Host countries should take a tough stance when negotiating Chinese foreign direct investment deals as Chinese investors increasingly wish to be seen as responsible stakeholders in the region, a panel of experts has said.
The panel, hosted by the Stimson Center on May 11, discussed the evolution of Chinese business practices in Southeast Asia, in particular, the so-called Chinese Way, a pragmatic approach to investing, and the changing role of civil society.
Panelist Kavi Chongkittavorn, an Asian Studies Visiting Fellow at the East West Center and a former journalist with four decades of experience in the region, said Chinese investment was “very flexible” and a tough approach to negotiations would yield more returns for host nations.
“In negotiations with the Chinese over the high-speed train, we [Thailand] toughened our conditions, China responded. At first, it was like negotiating with Laos [with] all the basic conditions, and then the Thais said, ‘No, no! We want this.’ And then, the Chinese said, ‘Okay, let’s move on,’” he said.
The episode, Chongkittavorn said, was just one instance of how China could be bargained with as it places such a high priority on its relations with Southeast Asian nations, in what Chongkittavorn said was China’s “front yard.”
“China will be pragmatic and improve itself. In Southeast Asia, China has to be extremely careful. If you make [a] mistake and you don’t correct it, it will have far-reaching consequences because you affect one Asean country, you affect Thailand, it will have contagious effects towards other Asean countries,” he said.
China’s Front Yard
With a combined population of more than 620 million, half of whom are under 30 years old, the Southeast Asian region is the third-largest economic bloc in Asia, with a combined gross domestic product of about $2.6 trillion.
The Asian Development Bank has predicted that emerging Asian economies will require some $26 trillion in investment, or $1.7 trillion annually, by 2030 to keep pace with development goals.
China views the region as a natural destination for investment as its domestic investment opportunities have begun to saturate, as evidenced by China’s foreign direct investment (FDI) inflows into Southeast Asia, which in 2015 accounted for about 5.36 percent of the total, but had grown to about 10 percent in 2016, according to Asean.
“China needs Southeast Asia to throw money away, to invest excessive capital and productivity, particularly in transportation high-speed train,” Chongkittavorn said.
The massive China-led Belt and Road Initiative (BRI) that aims to build connectivity and cooperation between Eurasian countries has further heightened China’s investment presence in Southeast Asia. A number of rail projects in Thailand, Laos and Indonesia, and a new high-speed rail line that runs from Southern China to Thailand through Laos, have been funded under the BRI.
Chinese FDI in the region, however, extends far beyond infrastructure.
Courtney Weatherby, a Southeast Asia research analyst at the Stimson Center, said that China is by far the largest investor in key sectors such as infrastructure, power and mining, with numerous projects including roads, railways, hydropower dams, and pipelines in individual Asean countries. Manufacturing, she added, is also a major sector for China to invest in.
“Manufacturing is a natural area, given the current population dynamics, the expertise that’s already existing in many of the local countries in the manufacturing sector,” Weatherby said.
Rising labor costs also drive Chinese manufacturing companies out of China to Southeast Asia, she added.
“And particularly the shift that is happening inside China where manufacturing is becoming too expensive because of the rise in wages, so many Chinese companies are looking to invest in manufacturing abroad.”
Risks of Chinese FDI
Sectors such as hydropower in which China has historically invested in the region are seen as crucial for development, but also come with deep environmental and social impacts.
Weatherby said that the ten Asean countries have limited capacity to maintain legal standards, risk assessments and enforcement to minimize environmental and social costs from Chinese FDI projects.
“Laos, Cambodia, Myanmar are some of the countries that have the lowest legal standards for environmental and social impact assessments, for pollution requirements,” Weatherby said.
“Even countries that have these on the book, the capacity to monitor and to review environmental and social impact assessment is relatively low. And more importantly, enforcement is quite low, and a huge challenge,” she added.
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Insisting on High Standards
According to Weatherby, there is a widespread perception that Chinese companies take a “pollute first, clean up later” mindset, but many of those large companies would likely be willing to work through the process of ensuring that they meet standards and that they are “viewed as a responsible stakeholder who can negotiate.”
“They’ve been burnt by making mistakes and they are starting to improve behaviors. They may be more willing to take feedback from local civil society organizations and community that are impacted,” she said.
It comes down to the individual Southeast Asian countries to maximize benefits and pursue sustainable development in Chinese FDI projects.
Yun Sun, East Asia Program co-Director at the Stimson Center and the moderator of the panel event, said that the main takeaway of the discussion was the role of host countries in setting standards that ensure good business practices and active involvement of civil society to monitor and scrutinize the behavior of Chinese companies and their relationships with local officials.
“The recipient governments have to be persistent about their positions. If they insist on their standards, if they insist on a fair deal, then the Chinese will make concessions,” Sun said.