How will South-east Asia fill the China gap as development funds dry up?

Beijing’s aid disbursements are shrinking in a region recalibrating its dependence.

As the Belt and Road Initiative (BRI) enters its second decade, the story of China’s development finance in South-east Asia is shifting, marked not by growing dominance, but by recalibration, caution and quiet resistance.

Once seen as the region’s development giant, Beijing has seen its footprint in South-east Asia shrink. Chinese aid disbursements in the region have fallen from a high of US$9 billion in 2015 to US$4 billion (S$5.2 billion) in 2023. New commitments are drying up, and China has slipped from the top donor to third place, behind the World Bank and the Asian Development Bank, and just ahead of Japan.

What happened? Partly, China is pulling back, tightening its belt amid slowing growth and rising domestic needs. But perhaps more importantly, South-east Asia is pushing back.

For example, several high-profile Chinese infrastructure projects in the region have faced backlash or renegotiation amid growing political and financial concerns. In Malaysia, the East Coast Rail Link (ECRL) has been suspended, restructured, and partially revived under successive governments, while two other projects – the Multi-Product Pipeline and the Trans-Sabah Gas Pipeline – were cancelled or left in limbo due to corruption allegations and poor implementation.

Similarly, Thailand’s high-speed railway project is now being self-financed, after concerns over Chinese loan terms.

Our latest analysis at the Lowy Institute looks at how the region’s eight developing economies – Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand and Vietnam – are responding to Chinese aid with growing pragmatism and agency. While some continue to rely heavily on China, others are walking away. Most are hedging their bets.

Three strategies have emerged.

First, the constrained approach is employed by Cambodia, Laos and Myanmar – countries that are heavily reliant on Beijing. For them, China remains the primary development financier by far, and cumulative Chinese development financing is equivalent to more than 20 per cent of their annual gross domestic product. Geography, limited governance, and few alternatives mean these countries have little choice but to accept what is offered.

Second, the restrained approach, seen in Vietnam and the Philippines, keeps China at arm’s length. Historical tensions (notably in the South China Sea), domestic pushback, and an assertive sense of sovereignty have kept Chinese development financing to a minimum. While both countries occasionally accept Chinese funding, it’s usually limited to a few tightly controlled projects.

Then there is the opportunistic approach, exhibited by Indonesia, Malaysia and Thailand. These upper-middle-income countries engage with China in a practical and flexible way, leveraging Beijing’s development finance when it suits their national agendas, but maintaining enough political capital and institutional capacity to decline China’s offers when needed. They are using Chinese development finance as one tool among many, not a dependency.

But don’t write China off just yet.

While Chinese commitments for new projects are down, the sheer volume of past contracts signed ensures China will remain a major infrastructure player in the region.

Beijing still holds a pipeline of roughly US$48 billion in unfinished projects across South-east Asia. These include Myanmar’s Kyaukphyu Deep Sea Port and Malaysia’s ECRL. And even with its new “small and beautiful” approach, focused on smaller and more targeted projects, the BRI continues to adapt in ways that keep it competitive in the face of Western offers, and attractive to South-east Asian governments.

Yet the future is uncertain. As China scales back and the West struggles to get its act together, South-east Asia’s development ambition is at risk.

Despite flashy initiatives like the European Union’s Global Gateway and the Group of Seven’s Just Energy Transition Partnerships, Western financing has struggled to match China’s scale or speed, and now faces major cuts. The US has paused most of its foreign aid under President Donald Trump’s second term, and Europe’s budgets are increasingly redirected to domestic crises.

If Western donors retreat and China scales down its funding, South-east Asia may be squeezed by shrinking options, reduced agency, and rising development needs. The region faces US$2.8 trillion in infrastructure needs by 2030.

Without reliable financing, progress on climate, poverty, and economic growth will stall, especially for Least Developed Countries like Cambodia and Laos, where development finance is equivalent to nearly 70 per cent of government spending on health, education, and public infrastructure.

At the same time, less competition means less pressure on China to improve the quality and transparency of its BRI investments.

That is why how South-east Asia navigates this moment matters. Hedging between partners, projects and priorities is more than just savvy diplomacy; it’s a development strategy in a fragmented, unpredictable world.

But whether the region can keep hedging will depend not just on its own choices, but also on whether its development partners show up.