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Illustration: Henry Wong

Dealing with the dragon: Asean and China trade thrives amid disputes

Although wary of Beijing's territorial disputes with its member nations, Asean still boosted trade with China to US$350 billion last year

Asean
Don Weinland

When China moved a 1,400-tonne oil rig into waters disputed with Vietnam on May 2, it seemed the two countries' US$50 billion trade relationship last year - 22 per cent bigger than in 2012 - was a distant consideration.

In much the same way, China's US$2.3 billion in foreign direct investment in Vietnam last year, up 20 per cent year on year, appeared little more than an afterthought to Vietnamese rioters who set fire to Chinese-owned factories in Hanoi that month in protest at what they said was infringement of their country's sovereignty.

China has been called a divider as well as a unifier in the Association of Southeast Asian Nations (Asean), the loose economic bloc comprising 10 nations, 622 million people and hundreds of distinct cultures and languages.

For some member states, Beijing's role has become increasingly schismatic.

"We are a bit worried about what happens with relations between China and some of the Asean countries," says Arifin Siregar, chairman of the strategic advisory board for private equity firm Ancora Capital and a former Indonesian ambassador to the United States.

The sentiment is shared by enterprises throughout the region, particularly at a time when economic and political cohesion within Asean have come to the fore. The bloc is in the throes of implementing an ambitious free-trade agreement and plans to integrate financial and regulatory standards by next year with the hope of lifting regional trade.

Asean's annual gross domestic product grew by 5 per cent last year to US$2.4 trillion, making it one of the world's largest economic players. In 2013, intra-Asean trade was worth US$608.6 billion, an increase of nearly US$100 billion from 2010, according to official data from the Asean secretariat.

That makes the territorial conflicts with China all the more harrowing. On the one hand, four Asean states contest China's claims to islands and reefs in the South China Sea. For Vietnam and the Philippines, the waters off their coasts have become some of Asia's most dangerous flashpoints for conflict.

On the other, trade with China has never been more robust. China and Asean did more than US$350 billion in trade last year, making the mainland Asean's No1 trading partner.

Chinese leaders are wont to state bold trade goals on visits to the region. When then president Hu Jintao visited Cambodia in 2012, he declared the two countries would double their trade to US$5 billion within five years.

"The smarter countries … don't see this as a China invasion or China's hegemony over the region," said S. Narayan, head of research at the Institute of South Asian Studies at the National University of Singapore. "It's a question of what they need and what China can provide."

Southeast Asia is a needy region. The Asian Development Bank, a Manila-based financer of major infrastructure projects in the Asean region, has estimated the bloc will require up to US$60 billion in infrastructure finance a year between 2012 and 2020 if some of the less-developed member countries hope to modernise their transport links.

Stronger rail links could substantially boost the region's economic growth. For example, by adding a dual-track railway system in Indonesia, the costs saved on expensive road transport would be the equivalent of 2 per cent of gross domestic product, a recent report from CLSA estimated.

This has put poorer Asean countries in a bind. Regardless of their political disposition, China has an offer Southeast Asian leaders couldn't refuse, said Shen Dingli, dean at Fudan University's Institute of International Studies.

"It's supply and demand," Shen said of the need for infrastructure finance and China's willingness to provide credit and construction expertise. "If China says it will build a railway to Singapore or Indonesia, they can't say no. They need it."

Mainland companies have promised to do just that. In August, Thailand's new ruling junta awarded a US$23 billion high-speed rail project to a state-owned company from the mainland. That's just a link in a 3,000km line it wants to build from Yunnan province to Singapore.

The single project in Thailand would more than match total Chinese investment in the Asean region between 2011 and 2013. China invested US$21.9 billion in Asean during the three-year period, making it the third-biggest investing country after Japan and the United States, according to official Asean data.

Chinese-backed infrastructure projects have become a common sight across the region.

Projects tend to start with government-to-government brokered deals in which mainland officials, state-owned construction firms and bank executives arrive en masse and depart with concessions often worth billions of dollars.

It was a return to the days of the "heavenly dynasty", Shen said, using a term that depicts the Chinese empire as the centre of the world and the surrounding states as vassals.

Shen sees Asean's key transportation hubs cropping up in cities such as Guangzhou - outside the bloc. China would look to conquer the region not with gunboats and soldiers but with cranes and labour, he said. Not all Southeast Asian nations will fawn over a new heavenly dynasty. After all, Vietnam warred for a millennium with imperial China, only to fall under its rule for hundreds of years.

Business leaders in the region do not doubt the mainland's intentions to support trade and continue bankrolling bridges and dams. At the same time, some sense China's territorial conflicts will gradually infect the region, having a detrimental affect on development.

Manu Bhaskaran, chief executive at Centennial Asia Advisors, a Singapore-based policy consultancy, said the disputes are even pushing some countries not directly involved in the conflicts away from China.

"China's assertiveness is triggering a pushback from others in the region," he said.

This article appeared in the South China Morning Post print edition as: Dealing with the dragon
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