Abstract
In East Asia, China’s growing economic weight and economic initiative, along with the corresponding intensification of intra-East Asian economic ties, has renewed debates about the roles played by major power leadership in regional integration. Focusing on China’s particular relations with Southeast Asian states, this article investigates the extent to which China can be said to be substantiating or redirecting existing patterns of East Asian integration. It does so by considering some basic markers of Chinese influence in trade, investment and aid, as well as the domestic-political and regional-political dimensions of leadership that can complicate the ability of otherwise materially able powers to lead. While recent economic initiatives like the Asian Infrastructure Investment Bank suggest that China is turning to a more proactive approach to East Asian integration, this article also highlights how any prospective leading Chinese role seems likely to be conditioned by a system of expectations and interests constituted by Southeast Asian states and their historical relations with the US and Japan.
Introduction
East Asia has been the site of tremendous economic activity, which has created a region that has become more interconnected, networked and regionalised. Such developments have generated considerable interest from theorists and practitioners seeking greater insight into East Asian integration’s drivers, prospects and constraints. Attention has focused in particular on the role of major powers and, most recently, China, whose growing economic weight has been associated with recent integrating trends. Perhaps not surprisingly, China’s activities renew long-standing debates about hegemonic leadership in the economic realm. While heightened security tensions may undercut China’s attraction, economic trends also suggest that few find it easy to resist the gravitational pull of China’s economy.
This discussion examines the question of China as a leading, integrating power in East Asia – that is, its potential to provide for, substantiate or redirect East Asian regional integration. It does so by considering China’s economic engagement with the member states of the Association of Southeast Asian Nations (ASEAN). The focus on ASEAN and Southeast Asia is deliberate and important in at least two respects. First, Southeast Asia’s 10 states provide a critical audience for major powers with aspirations to leadership. ASEAN’s institutional prominence also means that its frameworks provide key platforms for regional initiatives in East Asia. The second reason to focus on Southeast Asia follows from the first – that is, a major power’s ability to lead and to organise also rests on its responsiveness to the concerns of would-be follower states.
Proceeding in three parts, this article begins by identifying key themes from the International Relations literature on hegemonic leadership. This is followed by a brief overview of East Asia’s Cold War economy, the legacies of which continue to condition East Asia as a system of political-economic relations. Particular attention is given to Southeast Asia’s Cold War economic relations with both the US and Japan. I argue that the possibility of Chinese leadership we see today is as much a function of structural and normative opportunities created by unmet expectations vis-a-vis ASEAN states’ historic partners as it is China’s growing economic weight. Similarly, to the extent that leadership is about the ability to sustain existing paths or define alternative ones, these established relationships and systems of expectations are likely to condition the form and qualitative content of any Chinese role.
The third part of the article then turns to China. It considers, first, questions of capacity by examining some basic markers of China’s economic engagement with Southeast Asia – specifically, trade, investment and aid – and what they might signify for East Asian integration. Materially capable powers, especially when asymmetries are great, can provide economic incentives (and disincentives) that push and pull integration patterns in new ways. The question is how and to what extent is China doing this? Finally, the article considers questions of political will and intention; that is, does China have the will to lead, to initiate and to bear the burdens of regional integration?
The power to lead?
In International Relations, ‘leadership’ is often preceded by the term ‘hegemonic’ or ‘major power’. This is because of an underlying assumption that material capacity has an attractive power. Others ‘follow’ because the preponderant or larger power has the capacity to distribute benefits and side payments to specific partners, and to provide public goods. Alternatively, others may follow out of a concern for undesirable consequences – that is, fear that not following might result in missed opportunities or retribution from the powerful actor. In both discussions of international political economy and the creation of regional arrangements/regimes, for example, material leadership is key to the creation and maintenance of political/economic systems – in other words, ‘hegemonic stability’. 1 Both realists and liberal institutionalists, for example, see major powers as uniquely able to lead. However, even constructivists – though taking a broader view of ‘power’ that is inclusive of the ability to define correctness, legitimacy and belonging – tend to see ‘power conventionally understood’ as organisationally important ‘by virtue of a core state’s ability to nudge and occasionally coerce others to maintain a collective stance’. 2 Indeed, major powers provide ‘cores of strength around which in most cases the integrative process developed’. 3 In short, differences notwithstanding, the emphasis placed on materially capable powers across theoretical perspectives is notable.
Read more closely, however, the aforementioned theories also contain important qualifications and nuances. While material capacity may be assumed to be a key characteristic of leading powers, perspectives also highlight how material capacity, in and of itself, may not, in fact, provide the ability to lead or to convince others to follow. Consequently, theories turn to non-material factors to explain ‘leadership’, thus acknowledging that material capacity and leadership are not the same. For example, traditional realists of the classical variety highlight the importance of diplomacy and the roles played by astute individual diplomats as the critical additional factor. 4 Liberal regime theorists point to political will and domestic capacities to actualise leadership in the international realm. An actor may possess great material capacity but without the political will – which is a function of domestic ideologies and domestic politics – to actualise certain claims, leadership will not materialise. This leads those like Oran Young to define ‘structural leadership’ with reference to one’s ability to translate material power into actual influence; indeed, for Young, unlike others, the ability to translate hard power into actual influence is not just a supplementary variable, but, in fact, the very definition of (structural) leadership. 5
Often missing in characterisations of leadership, however, is the acceptability of any would-be leading power to its would-be followers. That acceptability will be based as much on normative ideas about the ‘rightness’ or trustworthiness of the prospective leading state as on its material capacity to provide. Thus, hegemonic orders are stable and durable when there exists ‘a meaningful consensus on the right of the hegemonic state to lead, as well as the social purposes it projects’. 6 Similarly, projections of power that do not enjoy such consensus will make for less stable systems. Especially given the complex effects of material power in East Asia, it is no surprise that recent scholarship has seen a promising line of inquiry in Gramscian conceptions of hegemony, which give attention to questions of consent and ideological acceptance. 7 Ultimately, major powers cannot simply decide to lead; others must also be persuaded to follow. What this suggests is that leadership is not just a material relationship, but also a socially negotiated one – one that, moreover, requires a minimum of attentiveness to the concerns and sensitivities of other states.
In short, leadership is attached to capability, political will and also social acceptability. Due to space constraints, the discussion that follows focuses primarily on the first two; however, suffice it to say that the social negotiations involved in the exercise of leadership are not to be underestimated as I argue that they affect both the willingness of others to follow and the kinds of goods provided.
From Cold War to post-Cold War: A transitioning regional economy
China’s economic engagement, including its prospects for economic leadership, does not take place in a political vacuum. Indeed, China, as a socialist state that adopted market reforms only in 1978, encounters a strongly institutionalised (domestically and internationally) system of economic interests and expectations oriented around the US market and Japanese production chains – a ‘complex web of dependence’ whereby ‘Japan and to a lesser extent the United States provide[d] investment capital, and Southeast Asia supplie[d] the raw materials for Japan and the cheap labour for the production of manufactured goods destined primarily for the United States’. 8 This system also, at once, provided the conditions for ASEAN states’ export-led growth strategies and impressive economic growth, and ASEAN’s becoming what may be ‘the most trade-dependent formal grouping of nations in the world’. 9
As has been well discussed, US Cold War policies were critical to the evolution of that system: first as a provider of critical economic, political and security goods; and later as a facilitator of Japan’s emergence as a major economic power in its own right. Moreover, as Beeson and others highlight, ‘the US was prepared to tolerate a variety of social, political, and economic practices of which it did not necessarily approve’ as the understood ‘price’ it had to pay in the interest of stronger anti-communist partners, as well as US strategic mobility. 10 A challenge, of course, arises when the US finds the price too high but regional expectations and interests remain the same.
That challenge began in the mid-1980s, when US economic troubles led to new US trade grievances, diminishing its willingness to support East and Southeast Asian growth in ways that it had previously. These changes ultimately served to catalyse expanded economic linkages in East Asia, especially between Southeast Asian states and Japan. Bowing to US pressure, Tokyo agreed – under the 1985 Plaza Accord – to appreciate the value of the Japanese yen, the result being a flood of Japanese investment to ASEAN economies as Japanese companies and conglomerates sought cheaper production sites. In the course of just three years, in fact, Japan’s foreign direct investment (FDI) to ASEAN countries increased from US$855 million in 1986 to US$7.5 billion in 1989. By the late 1980s, ‘Japan [had] surpassed the US as the region’s largest trading partner and aid donor’ and accounted for over 60% of ASEAN-bound developmental assistance. 11
Japan consequently emerged as a source of alternative economic leadership. Some in Southeast Asia were, in fact, explicit in linking US deficiencies to their interest in Japan. Responding to US Secretary of State George Schultz’s 1987 ‘warning’ to ASEAN states that they ‘look elsewhere instead of America as an engine of growth’, Thailand’s Foreign Minister Siddhi Savetsila characterised Schultz’s remarks as: a timely reminder that the world economy that we have known since the end of the Second World War is being fundamentally transformed. Other economic centres are replacing the United States as the engine of growth. The principal one is Japan.
12
Indeed, as Japan grew in economic stature, it began to take cautious steps in initiating and promoting new ASEAN measures – including a two-billion-dollar (US$) aid package for an ASEAN–Japan development fund offered at the second Japan–ASEAN summit in 1987, the same year as Schultz’s warning. Lee Poh Ping characterises the package as symbolic of Japan’s emergence as a ‘global economic power…willing to dispense ever larger amounts of largesse to ASEAN development’. 13 Japanese initiative was also on display 10 years later, during the Asian Financial Crisis. Under the Miyazawa Plan, Japan provided US$30 billion in assistance – the largest amount from any single state – to the five most affected Asian economies, four of which were in ASEAN. 14 In response to the perceived shortcomings of US-backed global institutions, Japan also proposed an alternative Asian Monetary Fund (AMF) – a US$100 billion fund that would extend loans to countries facing balance-of-payments emergencies. While US opposition led to the AMF’s defeat, Japan continued to develop monetary cooperation in other guises. 15 Japan’s role in the Chiang Mai Initiative’s (CMI’s) system of post-crisis bilateral swap arrangements was also evident from the start: of the first six agreements signed, Japan was a partner in five.
Yet, despite these notable and significant initiatives, Japan’s role has also faced constraints – the most important of which in the area of trade. Notably, that constraint has been understood as more domestic-political than material, though Japan’s protracted economic troubles since the early 1990s also provide a persistent source of uncertainty on that score. For ASEAN’s trade-dependent economies, concerns focus on market access. A long-standing ASEAN complaint since the 1980s, ASEAN states tend to view Japan’s potential and responsibilities as an export market as mostly unfulfilled. 16 In fact, of all ASEAN’s major trade partners, Japan’s share of ASEAN exports experienced the most dramatic decline as a percentage of overall ASEAN trade over the last 30 years (see Figure 1). In sum, despite Japan’s significant contribution to Southeast Asian development and East Asian integration, questions about capacity (Japan’s economic troubles) and political will (domestic constraints plus susceptibility to US pressure) have served to undercut Japanese credibility. 17
ASEAN-5’s major export markets as % of total.18
A leading role for China?
Despite the fact that ASEAN states’ questions about their historical partners made China an attractive trade partner early on, most ASEAN states initially viewed China – whose reforms had only been under way for a decade – to be a developing and limited, albeit rising, power. China also differs from the US and Japan in at least one other critical respect. Specifically, given its late market engagement and development, China competes with ASEAN states for similar kinds of market share, investment and aid. Consequently, it is only recently that states have begun to see China as an actor that could potentially perform the kind of economic leading roles that they have historically associated with the US and Japan.
A question of capacity?
Much of the attention given to China’s potential economic leadership in East Asia draws from important assumptions about China’s economic power and capacity. The year 2010 proved to be a particular milestone. That year, China first surpassed Germany as the world’s top exporter, and then replaced Japan as the world’s second-largest economy. Some predict that China will surpass the US as the world’s largest economy in 2014, earlier than originally anticipated. Such measures speak to questions about relative, not just absolute, capacity – though what that signifies for East Asian integration remains a question much debated.
China as regional export market
For ASEAN’s trading states, China holds particular attraction as a potential export market. Because of the relative lateness of China’s market reforms, however, its significance has, thus far, been mostly in potential. As a point of contrast, in 2013, China’s household final consumption comprised 34% of its gross domestic product (GDP) compared to 69% in the US. 19 This said, China’s development and state policies all indicate that Chinese domestic consumerism will grow.
Despite growing China–ASEAN trade, a point of ongoing debate has been the extent to which China reduces East and Southeast Asia’s historical dependence on the US market. What is agreed is that intra-East Asian trade as a percentage of East Asia’s world trade has generally increased – from 21.6% in 1980 to 35% in 2012 – though the number appears to have declined a little since. This trend began as a result of Japan’s extension of production chains into Southeast Asia following the Plaza Accord's appreciation of the yen. This was a key factor contributing to the rise in intra-ASEAN exports – and also the precipitous drop in ASEAN exports to Japan – in the late 1980s and early 1990s. However, because Japan’s domestic market remained relatively closed, the emergence of Japan as a global economy did not significantly offset ASEAN’s vulnerability to the cycles and politics of the US market, which remained a critical final destination market for goods produced in Asia.
China’s entrance into the regional political economy has similarly been associated with the increase in intra-East Asian trade. Rates of increase have been relatively steady and similar to that of Japan in the late 1980s and early 1990s, but China, compared to Japan, has also offered a steadily expanding market for Southeast Asian goods and services. For example, on the all-important export front, ASEAN exports to China experienced a 138% increase between 1996 and 2002, a time when ASEAN’s exports to the US and Japan were declining. 20 ASEAN’s China-bound exports grew even more spectacularly following China’s entrance into the World Trade Organization (WTO) in 2001, growing in volume about sixfold by 2008, and as a percentage of ASEAN’s total exports, from 4% in 2001 to 9% in 2008. During that same period, US-bound ASEAN exports dropped 7.5% in relative importance. In 2009, China became ASEAN’s largest trade partner, and in 2010, its largest extra-ASEAN export market (taking 12% of all ASEAN exports). 21 In 2013, China was the largest extra-ASEAN trading partner of eight of ASEAN’s 10 states. Even more critically, it was the largest extra-regional export market for five and the second-largest for two. 22 These trends are especially notable for the ASEAN-5, as they signify shifts in historical trade dependencies (see Figure 1). 23
At the same time, China’s own trade presence has also been facilitated by the production networks established earlier by Japanese companies. Consequently, as was the case during Japan’s boom in the late 1980s, intra-Asian trade remains significantly intra-industry. Recent estimates are that as much as 58–60% of ASEAN exports to China are comprised of intermediate goods in need of final production/assembly, while only 22% of China–ASEAN trade stays within the region. 24 In other words, although China’s market importance is expected to increase, it has not, at present, significantly altered ASEAN states’ long-standing dependence on certain extra-regional markets.
Outbound investment and foreign aid
Accounting for China’s investment and especially its foreign aid can be difficult because China’s reporting practices are neither centralised nor transparent. Official assistance is also often conflated with investment, complicating accurate comparisons of China’s relative influence. 25 What is known is that Chinese investment and official development assistance (ODA), like many other aspects of China, have grown rapidly but the trend is also relatively new. In fact, post-1978, China has been better known as a recipient of foreign investment and aid than as a provider. Only since the late 1990s did China really begin to invest overseas, and even then, its outward foreign direct investment (OFDI) was quite low. 26 Even on the developmental assistance front – an area for which China has received much recent attention – China only became a net provider around 2006, though by no means do such facts detract from China’s ‘remarkable journey’ from world’s largest recipient of developmental assistance in the mid-1980s and 1990s to net donor status in the late 2000s. 27
China’s late entrance on the investment front has meant that its presence in the ASEAN-5 has generally lagged behind other ASEAN partners, which have been economically active in Southeast Asia for over half a century. For example, according to the ASEAN Secretariat, Chinese investment to the ASEAN-5 economies amounted to less than 0.5% of total investment between 1995 and 2004. This was in contrast to 17.5% from the US and 13.3% from Japan. 28 Similarly, China’s outbound investment constituted only 3% of China’s GDP compared to the US at 49% – though this would suggest that Chinese investment has room to expand.
Yet, as with trade, there has been an upward trajectory. In 2000, China officially launched its ‘going out’ (or ‘going global’) campaign to encourage outward investment by Chinese companies, resulting in steady increases especially since 2004. Despite little policy coordination and few state incentives during its first years – as well as general firm-level inexperience 29 – Chinese OFDI grew at an average annual rate of 47% between 2003 and 2012, 30 moving China from the world’s 32nd-largest source of foreign investment in 2000 to third in 2013, which was the largest on record. 31 China's November 2014 move to connect the Shanghai and Hong Kong stock markets will also facilitate investment in and out of China.
In Southeast Asia, China – once a negligible source of FDI – became the fourth-largest non-ASEAN source of FDI to the ASEAN-5 economies in 2011, and the third-largest to the ASEAN-10 in 2013. 32 If one includes Hong Kong, Chinese FDI, at 9% of all ASEAN-bound FDI, increasingly rivals that from the US – though it still lags considerably behind Japan at 20.5% 33 despite their assigning comparable importance to ASEAN in their overall OFDI portfolios (12–13%) (see Figure 2). On balance, the ASEAN-5 states have also historically been larger investors in China than the reverse.
FDI inflows to ASEAN by source country.34
Considering the above developments, China’s economic impact on Asian integration thus far contrasts with Japan in the 1980s in at least three key ways. First, there is the relative prominence of trade versus investment and aid, with investment and aid factoring larger in Japan’s early engagement with the ASEAN-5, and trade factoring larger in China’s. Second, whereas Japanese investment in the late 1980s was quite dramatic in reconfiguring patterns of intra-regional trade, China’s in the 2000s has thus far been less so quantitatively and qualitatively. Thus far, China’s primary impact on the structure of intra-regional trade has been to add itself as a final assembly platform to existing production chains serving extra-regional markets. The dominance of Japan in the ASEAN-5 economies plus the reputational challenges of Chinese businesses have also constrained the ability of some Chinese firms to make greater inroads there. 35
Third, the ways that the two economies affected investment flows also contrast. As Takashi Inoguchi explains, Japan’s ‘leadership’ ‘took the form of expanding Japan’s operations outward, whereas Chinese external economic transactions have taken the form of luring foreign capital and business into China’, which, in turn, drives demand (mostly for intermediate goods) throughout the rest of the regional economy. 36 China may also be attracting new investment to the region. Such an interpretation thus contrasts with the popular view – and Southeast Asian fears – that China has been diverting FDI away from neighbouring countries. 37 While China has drawn investment from specific industries like food processing, China’s economic presence also ‘encourages FDI flows to other Asian countries’ by virtue of their being in the same global production chains as China and/or because their proximity to China makes them convenient as platforms for production, be it by Chinese or other firms. 38 Thus, as Barry Eichengreen and Hui Tong conclude in their study of China’s relationship to regional FDI, the size of China’s economy does matter: not only does China, as a larger economy, have more ‘resources to invest abroad and [is] more likely to attract FDI’, but, for the same reasons, it is also linked to greater spillover, than diversionary, effects for most Southeast Asian countries. 39
In fact, in 2013, the ASEAN-5 experienced a 7% increase in FDI, while China’s fell by 3%. 40 Here, ASEAN economies may have benefited from an uncertain investment climate created by China’s leadership transition, high-profile anti-corruption campaigns and bureaucratic obstacles. China–Japan tensions have also heightened Japanese concerns about over-concentrating production in China, which had drawn much of Japan’s Asia-bound FDI between 2000 and 2005. The result has been ‘a second wave of Japanese FDI into Southeast Asia’ since 2009/2010. 41
Chinese investment is also expected to increase as Chinese firms face pressures similar to those faced by Japanese firms in the late 1980s; that is, firms will feel compelled to seek lower production costs in neighbouring countries as China develops, as the yuan grows stronger and as Chinese firms grow richer. 42 Southeast Asia also offers attractive training markets for Chinese firms interested in expanding to markets in North America and Europe. Different trade agreements – including the ASEAN China Free Trade Area (ACFTA) and the prospect of the Trans-Pacific Partnership (TPP) – may also offer additional incentives for Chinese firms to invest in Southeast Asia. 43 In Vietnam, approved Chinese FDI increased by 710% in 2013 from the year previous, reportedly in anticipation of the TPP and notably despite ongoing China–Vietnam tensions in the South China Sea.
There has also been a qualitative shift in the content of Chinese investments from trade to capital investment (raw materials, technology and labour). 44 Whereas the ‘first wave’ of Chinese investment was primarily state-owned enterprise (SOE)-led, resource-driven and focused on smaller, less developed economies, as in Southeast Asia, the second wave has involved larger strategic acquisitions by private firms towards expanding or ensuring access in China’s main export markets, raw materials and/or skills and research and development (R&D). 45 For example, of China’s top 10 investment destinations in 2013, six (including Singapore) were richer, more developed economies or tax havens (e.g. the Cayman and British Virgin Islands). 46 While Southeast Asia, by virtue of proximity, resources, and reasons discussed, is likely to remain an important destination for Chinese investment, these trends do suggest shifting priorities and interests.
China’s government-sponsored investments and developmental assistance also remain significant funding sources. As noted, interpreting the data on China’s official aid and developmental assistance is difficult due to problems of definition (e.g., what counts as aid versus investment and how to count preferential export credits), 47 lack of transparency and reporting problems, and the problematic inclusion of aid commitments alongside actual aid disbursements. 48 Efforts to compare China’s developmental assistance with other countries must therefore be treated with caution. Still, there is broad consensus that China’s overall aid contributions increased quite dramatically after 2004. One of the few reports to compare China’s assistance outlays in terms comparable to Organisation for Economic Co-operation and Development (OECD) categories shows that China’s net foreign aid, as with trade and investment, has moved ‘sharply’ up the ranks of donor countries since 2005, from 16th or 17th to 6th in 2012 and 2013, ‘just behind France and Japan’. 49
China’s 2014 White Paper on foreign aid, which focuses on activities between 2010 and 2012, also gives some indication of its priorities. 50 In addition to a one-third increase in its foreign aid budget, Philippa Brant identifies a few key developments since China issued its last report in 2011: a shift from interest-free loans to concessional loans, alongside grants, which remain a large percentage of China’s assistance; a greater emphasis on the world’s least developed countries; and, a shift from economic infrastructure to social and public infrastructure, capacity-building, and human resources development. 51 On this third point, the United Nations Development Programme (UNDP) notes that the emphasis on concessional loans suggests that infrastructure development remains a high priority, as such loans are commonly used for infrastructure projects that commercial banks might deem too risky to fund. 52
In terms of its geographical focus, the White Paper gives clear monetary priority to Africa (51.8%) – whereas Asia (all of Asia, not just Southeast Asia) ranks second (30.5%). This is a significant decline since 2007, when Asia was estimated to have received 40% of China’s aid disbursement to Africa’s 25%. 53 Still, the 2014 White Paper does give special attention to Southeast Asia, which was one of three regions (the others being Africa and the Pacific Islands countries) prioritised for student scholarships. The report also includes an entirely new section on ‘Foreign Assistance under Regional Cooperation Mechanism[s]’, which devotes a small, but rising, amount to multilateral aid. Indicative of the priority attached to Southeast Asia, the White Paper gives the China–ASEAN Summit its own subsection, one of only two frameworks to be so distinguished (the other being the Forum on China–Africa Cooperation (FOCAC)). 54
Otherwise, most of China’s financial assistance takes place bilaterally via a mix of concessional and interest-free loans, grants, joint venture funds, and other assistance. China has been most active in ASEAN’s newest members, Cambodia, Laos and Myanmar (CLM), whose turn to market reforms was more recent and where China’s capacity to provide resources and goods is more evident. In the Mekong region in particular, Chinese investment has been facilitated by a confluence of domestic and strategic interests on both sides, as the CLM states have historically had fewer funding options for political and developmental reasons. China and ASEAN as a whole also share some complementary interests, especially as regards regional ‘connectivity’, with ASEAN being especially concerned that the CLM states not be left developmentally or politically behind. In addition to working with Cambodia, Laos, Thailand and Vietnam in the Mekong River Commission (MRC), China is also an active member of the Asian Development Bank’s (ADB’s) Greater Mekong Sub-region (GMS), aimed at developing and enhancing connective infrastructure (from roads, to railways, to power grids) there. Notably, the emphasis that China has placed on transportation networks and infrastructure development supports East Asian integration more directly than, for example, traditional donors (typically from North America and Western Europe), which have prioritised United Nations (UN) Millennium Development Goals. 55 The range of China-funded projects in resource and infrastructure development leads Jörn Dosch to conclude that Beijing is now playing a ‘de facto hegemonic role in the Mekong valley’. 56 China’s relative position in ASEAN’s so-called frontier economies generally contrasts with that of the US and Japan in maritime Southeast Asia, which receives about 90% of US investment, 80% of US trade and over 90% of Japanese investment. 57
However, even in the CLM states, there are caveats. For example, while China’s position may be relatively stronger, it has not been unrivalled. For example, until about 2005, Japan, far and away, led aid commitments in Cambodia, Laos, Myanmar, and Vietnam (CLMV). Similarly, as regards foreign investment, China has been unrivalled in only one – namely, Cambodia – and even there, China displaced Japan in Cambodia only in 2007/2008. 58 In Laos, Chinese investment competes with Vietnam and has generally trailed that from Thailand. South Korea has also been an active investor in education and has also rivalled Chinese investments in energy and mining. 59 As for aid, James Reilly observes, ‘Contrary to sensationalist media coverage, the distribution of China’s ODA in Laos does not vary greatly from that of its Northeast Asian neighbours, and increasingly approximates international aid distribution’. 60 In Myanmar, China clearly has a strong presence, but so do Thailand and Singapore, which respectively rival China in trade and investment. 61 In addition, the US, especially since it announced its ‘rebalance to Asia’, is now expanding in continental Southeast Asia in ways that parallel China’s in maritime Southeast Asia in the early 2000s.
The will to lead?
The preceding discussion highlights China’s growing economic weight and resources. Yet, as was discussed at the outset, economic growth does not necessarily mean leadership or the ability to produce more fundamental changes in the overall structure of the regional economy and how it is integrated. As regards China, in particular, its ability to translate capability into the ability to shape East Asian integration is complicated by a number of factors – not the least of which is China’s domestic politics and ‘fragmented authoritarian’ 62 system, which can undermine the implementation and coordination of policy. For example, the provision of foreign aid can involve as many as 40 different government departments. 63 Chinese financial initiative is also constrained by China’s underdeveloped domestic financial institutions, as well as domestic and developmental priorities that limit how much China is willing to loosen state controls on capital accounts and exchange rates. 64
Such domestic constraints thus also bear on questions of political will, a more active and strategic dimension of economic leadership than the aforementioned market-driven and domestic factors. Of special importance here is the extent to which China is willing to take initiative and bear the burdens associated with a more integrated East Asia.
Discerning intent is not uncomplicated. For example, to what extent can we say that Chinese economic initiatives are intended as efforts to lead – to provide for, substantiate or redirect – regional integration, as opposed to coincidental policies that happen to affect East Asian integration? This has become one of the more debated and interesting questions about China’s role in East Asia. Second, perceptions of Chinese will and intent also bear on the receptiveness of others to Chinese initiatives. Southeast Asian states’ receptiveness will be contingent on the extent to which Chinese proposals directly respond to their needs and concerns, but also how comfortable they are with the expanded Chinese influence that comes with those initiatives. Both sets of questions underscore the point that leadership has not just material, but also political and social, dimensions.
As regards the possibilities of Chinese leadership vis-a-vis Southeast Asia, most cite two Chinese overtures as especially significant. These are China’s decision not to depreciate its currency during the 1997–1998 Asian Financial Crisis and the Chinese-initiated ASEAN–China Free Trade Area (ACFTA), which was implemented in 2010. The two overtures, however, represent different categories of initiatives. For example, China’s currency decision may be considered more an instance of crisis management that had regional implications than a deliberate or considered attempt at regional leadership. Zhang Yunling, a well-positioned academic and early advocate of East Asian integration, similarly characterises China’s actions during the Asian Financial Crisis as situational; it was not China’s intent to lead East Asia during the crisis. 65 China also did not serve East Asian integration in its ‘passive’ and ‘silent opposition’ to Japan's proposed AMF. 66
This is not to say that the policy had no impact on regional integration patterns or on China’s regional role. As has been widely noted, China’s currency policies during the Asian Financial Crisis helped to pre-empt another round of competitive currency devaluations in East and Southeast Asia. China’s bilateral assistance to Thailand and Indonesia also contrasted with that of the US, which responded belatedly and made no bilateral offer of assistance to Thailand – though China’s assistance notably fell well short of Japan’s. In these ways, China’s actions helped shift thinking about the kind of role it might play in Southeast Asia. To that point in time, the ASEAN-5 had largely seen China as a similarly situated, developing state and thus more likely a recipient than a source of assistance.
The positive feedback may have also encouraged China to take greater initiative in the then-newly institutionalising ASEAN Plus Three (APT). In 1998, APT leaders approved China’s proposal that East Asia’s vice ministers of finance and deputy presidents of central banks meet to discuss international finance reform and the supervision of short-term capital flow. In 1999, Chinese Premier Zhu Rongji, along with Japanese Prime Minister Obuchi Keizo, took the lead in finalising arrangements for the CMI (2000), which, in 2009, became the Chiang Mai Multilateralisation Initiative (CMIM), ‘one of the most tangible outcomes of more than a decade of diplomatic dealings in Asia’s various multilateral forums’. 67
In 2000, China proposed ACFTA, resulting in a 2002 ASEAN–China Framework Agreement on Comprehensive Economic Co-operation (‘Framework Agreement’) covering trade in goods and services, as well as investment. In contrast to China’s currency decision, ACFTA was a much more deliberate effort to integrate the Chinese and Southeast Asian economies. Not only was it a Chinese initiative, but the initiative reflected Chinese willingness to bear larger costs. China’s responsiveness to ASEAN’s trade and investment concerns – both heightened by China’s impending entrance into the WTO at the time – was also notable. Ultimately, Beijing’s willingness to express its ‘good faith’ by granting ASEAN states ‘special and differential treatment’ was critical to reaching an agreement. These included an ‘early harvest’ proposal involving unilateral Chinese concessions on eight categories of agricultural products, along with specific manufactured goods that would be liberalised ahead of schedule. By this agreement: ASEAN agriculture gained early access to the China market; ASEAN economies were permitted exclusion lists with no reciprocal arrangement for China; Indonesia and the Philippines (the most resistant of ASEAN’s founding states) were granted 2.5 times the number of flexible tariff lines as others; and ASEAN’s newer members (Vietnam, Cambodia, Laos and Myanmar) were allowed a later target date (2015 as opposed to 2010). 68 As Reilly and others have observed, ‘While driving a hard bargain in trade talks with large, wealthy nations, Beijing has been surprisingly magnanimous toward smaller but strategically important economic partners’. 69 ACFTA is a good illustration of this pattern.
Even more than was the case during the Asian Financial Crisis, ACFTA served to spotlight China as a leading economic actor. As Aileen Baviera characterised the perceptual ‘sea change’ in the early 2000s, ‘From being perceived as mainly a potential economic threat, China has come to represent a potential benefactor…[and] new engine of growth’ that can help power and even lead the regional economy as a whole. 70 China’s attractiveness was also aided by Japan’s, as well as the US’s, coinciding economic troubles. Linking US and Japanese economic challenges to the possibilities of Chinese leadership in 2005, Abdul Razak Baginda, for example, expressed the view that ‘There is now this feeling that we have to consult the Chinese. We have to accept some degree of Chinese leadership, particularly in light of the lack of leadership elsewhere’. 71 As Chin and Stubbs note, the ASEAN–China economic agreement received the ‘most persuasive positive feedback’ in the form of ‘massive increases in trade and investment’ after 2003.
Still, one of the most debated questions has been the extent to which China wishes to play the kind of leading role envisioned, for example, by hegemonic stability theorists. Popular commentary often assumes that China does seek such a role, but debate inside China suggests far less certainty. For much of the reform era, for example, Chinese foreign policy was strongly conditioned by self-generated normative constraints associated with perceptions of itself as a limited and developing power. The general view was that China’s priorities were domestic – that is, how to move its 1 billion-plus population into the 21st century without incurring major political instability. 72 The result was a pragmatic, risk-averse foreign policy line expressed in the oft-quoted Deng Xiaoping directive that China ‘Observe the development soberly, maintain our position, meet the challenge calmly, hide our capacities, bide our time, remain free of ambitions, and never claim leadership’. 73 Recent Chinese policies and initiatives suggest that the ‘lay low’ foreign policy line is now giving way to a more active and confident Chinese foreign policy.
The 2008 global financial crisis created new pressures and opportunities for leadership. For China and for the ASEAN states, the global financial crisis raises long-standing questions about the sustainability of US and European markets to drive growth. Notably, in language that echoes George Schultz’s warning in 1987 during Japan’s rise, the Obama administration has warned East Asia not to rely on the US as the consumer market ‘of last resort’. 74 This has put more pressure (both domestic and regional) on China to be more proactive on the aid, trade and financial fronts.
With aid, for example, Reilly notes China’s attention to ASEAN, especially the ‘remarkable’ aid package offered in April 2009, which included: a US$10 billion contribution to initiate a China–ASEAN Investment Cooperation Fund, a US$15 billion line of commercial credit targeted at poorer ASEAN states (including US$1.7 billion for cooperative projects), an additional US$39.7 million for ‘special aid’ to Cambodia, Laos and Myanmar, US$5 million to the China–ASEAN Cooperation Fund and US$900,000 to the ASEAN plus China, Japan and South Korea Cooperation Fund.
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In trade, Chinese promises to ‘upgrade’ the ACFTA will provide a particular test of Chinese leadership. It remains to be seen if China is willing and able to provide a sufficiently developed, dynamic and open market that can serve as a dependable driver of the region’s economies. Notably, this was a source of ASEAN dissatisfaction and uncertainty vis-a-vis the US and Japan in the 1980s and 1990s. Of ASEAN members, all but Singapore, Indonesia and Myanmar currently have bilateral trade deficits with China, and while most are not especially large, 77 ASEAN states will be watching to see if China proves as magnanimous and sensitive to their needs as it was during the original negotiations.
As for financial cooperation, global and regional pressures appear to have increased China’s receptiveness to expanded financial cooperation, an area about which it had previously been wary and resistant. The result was a more ‘subtle’, ‘sophisticated’ and ‘proactive’ approach ‘aimed at ensuring Chinese influence and the image of a responsible great power’ in lieu of the ‘blunt dismissals’ of the past. 78
The CMIM offers one illustration of this changing approach. Between the Asian and global financial crises, the CMIM appears to have offered a particular ‘testing ground’ for Chinese economic multilateral leadership. 79 While the initial proposal to multilateralise the CMI’s swap arrangements came from Japan, China advocated additional measures and led (with Thailand) the initial investigation into reserve-pooling. Supported by both China and Japan, the CMIM expanded its emergency fund, was additionally institutionalised and gained a new regional surveillance unit, namely, the APT Macroeconomic Research Office (AMRO), which also made a Chinese national its first director, a position China appears to have actively sought. 80 China (by bringing in Hong Kong), also joined Japan, as the CMIM’s largest contributors.
Catalysed by the global financial crisis, additional cooperation followed in the form of a regional trust fund – the Credit Guarantee and Investment Facility (CGIF) mechanism under the ADB. As with the CMIM, China again joined Japan as its largest contributor (28.5%). The larger role given to China in these frameworks is why Chin characterises the crisis as marking China’s emergence as a leading financial actor. 81 Whereas before the global financial crisis, East Asia displayed a clearer division of labour – China leading trade and Japan leading finance – new financial arrangements put China on a par with Japan, with the same contributions and, consequently, status.
The Asian Infrastructure Investment Bank
In 2009, China began circulating a proposal for a pan-Asia sovereign wealth fund – the Asian Investment Corporation, later renamed the Asian Infrastructure Investment Bank (AIIB). The proposed AIIB aims to address extensive, practical infrastructure needs in developing Asia – an estimated, US$8 trillion worth in national infrastructure and another US$290 billion in regional projects. 82 By one ADB assessment, of that amount, existing multilateral banks collectively would be able to cover less than 5%. 83 That shortfall has not been helped by the 2008 global financial crisis, which hit Western lenders hardest and, consequently, Western lending institutions. By one estimate, ‘[t]he World Bank’s lending has plummeted to half of its pre-global financial crisis levels. And private lending for infrastructure has fallen to one-third’. 84 Consequently, as Andrew Elek concludes, ‘there is vast unmet demand for productive economic infrastructure, especially in the emerging economies of Asia’. 85
China’s AIIB proposal became more real and substantive when President Xi Jinping began peddling it in early October 2013 during the annual Asia-Pacific Economic Cooperation (APEC) meetings held in Indonesia. In January 2014, China organised the first multilateral meeting about the bank. It appears that the AIIB will focus on Northeast Asia, Southeast Asia and South Asia (China has proposed a separate Shanghai Cooperation Organisation Bank covering Central Asia, though the AIIB includes Central Asian membership). China has invited all the APT countries to join. The plan also envisions a minority of non-Asian members. Of those known to have been invited are the US, European Union and Australia. As conceived, the multilateral bank will have a capital account of US$100 billion (increased from the original US$50 billion), with 70–75% of that coming from regional members and with China reportedly anticipating a 50% stake. 86 Chinese officials have emphasised that the AIIB would serve functions and priorities different from, and complementary to, other multilateral development banks (MDBs). Where the World Bank and ADB prioritise poverty reduction, for example, the AIIB would ‘focus on infrastructure construction in Asia to promote regional connectivity and economic cooperation’. 87 China officially launched the AIIB on 24 October 2014, just before the APEC summit in Beijing.
Prior to its official launch, China held at least four working meetings dedicated to the bank; it also presented the AIIB proposal at the ASEAN–China meetings in August 2014, as well as bilateral meetings with various regional states. Consequently, the AIIB counts 20 countries plus China as its founding members: Mongolia, Malaysia, Cambodia, Thailand, Singapore, Laos, Vietnam, the Philippines, Myanmar, Brunei, India, Pakistan, Sri Lanka, Nepal, Bangladesh, Uzbekistan, Kazakhstan, Qatar, Oman, and Kuwait. Indonesia pledged support for the AIIB within two weeks of newly-elected Joko Widodo's inauguration and the announcement of his new cabinet. An ambivalent South Korea and a divided Australia (helped by strong US pressure) remained on the sidelines, while Japan, concerned about Chinese influence, sees the AIIB as a potential rival to the Japan-led ADB. As for ASEAN itself, the 2014 Chairman’s Statement on the ASEAN Post-Ministerial Meeting 10+1 session with China stated that ‘The Meeting welcomed China’s proposal to set up the Asian Infrastructure Investment Bank to provide financial support to regional infrastructure projects with an emphasis on supporting the implementation of the MPAC [Master Plan on ASEAN Connectivity]’. 88 The deliberate emphasis on ASEAN’s own master connectivity plan reflects ASEAN’s concerns and priorities.
Conclusion
China is clearly emerging as an increasingly influential economic force for East Asian integration. Among the more notable features of China’s influence has been its trade potential to provide a large source of regional demand, the absence of which has long been considered a key obstacle to more substantial (economic and political) integration. The creation and development of ACFTA has offered both a particular indication and test of China’s ability to fill that role.
In addition, while Chinese investment to ASEAN as a whole has been smaller than others, Chinese aid and investment has nevertheless made an impact, especially on the development of regional connectivity, an area prioritised by ASEAN states. The significance of its activities lies not just in the amount of funding offered, but also in how China’s investment has generated interest from others – partly for competitive reasons, but also partly because China’s willingness to fund otherwise high-risk, long-term projects at the start helps make them more commercially viable.
Lastly, the preceding discussion also suggests heightened Chinese intent to exercise initiative, if not leadership. As noted, this is a political question that has domestic and regional dimensions. Domestically, changes in China’s economy, strategic concerns about its economic vulnerability and also what appears to be personal interest by Xi Jinping (e.g. in the case of the AIIB) appear to be shifting Chinese foreign policy away from the ‘lay low’ policy line that has defined Chinese policy in the reform era. To the question ‘Does China have the wherewithal to provide for, substantiate and/or redirect East Asian regional integration?’, economic trends and more recent initiatives seem to suggest a tentative ‘yes’.
Yet, that ‘yes’ is also clearly conditional. As this discussion has shown, China’s initiatives are not taking place in a political and economic vacuum. Rather, it enters a structure and system of relations that condition the regional political economy, including China’s own development in key respects. Consequently, any prospective leading Chinese role seems likely to be conditioned by long-standing Southeast Asian expectations as to the responsibilities of major powers to their development, not to mention the interests of the US and Japan, which have enjoyed much more established and extensive relations with much of Southeast Asia – though the fact of China’s size and its having developed more independently of US interests than, for example, Japan could allow China to exercise more distinct and independent leadership. Thus, political will also has regional and non-economic dimensions. While Chinese domestic sentiment may have shifted in favour of a more active role, the regional aspect of that question still presents one of the biggest challenges to a Chinese leadership role in East Asia. Even putting aside the recent heightening of tensions over maritime territorial disputes, questions about China’s political credibility still complicate its economic overtures. Consequently, to the extent that China has exercised economic leadership, it has thus far been primarily de facto, not de jure in the sense of being politically recognised. China's recent initiative in the CMIM, renewed attention to ACFTA, and especially the AIIB may therefore be significant as multilateral initiatives that could mark the start of a new phase of Chinese-led integration efforts.