Chinese and Japanese Investment in ASEAN: From Competition to Cooperation?
Photo Credit: Kyodo News
By Hong Zhao

Chinese and Japanese Investment in ASEAN: From Competition to Cooperation?

Jul. 16, 2018  |     |  0 comments

Southeast Asian countries still face major challenges in regional market integration and connectivity development. ASEAN has come up with several initiatives in an attempt to close its development gaps. ASEAN’s plans to strengthen connectivity through the development of a series of rail, road, and water links not only offer the possibility of investment contracts, but also the opportunity for the regional powers to shape Southeast Asian infrastructure in their favor. This has prompted and heightened competition between the two Asian giants of China and Japan, particularly in the areas of infrastructure financing and high-speed rail (HSR) construction.

Japan began its large-scale investment in Southeast Asia since the late 1970s and had formulated and invested its vision for infrastructure connectivity across Southeast Asia in the 1990s. The basic idea of Japan’s development of interconnectivity in Southeast Asia is to establish cross-regional and inter-regional interconnectivity and, especially with large urban agglomerations as nodes, to build economic corridors across different developing countries in the region, so as to promote ASEAN countries’ industrialization and regional integration.

Japan regarded ASEAN as “a market where Japan can never lose and be behind.” After Japan was outbid for the Indonesian HSR project between Jakarta and Bandung in September 2015, the Japanese government was prompted to adjust its loan policies and promised to contribute “high quality” infrastructure development in the future. In February 2018, Prime Minister Shinzo Abe and his cabinet outlined Japan’s new aid strategy, pledging to employ Japan’s aid power for the realization of the “Free and Open Indo-Pacific Strategy” which was announced by Abe in August 2016 and which aimed to enhance connectivity through “high-quality” infrastructure and the implementation of maritime law enforcement.

China began to cultivate its economic ties with Southeast Asia much later than Japan. Its commitments to infrastructure development in Southeast Asia were seen in the early 2000s when Yunnan Province and Guangxi Zhuang Autonomous Region prioritized inter-regional physical transport connectivity with ASEAN countries and initiated the Gateway Strategy and the Pan-Beibu Gulf Economic Zone respectively. They aimed to strengthen their land connectivity with Southeast Asia through expressways and railways, as well as building bilateral maritime and air connectivity through port, harbor-related, and airport infrastructure cooperation.

China’s initiatives for building infrastructure connectivity in Southeast Asia gained momentum in 2013 when President Xi Jinping proposed the Belt and Road Initiative (BRI). This initiative has the strategic objective of advancing practical economic cooperation on infrastructure development and strengthening linkages with neighboring states by relying on the distinctive values and ideas of the ancient Silk Road.

Beijing’s long-term goals for infrastructure building in Southeast Asia within the framework of the broader BRI include the ambitious plan to build a Pan-Asia Railway Network that will see three 4,500-5,500 km railway lines linking China and Southeast Asia. Central, eastern and western routes of this planned railway network will run from Kunming through Laos, Thailand, Myanmar, Malaysia and Singapore.

The China-ASEAN transport cooperation plan paved the way for the International Transport Corridor between China and Southeast Asian countries. More importantly, the Sino-Laos and Sino-Thailand railways will form a vast railway network connecting local areas, and that is a salient feature which neither Japan nor other countries can match. While Chinese investment in the ten ASEAN countries is well behind Japan and even the US, it will only increase further as the implementation of China’s BRI goes on and policy coordination is strengthened between China and ASEAN.

In 2015, Japanese and Chinese FDI inflows to ASEAN reached USD 17.3 billion and USD 8.1 billion respectively, accounting for 21.3 percent of the total FDI inflows.

If we look at the respective Chinese and Japanese plans to develop railway networks in Southeast Asia, we find the two countries have different ideas and strategic considerations. Japan mainly focuses on building East-West lines, intending to synergize with several Japan-involved East-West Economic Corridors that would connect Myanmar, Thailand, Laos and Vietnam, and aiming to help Japanese companies expand business and optimize the production networks within and outside the ASEAN region through infrastructure connectivity.

In contrast, Beijing’s long-term goals for infrastructure development in Southeast Asia within the framework of the broader BRI is to build a North-South Pan-Asia Railway Network, intending to synergize with the proposed Kuala Lumpur-Singapore HSR and improve its access to Southeast Asia and beyond. That said, Sino-Japanese infrastructure investment activities in Southeast Asia are not largely influenced by their geo-political rivalry. Their respective investment activities rest on solid market expansion considerations.

For Japan, the government explicitly located the export of infrastructure systems (including HSRs) as a key to revitalize its long-stagnated economy and foster new sources of economic growth. The infrastructure business was regarded as a business that extended from manufacturing to services and was a main item for obtaining the global market. The Abe government thus was determined to strengthen sales of Japanese infrastructure products through private investment.

For China, its infrastructure projects in the region carry some political considerations (mostly through the BRI and the AIIB), but they rest more on economic interests. One of the major objectives of China’s BRI is to reduce disparities in China by stimulating growth in the country’s underdeveloped hinterland. It seeks to accelerate the development of the western region through accommodating and synergizing with the development strategies of neighboring countries, with approaches including creating new corridors for international economic cooperation, putting into place a smooth and efficient regional thoroughfare. In this sense, Japan and China have common goals and economic interests in Southeast Asia, and such competition is generally good for the overall development in Southeast Asia.

For ASEAN countries, both China and Japan are important sources of investment, important markets and key trade partners. In 2015, Japanese and Chinese FDI inflows to ASEAN reached USD 17.3 billion and USD 8.1 billion respectively, accounting for 21.3 percent of the total FDI inflows (USD 119.9 billion), according to the 2016 ASEAN foreign direct investment statistics database. Both China and Japan have been able to mobilize their financial and construction capability to finance infrastructure projects in Southeast Asia. So, in order to avoid overdue competition between the two big powers, both China and Japan need to consider possible harmonization with each other’s policies and find a proper approach.

Regional connectivity is the long-term goal of the ASEAN Community, and ASEAN has its own agenda, including ASEAN Integration Work Plan and the Master Plan on ASEAN Connectivity 2025. It is possible that other powers’ investments may not be consistent with ASEAN’s agenda and initial intentions.

For example, as China’s investment in some individual countries increases, there are growing concerns that “the new infrastructural connections — which would tie Southeast Asia nations individually to China, rather than connecting China with ASEAN as a whole—would pose a threat to ASEAN connectivity, a key principle in the strength of the organization.” Furthermore, as the Japanese and Chinese HSR systems use different types of construction, it is possible that railway networks could be incompatible if various countries across the region choose to adopt different systems and technologies.

Therefore, an effective mechanism for coordination and dialogue on the regional connectivity between ASEAN, China and Japan is needed. More importantly, such multilateral collaboration would foster trust between China and Japan and enhance the effectiveness of their infrastructure development efforts from a broader regional perspective than through the narrow lens of national interests.

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