Over the years, China’s involvement in financing Southeast Asia’s infrastructure needs has been on the rise. State-owned companies in particular have been targeting investments in infrastructure sectors like energy, railways, roads and ports that offer maximum potential and require expertise and funding that the respective ASEAN governments severely lack. This has further been bolstered with the huge push being given by the Chinese government through various initiatives, policy and commercial banks, state-backed investment funds and the newly established multilateral Asian Infrastructure Investment Bank (AIIB).
In 2016-17, China accounted for around 14 per cent of the net foreign direct investment (FDI) inflows into Thailand, 8 per cent each in Vietnam and Indonesia, and 6 per cent in Malaysia, while, the Philippines received a marginal share of 0.14 per cent. Overall, China’s FDI inflow into the ASEAN region stood at $8.2 billion in 2016-17, which was 17 per cent higher than in 2015-16. Sector-wise, a major portion of Chinese investments have been made in the energy, transport and real estate areas, accounting for nearly 78 per cent of China’s cumulative investment and construction contracts in Southeast Asia from 2005 to June-2017.
Broadly, ASEAN’s strategic geographic positioning and economic importance to China has been the prime reason for its renewed support for infrastructure investments in the region. While a majority of the ASEAN governments have shown a strong inclination towards Chinese investments, the chances of this backfiring, in the event of China seeking hegemony, poses a serious threat to the region.
Key initiatives
The two major financing sources of China’s outbound investments into the ASEAN region have been the China-ASEAN Infrastructure Investment Fund and the newly established Silk Road Fund. The former, established in 2013, started with an initial capital of $1 billion, of which the China Export-Import Bank contributed $300 million and led the formation of the fund, while the World Bank’s International Finance Corporation contributed $100 million and holds equity of 10 per cent. The first phase of funding was mainly undertaken to fund 11 projects spanning the telecom, mining, energy and transport sectors. Going forward, the fund aims to garner a total corpus of $10 billion to further bolster its objective of developing infrastructure, energy and natural resources in ASEAN. For the second phase of funding, China aims to raise around $3 billion.
China also launched the multilateral AIIB in 2014, with an initial authorised capital of $100 billion, and around 57 countries registered as prospective founding members as of June 2016. China currently holds the largest number of shares in the organisation, accounting for around 30 per cent of the total, and controls around 26 per cent of the voting share. The bank mainly aims to provide finance to key infrastructure and other productive sectors. It announced its first batch of projects in April-May 2016.
Further, to spearhead its vision of integrating China with the ASEAN region, another major initiative was announced by China in 2013 – the One Belt One Road (OBOR) initiative, aimed at promoting interregional connectivity between China and Asia, the Middle East, Africa and Europe through the development of robust transport, energy, trade and communications infrastructure. The two main components of the initiative include the land-based Silk Road Economic Belt, and the oceanic 21st Century Maritime Silk Road, which encompasses the development of not only the two corridors, but also several additional stretches connecting the two corridors. The primary motive of this initiative is to enhance global supply chains though debt-financed infrastructure projects.
Currently, around 60 countries, including ASEAN member countries, with a combined gross domestic product of $21 trillion, have evinced interest in the initiative, which as of July 2016 had 900 deals worth $890 billion underway. China further expects annual trade with these countries to increase to $2.5 trillion within a decade from the initial $1 trillion registered in 2015. While massive investments have been envisaged for this initiative, China is likely to invest around $4 trillion in OBOR countries.
Further, to support the initiative, another fund, the Silk Road Fund, was established in 2014 with a corpus of $40 billion, aimed at undertaking investments in major infrastructure projects in China and other countries involved in the initiative. Besides, Chinese policy banks like the China Development Bank and the China Export-Import Bank have also been actively operating oversees to encourage Chinese companies to expand overseas, for which significant amounts of money have been injected into these banks by the Chinese government.
Recently, the Industrial and Commercial Bank of China (ICBC) signed several memorandums of understanding (MoUs) with the Singapore Business Federation (SBF), Singapore Exchange, Surbana Jurong, Sinochem, and Singapore Press Holdings to strengthen ties between China and Singapore and support infrastructure projects under the OBOR initiative. Under this cooperation, ICBC will extend up to approximately $7.49 billion to SBF member companies for financing projects and other related professional services.
Further, the China Construction Bank signed an MoU with International Enterprise Singapore to extend approximately $22.03 billion for OBOR projects in Singapore. As of April 2016, the bank had 176 major projects in OBOR countries, with an aggregate investment size of more than $300 billion covering sectors such as power generation, mining and transportation.
Key infrastructure projects to be funded by China
In October 2015, Indonesia and China signed a $5.5 billion joint venture agreement for the construction of a 142 km high speed rail link connecting Jakarta and Bandung in Indonesia, with 75 per cent of the funding to come from the China Development Bank. To build the railway line, an Indonesia-China consortium – Kereta Cepat Indonesia China (KCIC) – signed a $4.7 billion engineering, procurement and construction contract with a consortium of seven companies called the High Speed Railway Contractor Consortium. The project is due to be completed by 2019, after which the government plans to extend the link a further 740 km to Surabaya. Once operational, the railway will be longest and fastest line in Laos, having an average speed of 160 km per hour, with nearly 60 per cent of the line comprising bridges and tunnels.
Further, China has offered to fund the $3.24 billion trans-Sumatra railway project, spanning a length of 2,168 km to connect Aceh in the north to Lampung in the south; a $2.76 billion railway project, spanning a length of 1,686 km through Kalimantan; and the $2.99 billion trans Makassar-Manado railway project, spanning a length of 1,600 km across Sulawesi, linking Makassar in the southwest region with Manado in the northeast.
China is also in discussions with Thailand for constructing a 3,000 km regional railway line connecting Kunming in China with Thailand. The proposed route will require the track to cut across Thailand to eventually reach Malaysia and Singapore. One section of this stretch, from Kunming to Vientiane in Laos, spanning a length of 427 km and estimated to cost $6.3 billion, will be funded by China up to almost 70 per cent.
In Malaysia, China’s state-owned energy company China Power Investment Corporation plans to invest $17 billion in a 7,000 MW hydropower plant on the Kayan river in Indonesia’s West Kalimantan province in Borneo. Further, a third terminal at Port Klang in Malaysia is being planned with China, as almost 80 per cent of the ships passing through the Strait of Malacca are bound for Chinese ports. Other Chinese-led projects include the Malaysia-China Kuantan Industrial Park, the East Coast Rail Link and the Melaka Gateway Project.
Moreover, the Chinese government is currently reviewing loan applications for key infrastructure priority projects in the Philippines, including the $53.6 million Chico River Pump Irrigation Project in Cagayan and Kalinga provinces, the $374 million New Centennial Water Source-Kaliwa Dam Project in Quezon province, and the $3.01 billion south line of the North-South Railway Project. The Philippines government plans to put the three priority projects for loan financing under the $3.4 billion assistance to be provided by the China Export-Import Bank that was approved earlier.
Furthermore, the Philippines’ economic managers have submitted nine projects worth a total of $1 billion seeking feasibility study support to China. These are the Agus III hydroelectric plant; Ambal-Simuay sub-basin of the Mindanao river basin flood control and river protection project; the Camarines Sur Expressway; the Davao City Expressway; Dinagat (Leyte)-Surigao link bridge; the Luzon-Samar link bridge; the North Luzon Expressway east project; the Panay Guimaras-Negros Island bridges; and the Pasacao-Balatan tourism coastal development programme. Besides, in January 2017, Beijing committed $3.7 billion for 30 projects in the Philippines.
Challenges and concerns
Despite the encouraging investments being made by China, corruption, bureaucratic red tape, and failure to arrange for funds are some of the issues that have left a number of projects incomplete or delayed. One such example is the Bandar Malaysia railway hub project in Kuala Lumpur, under which Malaysia’s TRX City Company, owned by the Ministry of Finance, withdrew from the agreement signed with the China Railway Engineering Corporation due to its failure to meet the financial obligation of the project. The Indonesian government has also put the Jakarta-Bandung high speed rail project on hold due to financial and land acquisition issues.
Environmental concerns have also arisen regarding China’s OBOR initiatives in the region. Countries like Laos, Vietnam and Cambodia have issued complaints of environmental damage and droughts from the hydropower projects along the Mekong river. Further, infrastructure projects in the Greater Mekong Subregion, linking Yunnan and the “Golden Triangle”, have raised concerns of human trafficking and drug smuggling due to the recent developments in the region.
However, the most prominent concern has been the growing influence of China over the ASEAN region. While healthy relations between the two depend on good trade and investments, problems will arise if countries are unable to repay loans or default on payments. Whether payouts made by China would then be used as bargaining chips for economic favours to or interests of the state, is a serious dilemma faced by the entire ASEAN region.
The road ahead
With an array of ambitious projects lined up in the ASEAN region, funding has emerged as a serious concern. While the desired rate of infrastructural spend has been estimated at 5-8 per cent of their combined gross domestic product, the current spend stands at just 3-4 per cent. To narrow this gap, the Asian Development Bank and the Asian Development Bank Institute have estimated an annual investment of around $60 billion in the region till 2022.
Economic relations between China and ASEAN have grown strong over time, with bilateral trade experiencing an upward trend and the total volume exceeding $450 billion in 2016. Going forward, China and the ASEAN economies aim to achieve a trade volume of $1 trillion by 2020. With regard to the OBOR initiative, the ICBC has supported nearly 95 projects with total financing amounting to $22 billion as of September 2016, with 211 prospective projects in the pipeline for development, estimated to cost around $213.2 billion.
Overall, the Chinese government has been bullish with regard to funding infrastructure projects in the ASEAN region. Whether this development pans out well for ASEAN in the time to come is a question that is still debatable.
