More often than not, however, China’s geoeconomic coercion in Southeast Asia happens in a far more subtle fashion. Foreign firms routinely feel the pressure of doing business in an environment marked by Chinese intimidation: any ratcheting up of tension that impedes the flow of supplies and products between China and Southeast Asian nations—especially Vietnam or the Philippines—will ripple across the global economy.138
China’s leverage in the region is helped by strong bilateral trade levels. Trade between China and the Association of Southeast Asian Nations (ASEAN) reached $350 billion in 2013; in that year bilateral trade reached $36.4 billion with the Philippines, $40 billion with Vietnam, and $60 billion with Indonesia.139 China’s emergence as the most important trade and investment partner for virtually all of Southeast Asia lends a preemptive, foreshadowing quality to any geoeconomically coercive threats Beijing may issue. Vietnam, for instance, has softened its approach to territorial claims with China as a result of watching what happened to the Philippines.140 China’s economic hold over Vietnam is such that Hanoi remains more vulnerable than Manila to Chinese coercion: Vietnam is highly dependent upon the PRC for rubber, and major Chinese imports are used in the goods Vietnam ultimately exports.141 Unlike the Philippines, Vietnam does not enjoy a mutual defense treaty with the United States. Perhaps not coincidentally, China’s claims in the South China Sea are particularly aggressive toward Vietnam, threatening 70 percent of Vietnam’s exclusive economic zone—not particularly auspicious for a country so reliant on fishing as a food source.142 Nor are the trend lines comforting. The Vietnamese government has set a “very bold” target for the maritime economy to account for 60 percent of the country’s GDP by 2025.
Vietnamese leaders have developed contingency plans of sorts to diversify away from the Chinese in the case of economic sanctions, but current dependency levels make the prospects for diversification limited.143 And, perhaps telling of the preemptive power of China’s geoeconomic coercion, Hanoi has not asserted its claims in a way that has tested those contingency plans.
In a region where “nothing is as charming as money,” China’s geoeconomic efforts in Southeast Asia, in addition to policing territorial disputes, have been equally pinned on the broader goal of disrupting and supplanting U.S. influence.144 Xi Jinping and the rest of China’s current leadership seem to have a renewed appreciation for the power of institutions, particularly given how many of China’s geopolitical objectives in the region are dependent upon preserving legitimacy. For Beijing, this realization process began with the 2010 ASEAN summit, hosted by Vietnam, where, country by country, ASEAN succeeded in advancing a largely united front against China’s more exotic maritime claims, resulting in a joint statement that was sharply, if implicitly, critical of China.
China’s learning curve proved quick. During its tenure as ASEAN chair the following year, Indonesia mainly reiterated the statements of the previous year, neither conceding nor gaining progress on the issue. By the time Cambodia took its turn as ASEAN chair in 2012, Beijing had amply learned its lesson. China pledged $2.7 billion worth of loans and grants to Cambodia that year (a sharp uptick over the $1.9 billion it had invested in Cambodia in 2011); it was more than double the investment by all ASEAN countries combined and ten times that provided by the United States.145 Beijing’s benevolence paid off. Cambodia used its power as chair of the ASEAN summit to block a joint statement criticizing China’s approach to territorial disputes in the South China Sea—marking the first time in forty-five years that the ASEAN countries failed to reach consensus on a joint communiqué.146 The fact that the summit was hosted at the Peace Palace, completed in October 2010 with Chinese funding, lent a fitting irony to the whole affair. In 2013, China blocked Philippine president Benigno Aquino III from attending a China-ASEAN trade expo, insisting that he withdraw the Philippines’ UN arbitration case on the disputed South China Sea islands as a condition of attending. Rather than caving in to Beijing’s demands, President Aquino decided not to go to China, sacrificing potential trade opportunities both with China and throughout the region.147
As ASEAN chairs in 2013 and 2014, respectively, Brunei and Myanmar both succeeded in maintaining a more middling course, keeping the maritime disputes on the agenda but without prioritizing them or explicitly referencing China. In comparing the Brunei and Cambodia summits, many attribute Brunei’s lesser vulnerability to Chinese pressure to the fact that, thanks largely to its oil wealth, it is less economically dependent on China.148 For its part, Myanmar fell under what some ASEAN officials described as enormous pressure from China, but thanks to the priority that Burmese officials have assigned to the country’s efforts to reduce economic dependence on China, and the fraught relations between Naypyidaw and Beijing since Myanmar’s 2011 opening, China did not overreach and Myanmar “acquitted itself quite well as ASEAN chair,” according to press commentary.149
China has also sought to create altogether new institutions. Under the leadership of Xi Jinping, China is launching a new Asian Infrastructure Investment Bank (AIIB). Notably absent from AIIB discussions, however, have been the PRC’s regional rivals Japan, India, and the United States.150 Notwithstanding U.S. opposition, China ultimately lured some 57 countries to join its new bank, including fourteen advanced economies of the G20 and every major treaty ally of the United States save one (Japan). Left alone in its opposition, the United States was forced to soften its position.151 Management and operational details have also been conspicuously lacking, but China would likely be the institution’s largest shareholder, with a stake of up to 50 percent of the registered capital of around $50 billion.152 The bank will offer quick financing for transportation, telecommunications, and energy projects in underdeveloped countries across the region, rivaling the reach and responsibilities of the World Bank. U.S. officials have been uncharacteristically blunt in their assessment, warning that the bank is a deliberate attempt to undercut the international financial institutions established after World War II (and dominated since by the United States, Europe, and Japan). Beyond attempting to weaken the U.S. alliance fabric of the region, the AIIB could allow China to pull its neighbors closer into its orbit, into relationships that promise increased geoeconomic benefits including decreased tension over territorial claims.153
China has focused intensely on deepening trade and investment with Southeast Asia. While driving a hard bargain in trade talks with large, wealthy nations, Beijing has been munificent toward smaller if strategically important partners.154 China included a generous Early Harvest Program in the 2002 China-ASEAN Free Trade Agreement (CAFTA), opening China’s markets to ASEAN agricultural imports. Rather than extracting the best possible deal for China, Beijing instead structured CAFTA to reassure China’s Southeast Asian neighbors and give them a stake in China’s economic success, striving, as one analyst put it, to present itself as a “benevolent regional hegemonic power.”155 CAFTA also bolstered Beijing’s pursuit of WTO recognition as a market economy—a status ASEAN accorded China in September 2004.156
This strategy offers Beijing what China expert James Reilly calls “a classic ‘win-win’ opportunity: drawing nearby countries into China’s economic orbit while bolstering its diplomatic leverage and creating commercial opportunities for Chinese firms.”157 China’s steady push for regional infrastructure lies at the heart of this effort. Beijing has financed an increasingly dense network of cross-border railways, roads, water projects, and oil and gas pipelines across mainland Asia in recent years. These projects enhance China’s access to strategic natural resources and, by addressing severe infrastructure shortfalls in the region, curry political favor for Beijing—all while bringing these countries more tightly within Beijing’s influence. Crucially, these infrastructure projects also help to lessen China’s heavy dependence on maritime trade routes that are secured by the U.S. Navy. Currently, 90 percent of China’s trade travels by sea, and to reach ports on China’s eastern coast, seaborne trade from the west must pass through maritime chok
e points such as the Strait of Malacca (through which 82 percent of China’s crude oil imports passed in 2013).158
As New York Times China bureau correspondent Jane Perlez wrote in August 2014, “A favorite export from China to its neighbors these days are high-speed rail lines designed to make trade routes in the vast stretches of Asia more accessible and fortify Chinese dreams of turning its southern reaches into the capital of mainland Southeast Asia.”159 Referring to one rail project proposed by China that would pass through the mountains of northeast Myanmar to the coastal plains on the Indian Ocean, giving China a shortcut to the Middle East and Europe, Perlez explains how “for China, the strategic importance of the proposed line can barely be overstated: The route would provide an alternate to the longer and increasingly contentious trip through the South China Sea.”160 China has pitched similar plans for a high-speed railway in Laos, to be built by the Chinese. Minerals will be used as collateral, allowing Laos to borrow $7.5 billion from Beijing to pay for the railway.161 But the railway would connect Laos and Thailand with China, allowing for Chinese goods to move south and important resources to come into China.162 In all, China wants to build thousands of miles of track that will loop through Laos, Cambodia, Thailand, and Malaysia, heading south to Singapore as part of a grand trans-Asian rail accord signed by nearly twenty Asian countries in 2006. When the people of the mainland countries soon find that through the convenience of high-speed rail the Chinese province of Yunnan is their closest neighbor merely a few hours away, Yunnan and its capital city, Kunming, may well eventually become the effective capital of mainland Southeast Asia.163
Beyond high-speed rail are water, agriculture, commodities, and energy. China’s state-owned China International Water and Electric Corporation (CIWEC) has fifteen infrastructure projects across the Philippines to date, one of which is the water improvement project at Angat Dam, Manila’s primary source of water supplies. In 2007, China’s biggest state power company won a $3.95 billion bid for a twenty-five-year contract to manage the Philippines’ entire electricity grid.164 As of 2014, the State Grid Corporation of China owned as much as 40 percent of the Philippines’ National Grid Corporation (NGCP), and four senior officials of the State Grid of China sat on the board of NGCP. A senior Philippine government official told the South China Morning Post that the government was “quite concerned” that a Chinese state-owned company controlled the technical aspects of the national grid.165
Two states among the most central to China’s success are Malaysia and Indonesia. Neither is among Beijing’s outspoken skeptics in the region, nor its reliable supporters. And both are sizeable in their own right. Two new Malaysia-China industrial parks were launched in 2013, Kuantan Industrial Park and Qinzhou Industrial Park, to further boost bilateral trade and investment. Similar to the Singapore-Suzhou Industrial Park, these areas will offer attractive land prices, tax incentives, and financial support for Malaysian and Chinese investors. These deals also help solidify Kuala Lumpur’s place in China’s “maritime silk road” (the term, first coined by Xi Jinping in October 2013, appears to be little more than a euphemism for what more-skeptical observers call China’s “string of pearls” strategy), allowing Beijing to stake a claim to the Malacca Strait, challenging the United States’ geopolitical advantage in those waters.166 Indeed, China is expected to insert $62 billion into state-owned “policy banks” to support this strategy to build infrastructure and increase influence in Southeast Asia.167
In Indonesia, China’s geoeconomic influence is partly aimed at checking Jakarta’s desire to play a leading role in Southeast Asia.168 Often, it comes down to timing and vigilant opportunism. China timed investment deals to coincide with the October 2013 Asia-Pacific Economic Cooperation summit in Bali, and the two sides signed $28 billion worth of investment agreements, including province-specific initiatives, with bilateral trade exceeding $50 billion annually.169 In the words of one Chinese saying, “sending coal in the midst of a snowstorm” maximizes political benefits.170 For Beijing’s geoeconomic aspirations in Southeast Asia, the 2008–2009 global financial crisis, just like the Asian financial crisis a decade before, marked a proverbial blizzard—an opportunity for Beijing to purchase political capital at a discount.171 Often the investment deals themselves are designed in such a way as to register maximum geopolitical returns for Beijing. Southeast Asian diplomats describe how “Chinese aid is often carefully targeted, so that money to Malaysia, for example, is directed specifically to the state of Pahang, the political base of the prime minister.”172 “In Myanmar and Thailand, [the Chinese] make sure the generals get their share of the contracts,” one diplomat from the region explained.173
As China’s economic strength grows, so too does its urge to take care of old friends. Atop this list are Cambodia and Laos, countries linked to China through historical legacies of Chinese support. In the case of Laos, Beijing has a particular interest in propping up one of the few remaining Marxist-Leninist single-party socialist states. Included in China’s 2009 crisis support package to fund ASEAN regional infrastructure was a $15 billion line of credit for poorer ASEAN nations, and $40 million in “special aid” for Cambodia, Laos, and Myanmar. In the aftermath of the 1997 coup in Phnom Penh, China extended a $10 million loan to Cambodia to replace aid suspended by traditional donors; two years later, Chinese premier Zhu Rongji visited Phnom Penh and announced the cancellation of all Cambodian debts. China is the largest outside investor in Cambodia, and the Chinese are pouring ten times more money into Cambodia than the United States, simply to keep the country functioning.174 According to the Cambodia Investment Board, Chinese investment pledged in Cambodia has totaled $9.1 billion since 1994, including almost $1.2 billion in 2011—nearly 10 percent of Cambodia’s GDP that year.175
Myanmar used to be on Beijing’s list of reliable clients. But things are now more complicated. For China’s part, it wants to avoid a burgeoning democracy on its back porch, particularly one that looks to assistance from the United States to supplant Chinese influence. Myanmar figures as a key part of China’s plans for a New Silk Road, which, as noted above, aims to link China’s western Yunnan province to Myanmar and on to Bangladesh, India, and westward. Beijing also sees Myanmar as vital to diversifying its energy routes, allowing for shorter transit to Middle Eastern oil. Even more important, geopolitical connections with Myanmar enable the Chinese navy to access the Pacific and Indian Oceans more quickly, shortening the distance for military ships—as well as energy tankers—by forgoing the need to pass through the Strait of Malacca to the Bay of Bengal.
In 2011, shortly after Myanmar’s historic opening, the country was hit with a devastating earthquake. China responded with more than $500,000 in humanitarian aid—a rather feeble offer compared to India’s $1 million, but greater than the $100,000 or $200,000 offered by Thailand and South Korea, respectively.176 The two sides have since signed more than fifty economic and technical aid agreements through mid-2014.177 The Economic and Technical Cooperation Agreement of 2012 allowed China the chance to provide “350 sets of integrated housing with 30 million RMB and $1 million in cash [for] the resettlement of [earthquake] victims.”178 The domestic energy sector in Myanmar has seen an influx of Chinese investments and development efforts since opening up to external investment.
In particular, China has succeeded in laying two oil and gas pipelines traversing Myanmar. Owned and operated by China National Petroleum Corporation (CNPC), more than 2,500 kilometers of pipeline became operational in 2013, and at full capacity, the pipeline is expected to send as much as 12 billion cubic meters of natural gas across Myanmar and into southwestern China annually (the pipeline continues on from Yunnan into China’s northwest and eastern provinces).179 An additional $2 billion oil pipeline became operational in 2014, allowing China to import oil from the Middle East and Africa. The pipeline is expected to move up to 200,000 barrels of oil per day, 40,000 of which will go to Myanmar along with an additional $7 million in transit payments per year from Beijin
g. Such are the benefits of serving as a transit country.180
At the same time, the oil and gas pipelines built through Myanmar stand as a lesson in how things do not always go as intended. China’s Wanbao Mining—an offshoot of weapons manufacturer China North Industries Corporation—agreed in 2013 to invest just under $1 billion in the Latpadaung copper mine project.181 The deal sparked violent local protests, prompting renegotiations on the contract. The new contract allocates 51 percent of profits to the Myanmar government, 19 percent to the Union of Myanmar Economic Holdings Ltd. (owned by Myanmar’s military), and 30 percent to Wanbao.182 And in August 2014, Burmese officials allowed a memorandum of understanding regarding China’s proposed high-speed rail line through the country to lapse.
The scuttled rail line comes as the second major Chinese project to be suspended in Myanmar since a civilian government took over in 2011. Construction of another Chinese-financed hydroelectric dam at the source of Myanmar’s Irrawaddy River was suspended after protests by locals and ongoing violence between the military and the Kachin Independence Army.183 Local concerns center on the fact that if the dam is completed, China will likely generate 90 percent of the electricity needed in Myanmar.184 “China has not been the flavor of the month for some time,” said Thant Myint-U, a Burmese historian.185 According to Vietnamese officials, “It can be seen, although not very clear, that Myanmar has been trying to reduce the influence of China in its country, economically and politically.”186
But as wary of further dependence on Beijing as Myanmar’s new leaders are, they are also mindful that they may be too late in arriving at such concern, given how much of Myanmar’s viability already depends on China’s trade, aid, and investment in the country. Certainly Myanmar is not independent enough for Naypyidaw to behave in ways that risk angering Beijing over sensitive issues such as the South China Sea.187 China’s trade with the once-closed country has risen sharply, with Myanmar’s exports to China surpassing $8 billion in 2013, up from $1.2 billion in 2004 (a substantial sum considering that Myanmar’s overall GDP in 2013 was just $60 billion). China’s success in capitalizing on Myanmar’s opening is partly thanks to a twenty-five-year head start over other countries.188 Even amid U.S.-led sanctions on Myanmar in the 1990s following the military’s nullification of election results, China rebuffed pressure from the West, maintained economic relations with Myanmar, and criticized Washington and others for intruding upon the internal affairs of a sovereign nation.189 In a sign of just how confident Chinese leaders are that Myanmar will eventually sign up for its high-speed rail project, Beijing is moving ahead with plans to gouge an eighteen-mile rail tunnel out of the rugged Gaoligong Mountains that straddle China’s border with Myanmar and serve as the entry point to Yunnan province.190
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