Global aid instabilities undermine Southeast Asia's leverage with China

Developing Southeast Asian states have strategically hedged against China’s development offerings but could be thrown off balance by global instability, a new Lowy Institute Analysis argues.

The paper by Alexandre Dayant and Grace Stanhope, entitled Hedging bets: Southeast Asia’s approach to China’s aid, analyses the changes in official development finance from China to the region between 2015 and 2022.

Grouping the eight developing Southeast Asian states into three typologies — by their constrained, restrained, or opportunistic approaches towards Chinese official development finance (ODF) — the authors argue that regional demand for Chinese financing is not solely driven by development and infrastructure needs but also by the range of options available to each country and their ability to navigate foreign policy dynamics.

But they say China’s changing profile as a funder to the region could leave Southeast Asia with a development finance shortfall, particularly given the precarious nature of Western aid.

“Southeast Asia’s vast infrastructure needs, estimated at US$2.8 trillion by 2030, will increasingly depend on China,” write Dayant and Stanhope.

“If Beijing does not ramp up its financing, as recent trends suggest, the region’s development could be jeopardised, hindering economic growth, poverty reduction, and progress on climate goals.”

Chinese development aid has declined sharply in recent years, with Beijing ODF to the region declining from US$9 billion in 2015 to US$3 billion in 2022.

“It’s also concerning that Western governments are dramatically scaling back aid and development budgets,” write Dayant and Stanhope.

“The United States has frozen most of its aid program and dismantled its aid agency, and Europe is under pressure to reduce overseas assistance, with budgets squeezed by slow economic growth and redirected to domestic priorities.

“The new-found agency of many Southeast Asian countries to recalibrate their development ties with China may be undermined if Western aid cuts translate to a drastic reduction of ODF to the region.”

KEY FINDINGS

• States with acute development needs and constrained access to development financing — Cambodia, Laos, and Myanmar — are the most structurally reliant on China. By contrast, lower-middle income countries with more diversified foreign relations — the Philippines and Vietnam — have become far more restrained in accepting Chinese largesse over the last decade.
   
• Upper-middle income countries with only moderate development needs — Indonesia, Malaysia, and Thailand — appear to be playing the field of development partners the most opportunistically and politically.
   
• Amid weakening demand for Chinese development financing in Southeast Asia, Beijing is recalibrating its offering, transitioning to fewer, smaller, and more targeted projects. In 2022, China implemented $3 billion in development financing in the region, a sharp drop from more than $9 billion in 2015.
   
• However, Southeast Asia’s success in reshaping their development ties with China could be undone if Western cuts to development budgets lead to a drastic reduction in financing to the region.

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