Will China’s South China Sea belligerence impact ASEAN investment?

Maps of ASEAN and China ( Photos by: taesmileland, Ohmega1982)

While Chinese investment in Southeast Asia has been growing, a vital part of this relationship is yet to be resolved – Chinese belligerence in the South China Sea. In particular, China has engaged in belligerence with the key ASEAN markets of Vietnam and the Philippines over maritime territory.

According to a report by The Diplomat, key to the dispute is competition over the natural resources, such as fisheries and potential hydrocarbon energy resources. Despite ongoing friction, China currently still maintains access to the natural resources in the Philippines.

China continues to maintain access to these resources by leveraging on diplomatic pressure and military means, such as constructing airstrips and maritime bases in the South China Sea. This is in combination with the development of significant economic linkages and investments in Indonesia, Vietnam and the Philippines – all of whom are claimants to South China Sea territory..

Hydrocarbon resources (i.e. oil and gas) are the most valuable and high-profile natural resources in the South China Sea, dovetailing with the desire by China to ensure its energy security. Fisheries resources constitute an additional element, representing significant commercial value in terms of its links to food security, primary industry and the upstream segments of the F&B industry vertical.

Robert Haddick, a former military professional and defence policy analyst, has outlined China’s belligerence in its use of what Haddick described as the “salami-slicing strategy”. This involves a slow and steady accumulation of changes that result in a significant strategic shift over time, in favour of China.

The Chinese response to both Vietnam and Philippines has tended towards adversarial and designed to intimidate them, rather than create mutually beneficial outcomes. In short, China is playing a long game, with a certain degree of belligerence, that may impact trade relationships and capital flows in the long term.

Unequal Economic Relationship

Unequal economic relationships between China and countries like Vietnam and the Philippines are illustrated in the trade patterns between them. China often obtains access to Philippine fisheries resources, but in a way that is unsustainable and unregulated and provides limited economic benefit to either the Philippines, Vietnam or other countries.

ASEAN countries often export their fisheries products to China and the Hong Kong SAR.  have grown rapidly over the past five years, from $49 million in 2009 to $129 million in 2013. This represents an average annual growth rate of 33 percent. By comparison, 2013 saw the Philippines import only $60 million worth of fisheries products from China.

This indicates that the Philippines exports more than twice as much as it imports. A significant portion of high-value seafood imported into mainland China is trans-shipped via Hong Kong. Of all countries of the Coral Triangle region, the Philippines has the largest difference between exports and imports when measured by value: exports have an average value of $3,000 per ton, while imports average less than $1,000 per ton.

Fisheries trade structure inequality is represented in the tropical reef fish trade, with many fish exported live to China and worth approximately $1-2 billion. However, there are significant environmental and social costs. Targeted species in this trade are long-lived, slow-growing species and vulnerable to the pressures created by overfishing. As a side-effect, significant coral destruction also occurs.

Fisheries exports to China constitute crucial economic activity for maritime ASEAN nations like Myanmar, Philippines, Vietnam and Indonesia. But the trade structures benefit Chinese traders more than the local fishermen. Largely financed by China-based traders who invest capital all the way along the commodity chain, trade structures suggest that Southeast Asian fishermen and their communities bear the long-term externalities of overfishing and environmental degradation.

Poaching is also a significant contributing factor, with the governance of fisheries resources in the Philippines being significantly weak for instance. This is  characterised by a low capacity for cases and enforcement, as well as high levels of corruption. This is manifested in a weak judicial system which allows China and other parties to influence legal outcomes in incidences of poaching, commonly performed by Chinese fishing vessels.

Endgame

Using the example of China-ASEAN relations in the fisheries trade, corresponding trade patterns and outcomes suggest that as China grows, market dynamics may not result in an equitable ASEAN-China economic relationship. China’s mode of access to ASEAN resources, particularly in fisheries, is unregulated, unsustainable and setting the ground for future conflict.

In the broader scheme, this has implications for other areas of trade, as well as access to the hydrocarbon energy resources of the South China Sea. According to the Lowy Institute, analysis of a generic “Chinese” strategy in the South China Sea is complicated by a diverse array of mainland Chinese agencies with their own agenda operating in the region.

The increasing openness of the ASEAN economies in trading with China – supported by the China–ASEAN Free Trade Agreement that came into effect in 2011 – suggests that unequal trade arrangements might spill over to other sectors. Many ASEAN countries tend to face challenges of governance, with public policies subject to changes in the regime and a distinct lack of continuity.

A coherent, consolidated response needs to be made by the ASEAN nations to ensure that Chinese economic hegemony of the region is buffered against, with equitable trade structures. Responses that can compel China to play by the rules and maintain equitable trade relationships, rather than overwhelm local communities and markets, is necessary to the well-being of ASEAN nations.

Also Read:

ASEAN could replace China as manufacturing and consumption hub

ASEAN set for a possible infrastructure boom?

Image: freedigitalphotos.net

 

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.