How China is courting Southeast Asia

For centuries, the Malacca Strait has been a road to riches. Along with a wealth of natural resources, including spices, rubber, mahogany, and tin, it offers the most direct route between India and China.
Due to its strategic importance in connecting Europe, the Middle East and Asia, the strait was carved up by colonial powers from the 16th century onwards.

Recently, I had the chance to take part in a sailing trip in the Malacca Strait. It was a trip reminiscent of the era when Britannia still ruled the waves and the maritime trade. The ship we sailed on was a replica of a traditional sailing boat from the late 19th century, complete with three masts.

It was atmospheric, the weather was fantastic and the food was good. Perhaps most importantly, it offered some me some much needed tranquillity and distance from my fast-paced life in Asia.

I realised that this strait has been central to East Asia’s destiny for 400 years. Whoever controls Malacca has dominated the continent. It’s been controlled by the Dutch, the British, and now the independent nations of Southeast Asia. But a resurgent China is growing its influence here.

China demonstrates leadership in Asia

About a year ago, we highlighted America’s ‘pivot to Asia’, as seen in President Obama’s visit to Bangkok and South East Asia. But ever since then the US administration has been slow on keeping the momentum going. This raises the question of whether the Americans have put in enough effort to maintain their influence over smaller Asian nations.

Last month President Obama cancelled his trip to the region due to the debt-ceiling debacle. This was a huge disappointment. But it left room for China to take centre stage.

President Xi Jinping made his first trip to Southeast Asia to participate in the 21st Asia Pacific Economic Cooperation (APEC) meeting in Bali, Indonesia. During the meeting the Chinese leader urged members to take their economic restructuring further, oppose trade protectionism, and boost cross-Pacific inter-connectivity.

In this whirlwind trip two Chinese top politicians visited five out the ten members of the Association of Southeast Asian Nations (Asean).

China is Asean’s biggest trading partner, and Asean is China’s third biggest partner after the US and the European Union. Bilateral trade between them was worth $400bn last year, which the two parties aim to more than double, to $1trn by 2020.

China has also said it will establish an Asia infrastructure investment bank to promote inter-connectivity in the region. Moreover, China declared its readiness to strengthen maritime cooperation with Asean nations and jointly build a new maritime ‘Silk Road’.

 

Resurrecting the maritime Silk Road

The Silk Road is the fabled continental trade route linking China to Europe, which brought not only products such as silk, tea and spices, but also new philosophies, technologies and diseases to the Europeans over the course of two millennia.

The trade route lost its significance when the Europeans began sailing directly to Asia and found the sources of these products. This allowed them to import them directly from the East.

Meanwhile, China had its own less well-known maritime silk road connecting coastal China with Southeast Asia, India and Africa. This was made possible because of the Chinese Admiral Zheng Ho, who with a large flotilla, visited and mapped out the route in several voyages during the early part of the 15th century.

The Chinese government now plans to resurrect this maritime Silk Road to Southeast Asia. And the pivotal point is the Malacca Strait, which is controlled by the Asean members Indonesia, Malaysia and Singapore.

Laying the groundwork of an Asean asset bubble

At the opening of China-Asean expo in September, Premier Li Keqiang said that the past ten years have been a golden decade of China-Asean bilateral cooperation.We should remember about 70-80% of the overseas Chinese are living in Southeast Asia. Many are descendants of Chinese traders and workers who played a major role in the first maritime Silk Road and helped to establish leading trading centres along the Malacca Strait.

These ties literally fuel China’s economy. An OECD reports reveals that since China opened up its economy to outsiders in the late 1970s the majority of foreign direct investment came from Asia. And the direction of the flow is now turning…

In Indonesia, a Chinese delegation has recently signed on $28.3bn in fresh investments. Most of them are going towards infrastructure. For instance, the state-controlled China Communications Construction Co will build an 18-mile monorail network through the capital Jakarta.

The state-owned Industrial and Commercial Bank of China also signed a deal to lease five Boeing 777 and six Airbus 320 planes to Indonesia’s flag carrier Garuda. The Chinese and Indonesian central banks also agreed on a $16.3bn currency swap agreement, which can be used if Indonesia would face a sudden sharp outflow of foreign capital.

Bangkok and Kuala Lumpur have been listed as some of the favourite markets for property and real estate investors from China, according to a new report compiled by Knight Frank. And Singapore has been given green light to trade yuan, the Chinese currency, allowing it to compete with Hong Kong and London for offshore currency trading.

These are all important signals. But I’m most excited at the prospect of Chinese investors investing in Asean companies for the first time.

Last week the Chinese central bank hinted at a new programme that would allow institutions to make direct portfolio investments overseas. And it also said it could be extended to allow ordinary Chinese to make direct investments.

The last time a similar event took place – e.g. an increase in FDI and portfolio inflow – was in the mid-1980s when Japanese money helped to push the Asean markets into bubble territory.

Obviously there are concerns about Chinese influence. But Southeast Asia has a long history of dealing with foreign courtship. The Americans and the newly confident Japanese are waiting in the wings – which suggests there’ll be plenty of capital flowing into the region’s bourses in the future…