An offer they can’t refuse? China, South East Asia and Maritime Silk Road

ASEAN

There is huge fault line running through China – South East Asian relations, namely the ongoing dispute over who should control the Spratly Islands in the South China Sea. China has aggressively staked its claim, building airstrips and buildings on the tiny islands, alienating close neighbours such as the Philippines and Vietnam in the process. However this has not stopped fast growing trade and investment ties developing between the region and China.

While China’s trade with the EU and USA is the largest in volume and its ties with Africa are perhaps the most discussed and analysed, it is South East Asia that makes up the biggest chunk of China’s trade with a developing region. The relationship has been criticised as too one sided (much like in Africa and Latin America) in favour of China as it receives commodities like coal, wood and minerals in exchange for Chinese manufactured goods, which many feel is damaging in the long term for the natural resource exporter as it creates a neo-colonial dynamic.

However these criticisms are less valid in South East Asia as it contains a number of significant manufacturing nations such as Malaysia and Thailand and soon stands to gain from firms offshoring away China in search of lower costs.

Despite these differences trade relations remain good and China is planning a free trade area with the ASEAN region which would be one of world’s largest if fully enacted.

The announcement in 2013 by China to develop a Maritime Silk Road will also have implications for the region. The plan to develop the port and shipping infrastructure of South East Asia, East Africa, the Middle East and South Asia appears to be a pet project of the Chinese Prime Minister and will help advance the nation’s political and business goals, namely increasing Beijing’s geo-political influence and providing new opportunities for Chinese firms.

For ASEAN countries it is an offer they cannot easily afford to refuse. It is not every day the promise of spending at this level comes along for countries like Thailand, Myanmar and Cambodia. The chance to develop exciting, much needed rail and port projects is a powerful draw for politicians keen to create jobs, promote their economies and of course themselves.

The Chinese government is clearly hoping these growing economic ties will bind the countries closer to Beijing, but right now there is little evidence for that, instead many are eager for the investment but remain fearful of China’s growing influence. Beijing is perhaps counting on the idea that once a country is more dependent on trade and investment with China it will inevitably move towards a political alliance, but this would be a misguided notion.

The development of the Maritime Silk Road is backed by some heavyweight financing, but the Chinese have also taken the time to create a specialist fund to promote their vision, namely the China – ASEAN Investment Cooperation Fund. This new private equity fund sponsored by the Chinese EXIM Bank and headquartered in Hong Kong has approx US$10 billion to invest in much needed infrastructure across the region. The Fund mirrors the Silk Road Fund and the China Africa Development Fund which cover Eurasia and Sub-Saharan Africa respectively. Being a smaller unique institution focused on South East Asia and by extension on the Maritime Silk Road gives it major advantage over larger institutions which have a global footprint.

 

Typically the Fund targets:
  • US$ 50 -100 million sized investments, taking a minority stake
  • Co-invests with other strategic investors.
  • Will invest in both listed and unlisted equities.
  • Both greenfield and established companies.

The fortunes of the China – ASEAN Fund will be worth following as it not clear whether the Chinese state (via its policy banks) is the best qualified to run a fund of this nature. These funds are generally best left to the private sector. 



Categories: China Goes Global, Frontier Market Strategy, Frontier Markets, Geo-Economics, Kula Ring Trade Blog

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  1. Weekly Bulletin: March 27 – April 2, 2016 | Corint Consulting

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