From soft power to FDI, China must work on its economic ties with Asean

China is Asean’s top trading partner and more China-invested projects are gaining traction but its expanding economic influence is also attracting suspicion and distrust
Beijing should boost its FDI in the region and ensure China-funded projects are much more observant of local values and laws

Chengxin Zhang

Published: 7:45am, 27 Nov 2022

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The international community has recently renewed its focus on China’s economic presence in Southeast Asia. Earlier this month, as world leaders gathered in Bali for the G20 summit, the Jakarta-Bandung high-speed railway completed its test run, witnessed by Indonesian President Joko Widodo and his Chinese counterpart Xi Jinping.

With a targeted speed of 350km/h, Southeast Asia’s first high-speed railway aims to cut the travel time between the two metropolises from around three hours to just 40 minutes. Described as a landmark cooperation project between China and Indonesia, the equipment, technologies and standards applied are largely from China.

The project reflects China’s expanding economic influence in Southeast Asia. In the first 10 months of this year, bilateral trade between China and Asean, the regional bloc, reached US$798 billion. For the Association of Southeast Asian Nations, China has been the largest trade partner for 13 consecutive years.

But China’s advantages are not limited to its capacity for mass production and enormous market. Through industrial upgrading, China is asserting itself in the upstream global value chain. Besides the Jakarta-Bandung railway, Chinese equipment, technology and standards also play a dominant role in projects such as Kunming-Vientiane railway and Baleh hydroelectric station in Malaysia.

Furthermore, Chinese technologies are being integrated into the daily lives of the people of Asean, with the Beidou satellite navigation system, China’s version of GPS, offering coverage, and Huawei Technologies Co’s contributions to the 5G network in Thailand.

According to an annual poll released earlier this year by the ISEAS-Yusof Ishak Institute headquartered in Singapore, 76.7 per cent of respondents across Southeast Asia regard China as the most significant economic force in the region, far outpacing the United States, European Union and Japan.

But this does not mean that Beijing has established its economic leadership in the region. There are still hidden dangers that could weaken China’s economic sphere of influence.

Firstly, there is a disparity between the volume of China-Asean trade and China’s foreign direct investment (FDI) in Asean economies. While more China-invested projects are gaining traction, China is still only the fourth largest investor in Asean economies over the last two years, trailing the US, Asean members themselves and Japan, a reflection of China’s cumulative FDI stock in the region over the past decades.

Import and export trade can consist of just one-time or short-term transactions but FDIs often necessitate long-term working relationships, generating continuous economic and social benefits for the recipient countries. It is harder for China to maintain robust reciprocal ties with Asean than for its rivals, the US and Japan, because of China’s insufficient FDI in the region.

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There is more; soft power is a weakness that Beijing needs to fix. It is important to distinguish between objective and subjective feelings of admiration for China’s robust economic power. Based on data from ISEAS-Yusof Ishak Institute surveys of 2020-2022, the proportion of respondents concerned about China’s expanding economic influence in the Asean region varies around 70 per cent, whereas the US figure is less than 30 per cent.

The top factor of concern was “China’s growing economic dominance and political influence” in their countries, with over half of respondents concerned that “China’s economic and military power could be used to threaten my country’s interests and sovereignty”.

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China’s economic outreach has been criticised as part of the “China threat” narrative. Philippine former congressman Walden Bello warned back in 2010 that the China-Asean Free Trade Area could replicate the “old colonial division of labour”, allowing most of the benefits to flow to China. He blamed the rampant smuggling of Chinese goods after the 1997 Asian financial crisis for disrupting Asean’s economy.

Take the Morowali industrial park in Indonesia’s nickel-rich central Sulawesi as an example. The Chinese joint venture, described as a “tale of China’s grip on [a] rich region” by a Jakarta Post report back in 2017, was criticised after complaints emerged of Chinese workers there getting better pay and working conditions than local staff.

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Indonesian politicians and media have also criticised the Jakarta-Bandung high-speed railway for cost overruns, amid complaints of environmental pollution, evictions and disruptions of local livelihoods.

There is a risk in the lack of strong public support for China’s investments in individual Asean economies. It could start to sway Asean’s policies as a whole towards China, obstructing further transactions or projects, and ultimately weakening China’s economic clout in the region.

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As the starting point of the “21st century Maritime Silk Road”, the sea route part of the Belt and Road Initiative, Asean’s importance to China is undeniable. Beijing must optimise its economic foreign policy when it comes to Asean. The most straightforward way is to steadily and sharply increase its FDI in Asean economies to achieve a better balance between its bilateral trade and FDI flows.

Given the local complaints about China-funded projects, a more thorough and reasonable implementation plan for every project should be created to better understand and observe local customs, values, laws and regulations, particularly those pertaining to business operations, labour protection and environmental standards. This is the only way to eliminate the prejudice that some harbour against Chinese entities.

Hopefully, a more positive perception of China’s economic might would emerge.

Chengxin Zhang is a doctoral candidate at the School of Politics and International Relations of Lanzhou University, China, and a researcher at the Youth Think-Tank of The Glory Diplomacy of China