Western aid cuts and trade tensions risk ceding ground to China

Declining Western aid risks ceding a greater role to China, though other Asian donors will also gain in importance. Chinese ODF reached its lowest recorded levels in 2022 but rose by $1.6 billion to reach $4.9 billion in 2023. This was mostly driven by disbursements in large economies such as Indonesia and Malaysia, reflecting major infrastructure projects including the Jakarta–Bandung High-Speed Rail and Malaysia’s East Coast Rail Link. Despite challenges with many projects, China retains a substantial pipeline of infrastructure works that will maintain its presence as the region’s largest infrastructure financier.¹ In 2023, China also finalised the revival of the Kyaukphyu Deep Sea Port project under the China–Myanmar Economic Corridor framework, resulting in a fourfold rise in the dollar value of new project commitments, from a low of $2.5 billion in 2022 to almost $10 billion in 2023.

ODF from Asian donors is expected to remain broadly stable in the near term. Aid cuts by major Western donors will therefore see the centre of gravity in Southeast Asia’s development finance landscape drift towards Asian donors. This comes after several years in which Western donors had been improving their relative importance in the region, especially as China’s ODF contracted from its earlier highs. In future, development finance in Southeast Asia will be increasingly shaped by Tokyo, Seoul, and Beijing, leaving Brussels and Washington with a diminished role. China could gain in importance, especially in the Mekong subregion as well as in Indonesia.

China’s development financing carries its own important nuances.² Rising nationalism, political volatility, and growing concerns over debt sustainability in many Southeast Asian countries have led to increased scrutiny of Chinese-funded projects. China is adjusting by refining its ODF and transitioning to fewer, smaller, and more targeted projects. Indonesia, Malaysia, and Thailand are navigating China’s development finance opportunistically — seeking, accepting, and rejecting projects based on their own priorities and needs. Lower-middle income economies such as the Philippines and Vietnam have taken a more restrained approach, engaging with China only when it aligns with domestic priorities. Poorer economies such as Cambodia, Laos, and Myanmar, which have limited access to alternative financing, remain heavily reliant on China and have much less room to negotiate.

In this environment, reduced ODF from Western governments will shrink the pool of development financing options for Southeast Asian countries, leaving them with reduced room to manoeuvre and less leverage to negotiate favourable terms with Beijing. This is unfolding at a time of growing external pressures: the Trump administration’s new “reciprocal tariff” regime has reignited global trade tensions, potentially hitting Southeast Asian exports hard and destabilising key industries. As both aid and trade ties with the West weaken, many countries in the region may find themselves with limited alternatives and increasingly dependent on China, despite their efforts to diversify.

This poses three key risks. First, the ability of Southeast Asian countries to recalibrate their development partnerships and assert greater agency may be undermined. Second, the lack of competition could reduce the pressure put on China to reform the Belt and Road Initiative to address existing concerns about debt sustainability and project quality. Third, as global development budgets shrink, remaining funding is more likely to be geared towards serving donor interests, not necessarily the region’s development needs. This will further challenge Southeast Asian countries’ agency to channel financing to their domestic development priorities.

Taken together, these trends risk eroding Southeast Asia’s bargaining power and ability to shape the development support that countries receive.