How should Southeast Asian countries respond to an upsurge in Chinese investment

Investments from China are facing increasing headwinds globally. Investments from China in Australia, for instance, plunged by almost half in 2019 due to bilateral tensions, and Chinese investments in the UK face rising calls for scrutiny due to national security concerns.

Southeast Asia, on the other hand, has seen an upward trajectory of Chinese investments since 2013. This trend has intensified over the last two years, owing to greater geopolitical hostility against China, the decreasing appeal of Hong Kong as a gateway, and the need for Chinese firms to trade and go global to survive. As international opinion of China, particularly in developed economies, continues to plunge, more Chinese funds are likely to flow into Southeast Asia. How should Southeast Asian countries respond to this expected upsurge in investment from China, the region's largest trading partner?

Southeast Asia should step up to attract and welcome fleeing Chinese investment funds just as if they are from elsewhere. Imposing a jaundiced view on Chinese investments is not in the interest of ASEAN or the region as a whole, and certainly not in the interests of most of the member states. This might sound counterintuitive as there are security concerns regarding economic asymmetry, debt traps, cyber-espionage and corruption. These are valid, and regional countries certainly need to exercise due diligence to address them. Southeast Asian governments should ensure that all foreign investments, wherever they come from, are assessed carefully.

Southeast Asian states could vet incoming FDIs to ensure that they 1) are done in a non-predatory and sustainable manner, 2) do not promote criminality and illicit activities within their jurisdictions, and that 3) the benefits filter down to the local communities. If these three criteria are fulfilled, there is little reason to turn down the investment.

Southeast Asian governments should ensure investments from one foreign country do not gain control of strategic industries such as communications or critical infrastructure that could compromise national security, or lead to predatory behaviour such as the wholesale takeover of primary real estate and the creation of a property bubble. Every effort should be made to ensure that investments are channelled into sectors in genuine need such as basic infrastructure, health care, education and other sustainable industries that promote employment and protect the environment.

These countries should also vet investment against the risk of criminality. This often comes from private investment in the gaming sector, which provides cover for underground banking, money laundering and seeds other illicit activities like loansharking and vice.

While this is easier said than done, there is some evidence that regional countries do have the requisite capacity. Cambodia, China's main regional ally, has put in measures to try and better regulate Chinese investments. Even though investment from China had stoked resentment and bad press, there is no denying that many developmental projects in the country are underway because of it. This has not prevented the Cambodian government from shutting down underground casinos while enhancing economic relations with Beijing.

Likewise, Manila has to grapple with calls to shut down Philippine offshore gaming operations (POGOs). Much to the chagrin of domestic critics and the Chinese government, the Duterte government saw POGOs as an opportunity to attract foreign funds, boost real estate prices, increase employment, grow the local economy and derive tax revenue. Despite concerns about the influx of Chinese workers and increased criminality associated with this industry, the gamble paid off initially until the pandemic reversed these gains. Manila's acceptance of Chinese investment does not mean that the Philippines will always give in to China, as President Duterte's recent statement on the South China Sea to the United Nations General Assembly shows.

In this geostrategic climate, Southeast Asian countries have an added incentive in knowing that the acceptance rather than rejection of Chinese investments would likely stimulate competing investments from the West and Japan to "balance" China's economic sway. Regional countries should also understand that this investment flow might be slowed or reversed if geopolitical tensions ease. This window of opportunity should be looked upon seriously by regional governments to fund their economic recovery from the pandemic and further propel development.

There are voices that suggest that Southeast Asia should reject some investments from China because of what is happening in the South China Sea. Rejecting Chinese investments is certainly not going to ameliorate or deter Chinese actions in the South China Sea. Besides, a richer Southeast Asia is more resilient, whereas a poorer region would be even less of a match for China.

A win-win investment relationship based on reasonable and sustainable returns and judicious management might be the winning formula Beijing needs for its Southeast Asian strategy. Southeast Asian countries should remind Beijing not to squander its goodwill, as the region might be one of the last bastions of receptivity to Chinese economic cooperation in the post-pandemic world.

This article was first published as ISEAS Commentary 2020/159 "Welcome and Vet: Investments from China in Southeast Asia" by Victor Teo.

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