FEATURE: Sustaining Asean’s success

Writer: 
David Ho

 

HONG KONG (China Daily/ANN) - China-led Belt and Road Initiative and infrastructure investment bank will play key roles in 10-nation bloc’s development.

 As leaders of Southeast Asian countries gathered in the Philippines for the Asean summit and related meetings that started on Nov 10, they would have pondered what lies ahead while also reflecting on the 10-nation bloc’s past achievements.

And a key factor that will determine the sustained economic growth of the 50-year-old Association of Southeast Asian Nations (Asean) will be its growing relationship with China.

“China and Asean have been working over the years to increase trade flows within the region through frameworks like the Asean-China Free Trade Area. Even within China, there have been internal policies to encourage more trade flow with regional partners,” said Winnie Tsui, an economist with the Hong Kong Trade Development Council (HKTDC). 

“There have definitely been push and pull factors on both sides to create a more a cooperative economic partnership.”

The economic profile of the region has grown significantly since its inception. If Asean were a single country, it would boast a combined GDP of US$2.5 trillion as of last year. Analysis firm IHS Global Insight estimates it will rank as the fourth-largest economy in the world by 2050. 

In recent years, the group has been strengthening ties with its Plus Three partners — China, South Korea and Japan. In September, it renewed and intensified efforts under the Asean Plus Three Cooperation Work Plan. 

Last year, Chinese Premier Li Ke-qiang proposed six goals to enhance Asean Plus Three cooperation: To reinforce financial security cooperation, expand trade and investment cooperation, promote agricultural and poverty reduction cooperation, increase connectivity, create new models for industrial cooperation, and expand exchanges. 

Total trade between Asean and the three countries amounted to US$708.6 billion in 2015, 31.1 percent of ASEAN’s total. In the same year, the total foreign direct investment flows from the three countries into Asean reached US$31 billion, 26 per cent of total FDI inflows to the region.

China has been a key engine of this growth. The country was the first to establish a free trade area with Asean in 2002, the first to sign up to the Treaty of Amity and Cooperation in Southeast Asia and to establish a strategic partnership with Asean in 2003.

“Our analysis shows that China is a major trading partner of the Asean-5 (Malaysia, the Philippines, Singapore, Thailand and Indonesia), and is ranked among the top three for exports and imports for these Southeast Asian economies,” said Chua Han Teng, head of Asia country risk at BMI Research. 

Close relationship

Since 2009, China has been Asean’s largest trading partner, with two-way trade reaching US$350 billion in 2013 and set to reach US$1 trillion by 2020. Trade with China makes up about 14 per cent of Asean’s total and is growing at 10 per cent per year.

The close trading relationship means Asean and China are intrinsically tied.

“Asean countries such as Singapore, Malaysia, Thailand and the Philippines play an integral role in Asian supply chains by supplying key electronics inputs to China’s processing trade,” said Chua, adding that Indonesia is a key provider of natural resources to China. 

And changes taking place in China could also translate into slower but more sustainable growth. 

“China is in the midst of transforming its economy and moving up the value chain, which might account for its more sluggish performance of late,” said Xu Bei, an associate director with the China-Asean Investment Cooperation Fund. 

“Asean’s manufacturing capabilities and production rate are not up to par with China yet. Tech transfers between the two could be helpful in boosting the numbers related to that. 

“Once Asean countries gain stronger manufacturing capabilities, they can focus on selling back to feed the already big and growing consumption appetite of China,” she said.

Set to boost infrastructure investment is the China-led Belt and Road Initiative to revive the ancient Silk Road trading routes, as well as the Master Plan on Asean Connectivity to better connect the region. 

“Since the adoption of the Master Plan on Asean Connectivity 2010, notable progress has been made,” said Lee Minsoo, a senior economist at the Asian Development Bank (ADB). “However, much remains to be done to realize the vision of a seamlessly connected Asean.” 

In September last year, Asean leaders adopted the Master Plan on Asean Connectivity 2025, which incorporates the remaining initiatives from the previous plan.

The ADB said that Asean needs to invest US$210 billion per year until 2030 to meet infrastructure needs in areas like power, transport, water and sanitation. The Belt and Road could ensure a head start with projects worth US$350 billion over the next five years.

“China’s Belt and Road Initiative to build railway infrastructure in Southeast Asia is likely to take considerable time to bear fruit due to the scale of the plans and political uncertainty in the countries involved,” Chua said. 

“If successful, the railway network connecting China to Laos and Thailand and even Singapore could shorten shipping times in the region,” he added. 

Stanley Jia, chief representative of the Beijing office of global law firm Baker McKenzie, said: “The sheer scale and ambition of the (Belt and Road) means there will be plentiful opportunities for those local and multinational companies that can work hand in hand with Chinese organizations, particularly as the next wave of Chinese investment arrives.”

Much needs to be done to ensure infrastructure does not become the Achilles heel of growth in the region.

In this, another China-led initiative, the Asian Infrastructure Investment Bank, will have a crucial role to play.

The bank was formally launched by President Xi Jinping on Jan 16, 2016, and its website shows that as of Oct 31 it had US$3.49 billion in loans; approved 21 projects; and has 58 members, with another 22 prospective members.

Infrastructure goals

The HKTDC found that in the less-developed economies like Indonesia and Vietnam, there is a huge need for transport infrastructure to support industrial growth and boost development.

More developed economies like Malaysia need to expand existing infrastructure to boost capacity. 

Thailand, with aspirations to transform into a high-income country in two decades, is keen to develop the Eastern Economic Corridor in its industrial heartland along with 10 special economic zones along its borders.

Chinese outbound investments with a Belt and Road focus will be key to achieving Asean infrastructure construction goals. 

“Infrastructure doesn’t just connect two places — it allows the path between the two destinations a chance to bloom as well,” said Patrick Ip, managing director of the China-Asean Investment Cooperation Fund, the largest private equity fund focused on the Asean region. “Having the right infrastructure in place gives a boost to everything.”

“The short-term and long-term multiplying effects of infrastructure spending on GDP are substantial. This will boost the middle-class sizes and income creating further investment opportunities in healthcare, education, better housing, retail consumption and quality food products,” said Ip. 

He also urged countries to consider upping their investments in viable infrastructure projects.

“According to a recent Asian Development Bank study, Asean countries need to spend 5 percent of their GDP to meet their infrastructure needs. But at the moment, they are only spending 3 per cent. A breakdown of that shows that 2.5 percent comes from the public sector while the other 0.5 per cent comes from the private sector,” Ip said.

“They need to meet that remaining 2 per cent, which amounts to about US$146 billion, through more government spending and public-private partnerships (PPP).”

Lee from the ADB said these partnerships, which have evolved and improved, are at the heart of plans to develop infrastructure and the benefits they generate by sharing risks between the public and private sector.

“Instead of providing exclusively public assets and related services, governments have increasingly relied on the market for the direct provision of public goods and services,” Lee said. 

“If appropriately deployed and managed, PPP facilitates the provision of adequate and efficient infrastructure services for users, profitable investment opportunities for the private sector, and a development mechanism that expands the capacity of the state. 

“Southeast Asia is poised to surpass earlier growth forecasts,” said Lee. 

The ADB has revised up its projections for subregional growth to 5 per cent for 2017 and 5.1 per cent for 2018. 

“Growth for Asean will likely be in an upward trend,” said Tsui of the HKTDC.