Two years after China’s One Belt One Road initiative was launched, Chinese investment along both the mainland and maritime routes has surged. But political risks and uncertainties can halt the implementation of the grand strategy in Southeast Asia.
It has been more than two years since the grand strategy of One Belt One Road was introduced in September and October 2013 during Xi Jinping’s visit to Central Asia and Southeast Asia.
The initiative is a series of trade corridors with more than 65 countries, covering 4.4 billion people, 63% of the world’s population. It connects China, by land, to Central Asia and to Europe, and by sea, to Southeast Asia and then on to Africa. Officially known as the Silk Road Economic Belt and the 21st-century Maritime Silk Road, the Chinese framework aims to better improve regional connectivity, drive growth, and allows China to assume a proactive role in global affairs.
Support for project immense
Over the last two years China has formulated a regulatory framework and launched supporting funds and institutions. Meanwhile, high-level officials have been actively promoting the initiative, while private enterprises have also seized the opportunity and increased their investment in those countries along the route.
The “Visions and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road”, a broad plan that rolls out a framework for the strategy, was initially introduced by China’s National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce. Other top regulators, such as the State Administration of Taxation and the Ministry of Transport, have all introduced plans and measures that are specific for activities along the two routes within their respective fields.
Naturally, the project has received top political support and commitment. The China-led Asian Infrastructure Investment Bank (AIIB), BRICS New Development Bank, and the $40 billion Silk Road Infrastructure Fund all facilitate the initiative. Whereas the first two programs target infrastructure development beyond One Belt One Road, the latter program was created specifically for the initiative.
Since the launch of the initiative, various Southeast Asian countries have been engaged in the Belt and Road either through joint ventures with Chinese state-owned enterprises or private entities. Infrastructure, investment, and trade have all increased over the last two years.
There are now over 50 Chinese companies within the textile and light industry spheres in Cambodia’s Sihanoukville Special Economic Zone. Chinese investment in Thailand centers on railways and manufacturing investment. Projects in Myanmar mainly involve electricity and transportation. China’s CITIC Group Corporation recently won a bid to build a deep sea port on the Bay of Bengal. Indonesia, Myanmar, and Laos are becoming important destinations for China to export the overproduction of cement and new plants are being built across the three countries.
Risks and uncertainties in Southeast Asia could halt investment
China sees the region as an important hub for the rolling out of One Belt One Road. There are 40 million ethnic Chinese living within the region. China is ASEAN’s biggest trading partner and ASEAN is China’s third biggest trading partner, after the EU and the US. The demand for trade and infrastructure is high.
Investment and projects in the region will accelerate in the coming years, but there are risks and challenges that could keep Chinese investors on hold.
ASEAN discrepancies
Most of the Southeast Asian countries have expressed their support of the initiative, but their level of support varies. Laos, Cambodia, and Thailand are the most supportive states. Vietnam and the Philippines are least supportive. Myanmar, Singapore, Indonesia, Malaysia, and Brunei comprise the middle nations.
The discrepancy in the level of support can be broadly explained by the traditional long-term close relations a state has with China, its economic dependence on China, and whether the state has territorial disputes with China. While China is a trading partner with each ASEAN state, the trade bloc as a whole is nonetheless an important factor that could affect each individual country’s policy towards One Belt One Road.
Furthermore, anti-China sentiment is brewing in some states. Rise of populism in Southeast Asia and the territorial disputes over the South China Sea have increased anti-Chinese sentiment, and occasionally anti-China protests. For instance, while ethnic Chinese constitutes around 22 percent of the Malaysian population, and ethnic Malay, Indian and Chinese people have lived together peacefully, discrimination against ethnic Chinese still occurs in parts of Malaysia.
Sovereignty claims over the troubled waters can also trigger massive anti-China protests. In 2014, China’s decision to move an oil rig into disputed waters led to a massive anti-China riots in Vietnam. Anti-China sentiment in Indonesia, while unlikely to return to the level that Chinese experienced in the 20th century, might resurface due to disputes regarding delimitation of maritime boundaries between the two countries.
Chinese businesses operating in these three countries in particular see anti-China sentiment as a big threat to the investment environment, and to the security of their staff and property.
Political instability and lack of policy continuity
Additionally, power struggles which lead to political instability and violence, and lack of administration continuity which leads to project cancellation or contracts being delayed, all constitute a threat to foreign investment. In Thailand, for example, political struggles between the royalist-military establishment and Thaksin’s populist coalition have led to frequent changes of government. While the Thai military junta is likely to stay in power at least until mid-July 2017, political instability will persist and the risk of violent protests remains.
China also worries that changes in government might see a change in policy orientation. Under Cambodia’s current administration, for example, One Belt One Road is actively supported. Cambodian politics are dominated by two big parties: the Cambodian People’s Party, a pro-China party led by long-time Prime Minister Hun Sen, and the Cambodian National Rescue Party. The latter is a pro-liberal party that has received support from the US and Western countries. The CNRP remains in strong opposition to the current government and if it comes to power in the 2018 general election, this will likely affect Sino-Cambodian relations and follow-on effects on Chinese businesses might ensue.
Terrorism
Home-grown terrorist groups and the rise of Islamic State influence in the region are also something that Chinese investors are cautious about. The terrorist bomb and gun attack in Indonesia in January this year, Bangkok’s August 2015 suicide bomb attack, and the kidnapping of two German hostages for more than six months by pro-ISIS Abu Sayyaf in the Philippines all add to this concern.
So far, the region is relatively safe and the risk of massive terror attacks remains low. At the moment, Chinese and foreign companies are seldom the direct target. However, the spreading of ISIS to the region combined with the increasing engagement of China in global and domestic counter-terrorism all serve to make Chinese companies and properties more likely targets of terrorist attacks in the future.
Risks mark need for clear assessments
Trade, investment, and projects in Southeast Asia are likely to accelerate going forward. However, political risks and uncertainties will continue to challenge Chinese investors and participating countries.
Chinese companies will have to carry out complete risk assessments and have a comprehensive understanding of the destination countries. The Chinese government and countries along the routes will have to work together to mitigate these risks.
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