Making Inroads: Chinese Infrastructure Investment in ASEAN and Beyond

17 Jan 17

17 Jan 2017

Making Inroads: Chinese Infrastructure Investment in ASEAN and Beyond

By Inclusive Development International

Introduction

Little more than a decade ago, China was a relatively minor actor in global investment and finance. By 2014 China had become the second largest global investor, second only to the United States. Outbound investment has been made possible due to strong backing from the Chinese state and financing from its policy and commercial banks. China has become a more influential player within international financial institutions such as the World Bank and the Asian Development Bank. However, it has also grown increasingly frustrated with the dominance of developed nations and the limited role of emerging economies within the management and direction of these institutions. In response, China has promoted the establishment of new institutions and initiatives, including the multilateral Asian Infrastructure Investment Bank (AIIB). China has also established investment funds such as the Silk Road Fund to provide further capital to outbound investment. These new institutions and initiatives focus for the most part on infrastructure development.

Across the world, many developing nations face an infrastructure deficit. Inadequate infrastructure has both social and economic impacts. For example, weak transport links, limited power supply, and lack of access to irrigation all impact on the daily lives of some of the world’s poorest people. According to the World Bank, 1.2 billion people live without electricity; 1 billion people live over two kilometres away from an all-weather road; and at least 748 million people lack access to safe drinking water. While infrastructure is lacking in many countries, population growth means that demand continues to increase. Limited infrastructure can also create barriers to the development of industry, which can help catalyse economic development and contribute to lifting people out of poverty. China’s remarkable domestic growth was fuelled by infrastructure investment, and as its role in overseas investment and finance has developed, China has also become a key actor in global infrastructure development.

China’s overseas investment has increased rapidly over the last ten years. According to statistics from China’s Ministry of Commerce, mainland China’s outbound investment flows reached a record high of over US$123 billion in 2014. This is over 45 times higher than in 2002, when overseas investment was just US$2.7 billion. This investment flows to various sectors, including infrastructure development, and China plays a major role in the development of transport, energy and telecommunications infrastructure in Southeast Asia. Cambodia, Laos and Myanmar have all gone to great lengths to attract foreign investment, and China is now the top investor in all three countries. Chinese investment in Vietnam, Thailand, Indonesia and Malaysia is also significant and increasing.

All Association of Southeast Asian Nations (ASEAN) countries are members of the newly established AIIB, and the region also lies within the route of China’s One Belt One Road, an initiative announced by Xi Jinping in 2013 that seeks to promote and enhance interconnectivity and cooperation between China and over 60 countries en route to Europe. Following the announcement of this initiative, the Chinese state has made a revitalized push to promote outbound investment, focusing especially on infrastructure and connectivity. In addition, China has launched several multibillion dollar investment funds targeting overseas investments.

This renewed push from China is likely to have a significant impact on the availability of financing for large-scale infrastructure projects in Asia. At the same time, the emergence of new multilateral banks, and in particular the AIIB, creates an environment in which, for the first time, emerging economies have a leading voice regarding governance and management decisions in a major international financial institution. As a result, the landscape of both regional and global development finance and investment is likely to change significantly in the coming years. There has been much discussion and speculation about the potential impact of the new institutions and initiatives, especially regarding the social and environmental standards that will apply to their operations.

This study examines this rapidly evolving landscape and its potential implications. It focuses on the ASEAN region, and draws examples particularly from the lower Mekong countries. However, it will also be of value to individuals and groups elsewhere in Asia and internationally who are monitoring these developments. The main focus is on the formation of the AIIB and the implementation of the One Belt One Road initiative. The paper also looks at other Chinese financial institutions, including policy banks and investment funds, assessing the potential impact they are likely to have in the region and beyond as Chinese outbound investment continues to grow.

The aim of this study is to increase civil society awareness of these institutions and initiatives, how they will potentially impact on local communities and the environment in the areas where they work, and what environmental and social standards and governance systems that they have adopted. The paper concludes by exploring strategies that civil society could deploy to respond to these developments and influence the policies, projects and operations of Chinese-led finance institutions.

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