30 January 2015edge review

A Chinese-built road under construction in Gabon (jbdodane/Flickr).

China’s growing prominence as a regional and global infrastructure financier will have deep repercussions for ASEAN in 2015 and beyond

China reached a significant milestone last year, according to the International Monetary Fund: for the first time in modern history, the size of its economy had surpassed that of the United States, at least in terms of purchasing power parity even if in real terms it still lags behind.

The growing spending power of China’s burgeoning middle class speaks volumes about Beijing’s global aspirations, which are being felt – in very tangible ways – in China’s Southeast Asian backyard.

In 2012, the Asian Development Bank (ADB) estimated that ASEAN nations will need a cumulative US$60 billion per year in infrastructure financing until 2020, and countries around the region – some more than others – are increasingly turning to Beijing to fill in the gaps.

Across ASEAN, examples of China’s growing influence can be felt everywhere, from new roads and dams in Laos, Cambodia and Myanmar, to the networking hardware used by mobile operators region-wide.

Increasingly across ASEAN, Chinese-backed loans have come to eclipse the footprint of the ADB and World Bank, the two multilateral lenders that have traditionally provided external financing across the region.

China pays into both the ADB and World Bank, although Beijing has long complained that it has limited influence over their agendas. Between them, Japan, the US and the EU hold more than 40 per cent of voting power in the ADB; China, whose population eclipses those entities combined by more than 400 million people, holds just 5.5 per cent.

In 2014, China took unprecedented steps to undermine the hegemony of the established order by spearheading the creation of two new multilateral lenders that will mirror the functions of the World Bank and ADB.

In July, the leaders of the BRICS states – Brazil, Russia, India, China and South Africa – committed to the establishment of the Shanghai-headquartered New Development Bank, which will focus on infrastructure financing across the globe.

Then in October, 23 Asian leaders signed on to the Asian Infrastructure Investment Bank (AIIB) – China’s answer to the ADB – which is expected to begin lending later this year. Significantly, all ten ASEAN member states signed on, including Vietnam and the Philippines, whose overlapping claims with China in the South China Sea have precipitated ASEAN’s most intractable security crisis.

Beijing’s moves to level the playing field with the Bretton Woods system institutions and their offshoots have also come with commitments to step up direct lending of its own. Chinese Premier Li Keqiang committed infrastructure-related loans to ASEAN worth US$20 billion at the 6th East Asia Forum last November, while also earmarking funds for technical assistance and poverty-reduction schemes.

To put the latest round of Chinese lending to ASEAN in perspective, the ADB’s flagship ASEAN-focused lending program, the ASEAN Infrastructure Fund announced in 2012, only commits US$4 billion in direct lending until 2020, with plans to leverage that to US$13 billion through further commitments from member governments.

Those numbers, however, don’t take into account fundamental differences between China’s state-led development model and the established multilateral banks’ emphasis on public-private partnerships to fill in financing gaps. The huge Chinese conglomerates making inroads into Southeast Asia are almost all state-owned, obviating the need to engage the private sector as a source of financing.

For some governments in the region, massive infrastructure investments by China are most welcome, particularly in underdeveloped but strategically important Laos and Myanmar. Cambodia’s ties with Beijing are particularly strong, as the government of long-time strongman Hun Sen views Chinese influence as a welcome counterbalance to Vietnamese interests.

For Vietnam and the Philippines, Beijing’s newfound financing mettle may be cause for worry. Both states are significantly exposed to Chinese investment; the State Grid Corporation of China, for example, owns 40 per cent of the Philippines’ national energy grid. If conflict in the South China Sea were to escalate, Chinese ownership could pose a serious security risk.

But Hanoi and Manila, wary of Beijing’s overtures to ASEAN, have alternate sources of infrastructure financing at their disposal, including Japan and Korea – among the largest sources of FDI in both countries – and the ADB.

Indeed, last May, Vietnam got a green light for the largest loan to date from the ADB’s ASEAN Infrastructure Fund to upgrade its electricity grid, perhaps not a coincidental development given the geopolitical machinations at play.

Leave a Reply

Your email address will not be published. Required fields are marked *