China’s Strategic Focus on Mainland Southeast Asia   

By Yun Sun

Rail link between Laos and Vietnam. New Chinese investment is driving expansion of highways and rail lines in mainland Southeast Asia. Source: Skyfish81's flickr photostream, used under a creative commons license.

Rail link between Laos and Vietnam. New Chinese investment is driving expansion of highways and rail lines in mainland Southeast Asia. Source: Skyfish81’s flickr photostream, used under a creative commons license.

In the Belt and Road initiative China announced in 2013, Southeast Asia is the main region covered under the 21st century Maritime Silk Road project. Mainland Southeast Asia is defined as a key hub for China, especially Yunnan province, to develop an international transportation network to both South and Southeast Asia. China’s primary mechanism to pursue cooperation in the region had been the Asia Development Bank-sponsored Greater Mekong Subregion (GMS) program since the early 1990s. However, under the new Belt and Road initiative, China identifies the need to upgrade its regional engagement and in November launched a new Langcang-Mekong Cooperation (LMC) framework.

For China, an upgraded version of the GMS is potentially the key to a breakthrough in Southeast Asia. This conviction is based on several factors: As the largest trading partner and a main source of foreign direct investment, China already has a high level of economic integration with mainland Southeast Asia.  More importantly, with the exception of Vietnam, Mekong countries are not parties to the South China Sea dispute with China and therefore have been far less critical of Beijing’s maritime claims. Furthermore, the Mekong countries are less developed than their maritime neighbors, which translates into a more urgent need for economic development. This is the key leverage China holds to bid for a larger role in Laos, Cambodia, Myanmar, and Thailand.

While several priority areas are identified by China in this strategic upgrade of relations with mainland Southeast Asia, nothing stands out more than the Trans-Asia railway network spearheaded by the Sino-Laos railway and Sino-Thailand railway. Originally, there were three route options for the network: the western route was designed to connect Kunming to Myanmar’s Rakhine State (to the Bay of Bengal). The eastern route was designed to run from Kunming to Hanoi, and down to Ho Chi Minh City. The central option includes two portions between China and Laos and between Laos and Thailand and will eventually connect Kunming with Bangkok.

Both the western and eastern routes are increasingly unlikely to be built at this time due to the deterioration of Sino-Vietnam relations in recent years and the termination of the Sino-Myanmar railway project MOU in 2014. However, the central route has turned out to be promising: the agreement for the Sino-Laos railway project was finally signed in November and the construction quickly commenced within a month. The Export-Import Bank of China will provide the majority of the financing and a consortium of Chinese companies will be responsible for the construction.

China’s leadership certainly sees the commencement of the construction of the Sino-Lao railway as a major victory in its “railway diplomacy.” The negotiations for the project took nearly a decade.  The delay was due to multiple factors. Internally in China, former railway minister Liu Zhijun was arrested in 2011 on corruption charges, which led to a reexamination of China’s high speed railway plans and the restructuring of the Ministry of Railways. Externally, China believes that Vietnam’s strong opposition to the project due to its national security concerns affected Laos’ decision-making. On the financing side, China and Laos took time to reach an agreement over the enormous financing costs — estimated at $7 billion, or roughly two-thirds of the country’s gross domestic product — required for the project. The Lao parliament was reportedly concerned about accruing massive debts and the costs of repayment. There were also disputes over the land acquisition, and the relocation and compensation of farmers.

Similar problems faced the Sino-Thailand railway. While a memo of understanding was signed last year during Premier Li Keqiang’s visit to Thailand, construction has been delayed multiple times after eight rounds of negotiations. The biggest standing obstacle currently seems to be the interest rate of the Chinese loans. Thailand has seen neighboring Indonesia receive a loan offer of 2 percent for a similar project with China and wants the same rate. The negotiations will most likely result in a compromise by both sides, while Beijing seems to be confident about the prospects of the project proceeding.

The importance attached to the railway projects through Laos and Thailand reflects a strategic reorientation in China’s policy toward mainland Southeast Asia, which puts more emphasis and resources on cooperation with countries in the center of the mainland peninsula. China believes that countries on the outskirts — Vietnam and Myanmar — have had major uncertainties in their cooperation with China due to their domestic politics and friction in their bilateral relationships. In contrast, Thailand, Cambodia, especially Laos, have been much more welcoming of Chinese engagement and face far less concerns and constraints in advancing deeper cooperation with China. Beijing hopes success in the central mainland fosters a “demonstration effect” to push Vietnam and Myanmar to reconsider their policies.

Laos seems to stand out in this strategic adjustment. Some Chinese analysts have proposed that China treat Laos as an ally and greatly enhance its investment and aid to Laos to improve China’s image in the region and the appeal of Chinese projects. In the past, China had assisted Laos in designing the economic development planning for nine provinces in northern Laos. Now, a series of cross-border “economic cooperation zones” are popping up along the Sino-Lao border. In October, China launched the Mengla/Mohan National Key Development and Opening-up Experiment Zone on the Lao border with an investment of $31 billion.  China also plans to loosen the trade barriers on Lao agricultural products and expand port access for Lao goods.

China’s strategic endeavor also expands to broader functional areas, such as industrial cooperation and investment, and financial cooperation such as the cross-border financing and regionalization of the renminbi. There is even a focus on sustainable and clean energy development, such as hydropower, wind farms, and solar energy, although investors might remain skeptical about the scope and scale of such projects given the commercial viability of wind and solar energy and the political controversy associated with dam projects.

China’s strategic adjustment has major geopolitical implications. In the broad context of China’s troubled relations with Southeast Asia and its reputational problems due to the South China Sea dispute, China is developing new partners and creative approaches to build and improve ties with regional players. Under the broader Belt and Road initiative to reinvigorate the Chinese economy and diplomacy on its periphery, the world is likely to see a new but somewhat different surge of Chinese influence in the region.

Ms. Yun Sun is a senior associate with the East Asia Program at the Stimson Center.


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