Southeast Asia’s China illusion

Malcolm Cook

Posted on October 13, 2015

Conventional wisdom is often not wise and more an illusion than reality. Today, across Southeast Asia, it is increasingly proclaimed as a fact that needs no verification that China is the paramount economic partner of the region and that this economic dependence on China will only grow.

This conventional wisdom is shaping how regional political leaders and analysts view their country’s relations with China and other states. Presidential candidate Jejomar C. Binay in a media interview earlier this year used China’s economic importance to the Philippines to rationalize his promotion of a softer line on the sovereignty dispute in the West Philippine Sea, one focused on China’s preferred approach of joint development. There are no similar calls for falling in line with the United States and Japan politically and strategically to preserve economic relations with these arguably more important sources of economic opportunity for Southeast Asia. Rather, many warn that Southeast Asian states should be cautious in strengthening relations with the two friendliest major powers in the region for fear of annoying China, for many in Southeast Asia the least friendly major power.

If Southeast Asia’s and the Philippines’ economic dependence on China was already very deep or likely to become so in the near future, such a China preference approach may be warranted, particularly given widespread concern that the Chinese state does use economic pressure to achieve strategic ends. Purveyors of this conventional wisdom largely ignore one set of key economic indicators and superficially use another to provide an empirical shine to their purported wisdom and pursuant policy recommendations. A sin of omission and one of commission.

Not surprisingly, foreign direct investment (FDI) figures are largely skirted over in the argument of Chinese regional economic predominance as these FDI figures contradict it for the region as a whole and for the Philippines. Using the latest United Nations statistics available, by the end of 2012, China was only the seventh largest source of FDI for Southeast Asia in both stock and new flow terms. Malaysia’s FDI stock in Southeast Asia was close to 50% larger than that of China. Japan’s stock was well over five times larger than China, while China’s stock was only one-fifth that of the United States. Japan had twice the amount of money invested in Thailand as China had in the ten economies of the region. At the end of 2013, the United States accounted for one of every seven dollars directly invested in Singapore. China accounted for less than one in every 50 dollars.

The Philippine story is even more contradictory to this China-centric conventional wisdom than the regional one. At the end of 2012, China accounted for a mere 1.2% of the Philippines’ total stock of FDI. Japan’s investment was 20 times larger and the United States a full 25 times greater.

In 2012, Philippine firms had more than twice the amount of money invested in China as Chinese firms had in the Philippines. The latest figures show a similar hierarchy. In 2014, China was only the sixth largest source of approved FDI inflows accounting for 6.1% of the total. Japan was the largest accounting for 19.1% followed by the Netherlands at 17.5%. While Chinese FDI outflows are growing quickly, the large majority are avoiding Southeast Asia. From 2009-2012, Southeast Asia captured less than one of every 16 dollars China directly invested overseas. In the same period, the region attracted more than half of total FDI outflows from Taiwan and over one of every seven dollars Japanese firms invested directly overseas.

Purveyors of this conventional wisdom prefer to use aggregate trade figures to bolster their claims about Chinese economic primacy in Southeast Asia. These certainly provide a more compelling case as China is the largest or second largest trading partner of every economy in Southeast Asia except Brunei. Yet, for the economies of maritime Southeast Asia, these aggregate trade figures with China exaggerate potential Chinese leverage.

The regional and global value chains in the electronics and automotive sectors make up a large share of maritime Southeast Asia’s trade with China. Yet, it is Japanese, US, European, Korean and Taiwanese firms that control most of these chains and the location of their links not Chinese firms. So the correlation made between trade flows between firms located in Southeast Asia and China and potential Chinese economic predominance only makes sense if the ownership of these firms and chains is irrelevant. It is not.

Fears, and hopes, of present Chinese economic primacy in the Southeast and in the Philippines are illusory and will likely stay so for the foreseeable future. The wealthier and more open an economy is in Southeast Asia, the less dependent it is on China as is the case with the Philippines. Philippine and regional analysts and policy makers would be well served jettisoning this illusory conventional wisdom than repeating it and making policy recommendations and changes on the basis of it. Do not create the world you fear living in.

Malcolm Cook is a senior fellow at the Institute of Southeast Asian Studies in Singapore and a visiting professor at Ateneo de Manila University’s Political Science Department where he taught full-time from 1997-2000.