakarta and Bandung, its third-largest city.

Infrastructure financing until now has been a challenge for most ASEAN countries. With the exception of Singapore, the nations of Southeast Asia are by and large confronting major infrastructure financing deficits. Indonesia, for example, spends just 2 to 3 per cent of its GDP on infrastructure, though the need for better roads, railways and urban transport is evident.

China has set up three new financial institutions to help fund the Belt and Road infrastructure goals: the Asian Infrastructure Investment Bank, the Silk Road Fund and the Shanghai-headquartered New Development Bank, which is also backed by Brazil, Russia, India and South Africa. Between them these three institutions have a registered capital of USD240 billion, and they are starting to become active investors along the Belt and Road routes.

Even these combined funding capabilities cannot fully meet Asia’s immense need for infrastructure financing. The Asian Development Bank estimates that USD750 billion a year will need to be invested in Asia between now and 2020 as developing nations strive to raise their economic productivity and deal with rising urbanisation. However, Beijing’s drive and financial commitments are sizeable, and will have a significant impact.

Implementing the Belt and Road agenda will require a high level of mutual cooperation, understanding and trust. But with careful handling of the regulatory, political and financial risks involved, it will support high-quality and long-lasting economic growth in Southeast Asia and in China. 

A version of this article appeared in the South China Morning Post on 8 January 2017.

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