The unfolding power shifts chiefly driven by the power rivalry between China and the United States is causing uncertainties, anxiety, and dilemma for weaker states in Southeast Asia. The US’s retreat from economic liberalism to protectionism, and the lack of US’s clear commitment in maintaining its traditional regional leadership role further push Southeast Asian countries closer to China. To maintain their economic dynamism, Southeast Asian countries have to deepen their regional economic integration within themselves and with other Asian economic powers. Economic pragmatism and diversification have been the common foreign economic policy objectives and practices of Southeast Asian countries.
China is believed to be an emerging dominant economic power. Southeast Asian countries can maintain its growth prospect if they can manage well the economic expansion of China, especially under the framework of the Belt and Road Initiative (BRI) and the Lancang-Mekong Cooperation (LMC). Clearly, the opportunities from China’s ascending power are derived from its economic powerhouse. China is the top trading partner and a key source of foreign investment in Southeast Asia. China’s economic rise exerts a ‘powerful gravitational pull’ on regional countries. Chinese capitalism in the region is galvanised by four interconnected factors :
- Chinese economic statecraft
- Transnational Chinese entrepreneurs
- The ethnic Chinese
- Economic regionalism
Chinese economic statecraft here refers to the exertion of commercial actors for strategic objectives. However, power asymmetry and over dependence on China have caused a certain degree of concerns for Southeast Asia. Some believe that economic dependency constraints foreign policy option and strategic manoeuvre of weaker states.
The opportunities from China’s ascending power are derived from its economic powerhouse.
Two case studies, BRI and LMC are used here to illustrate China’s evolving regional economic diplomacy. Here economic diplomacy refers to the art of transforming the external environment into sources of national growth and deploying economic leverage for strategic benefits either through trade and investment or development assistance. Economic inducement or charm offensive and economic coercion or economic punitive measures are instrumental in exercising economic diplomacy. China has simultaneously exercised economic statecraft and institutional statecraft.
China’s Economic Statecraft
China has effectively implemented economic statecraft — defined as the use of economic might for strategic objectives — towards Southeast Asian countries through the combination of economic incentives or economic inducement as well as economic punishment or economic coercion. Economic inducement strategy has been exerted to countervail China threat theory and to win support from Southeast Asian leaders. For instance, during the Asian financial crisis in 1997, China decided not to devalue its currency but offered US$4 billion support to Thailand and other regional countries. China also encouraged regional countries to step up regional cooperation and international financial reforms. In addition, China’s bilateral economic ties with the Association of Southeast Asian Nations (ASEAN) have been remarkably strengthened since 1990s. In 1990, the bilateral volume between China and ASEAN accounted for only US$7.9 billion. In 2017, the trade volume reached US$514 billion, 65 times higher than that in 1990 (China has a trade surplus of US$43.4 billion). Starting with a modest amount of investment in the 1990s, China is now one of the main sources of foreign investment to ASEAN, amounting to more than US$ 71.6 billion in 2016. Now China is the largest trading partner and third biggest foreign investor of ASEAN.
China has also applied economic coercion against regional countries that were deemed to act against China’s interests. As an example, the economic friction between China and the Philippines in 2012 occurred at the peak of diplomatic tensions over the Scarborough Shoal in the South China Sea. China tightened quality controls on Philippine fruit and reduced the number of Chinese tourists to the Philippines. Similar practices are found in the case of China’s halt of rare earth elements exporting to Japan in 2010 and China’s economic punishment of South Korea in 2016 over the controversial deployment of Terminal High Altitude Area Defense (THAAD).
China’s Institutional Statecraft
China has proactively implemented institutional statecraft by promoting a China-led multilateralism while upholding the existing norms and rules of other multilateral institutions that are deemed to serve China’s interests. It is argued that China’s approach towards multilateral institutions covers a wide range of choices — a combination of engagement and integration into existing regional and global institutions as well as opposing and undermining these institutions. 
After becoming a member of the World Trade Organization (WTO) in 2001, China’s opening up policy has gained new momentum with a higher degree of liberalization particularly in trade and investment liberalization and investment. China is also actively involved in regionalism as member of the Greater Mekong Subregion (GMS) and a dialogue partner of ASEAN. In 2002, a free trade agreement (FTA) between ASEAN and China was signed — it was subsequently, gradually upgraded with the Agreement on Trade in Goods in 2005, Agreement on Trade in Services in 2007, Agreement on Investment in 2009, and the Upgraded FTA was signed in 2015. In 2003, China became a strategic partner of ASEAN.
GMS is one of the key subregional cooperation mechanisms in mainland Southeast Asia. At the 6th GMS Summit in Hanoi in March 2018, Chinese Foreign Minister Wang Yi reasserted Chinese commitment to deepen subregional integration and connect GMS with BRI. He said regional countries are ‘natural partners’ and ‘primary beneficiaries’ of the BRI. Promoting the alignment of GMS cooperation and the BRI is pertinent to China’s regional economic diplomacy. Wang Yi added,
We should make the policy alignment a reality, tap the full potential of the economic corridors, strengthen economic and trade links and deepen people-to-people bonds, so as to build a more close-knit community of shared destiny in the sub-region and open up a brighter future for the development of sub-region. 
Lancang-Mekong Cooperation (LMC)
In 2015, China proposed its own version of sub-regional cooperation mechanism called ‘Lancang-Mekong Cooperation’ with the aim to promote cooperation under three pillars similar to those of ASEAN Community Blueprints:
- Political security cooperation
- Economic cooperation
- Social and cultural cooperation
LMC serves as one of the important wings of the BRI in connecting mainland Southeast Asia. The 26-point Sanya Declaration in 2016 illustrates the importance of building synergy between BRI and LMC, as well as relevant development programs in the Mekong region, including the Master Plan on ASEAN Connectivity (MPAC). At the second LMC Summit in Phnom Penh held in January 2018, the leaders adopted a five-year action plan from 2018 up to 2020 to build a community of shared future of peace and prosperity, harmonise BRI, ASEAN Community Vision 2020 and other sub-regional cooperation mechanisms.
China’s economic footprint in the Mekong sub-region is preponderant. China is now the largest trading partner of Cambodia, Myanmar, Thailand and Vietnam and the second largest of Laos. China’s trade with these countries in 2017 topped over US$220 billion. China’s investment topped US$42 billion in cumulative terms and rose by more than 20% in 2017. Under the LMC framework, China has pledged to provide concessional loans of up to US$ 1.6 billion and credit loans totaling another US$1.6 billion to promote industrial capacity cooperation and infrastructure construction within the region. Additionally, China has committed another US$ 200 million to fund South-South cooperation and to set up an LMC special fund to provide US$ 300 million in five years to support small- and medium-sized cooperation projects within the region.
Under the economy and sustainable development pillar, LMC focuses on connectivity, production capacity, economy and trade, finance, water resources, agriculture, poverty reduction, forestry, environmental protection, and customs and quality inspection. The cooperation model is government-guided, project-oriented, and multi-stakeholder participation and partnership. There are four levels of working mechanism, namely sectoral working group meeting, senior officials’ meeting, foreign ministers’ meeting, and leaders’ meeting (the leaders’ meeting is the top decision making body).
Belt and Road Initiative (BRI)
At a higher level of regional diplomacy, China proposed BRI in 2013 with the aim to realise the China Dream and National Rejuvenation. It is a grand vision, with strategic ambition, that requires huge resources. However, it is hard to conceptualise. BRI is not yet a strategy. It is an inter-continental cooperation platform with a focus on economic and cultural cooperation. BRI has five areas of cooperation: policy coordination, facilities connectivity, trade and investment, financial integration, and cultural exchanges. The operationalisation of BRI is driven by the principles of openness and inclusiveness, mutual consultation, and mutual benefit or win-win cooperation.
It is a functional cooperation mechanism without clear, strict rules and regulations.
It is a functional cooperation mechanism without clear, strict rules and regulations. So far, the biannual BRI International Cooperation Forum is the top decision making platform, while other regional mechanisms such as China-ASEAN partnership, LMC, GMS, and Boao Forum for Asia serve as platforms for consultation and joint project implementation. Bilateral cooperation, normally under bilateral memorandums of understanding and agreements, is the most important mechanism in concretising the BRI projects.
Some of the key connectivity projects under BRI in Southeast Asia are China-Laos rail project, China-Thailand rail project, Jakarta-Bandung high-speed rail project, and road projects connecting Kunming and Bangkok, Kunming and Hanoi, Kunming and Kyaukpyu, and Phnom Penh and Sihanoukville in Cambodia. Additionally, special economic zones have been constructed and designated as BRI projects such as Thai-China Industrial Park in Rayong (Thailand), Sihanoukville Economic Zone (Cambodia), Long Giang Industrial Park (Vietnam), China-Indonesia Economic and Trade Cooperation Zone (Indonesia), Vientiane Saysettha Development Zone (Laos), China-Indonesia Julong Agricultural Industry Cooperation Zone (Indonesia), Indonesia Morowali Industrial Park, and Malaysia-China Kuantan Industrial Park (Malaysia). However, some of these projects are not bankable and economically feasible.
BRI is generally perceived as new opportunities and engines of growth. BRI provides an important alternative for countries to diversify their sources of growth, particularly within the context of the US-led protectionism. Ideally, BRI also plays a role as saviour and defender of an open global system and a liberal global economic order. Some Chinese scholars argue BRI encourages ‘a possible new globalisation path’, including the exploration of ‘inclusive globalisation’ which may consist of five elements such as inclusive growth, inclusive infrastructure development, inclusive development paths, inclusive participation in globalisation, and cultural inclusiveness.
These two initiatives are not designed to replace, but to complement the existing regional and sub-regional institutions.
China’s economic reasons for pushing the LMC and BRI are:
- Firstly, these initiatives encourage and enable Chinese companies to ‘go out’ by expanding their market access and business networks;
- Secondly, these help relieve overcapacity in major industrial sectors in China;
- Thirdly, the initiatives exert international influence and authority and enhance China’s status and leadership role.
These two initiatives are not designed to replace, but to complement the existing regional and sub-regional institutions. China wants to seek more influence and authority in decision-making at multilateral platforms. It can be argued that these are parts of China’s institutional statecraft.
BRI and LMC are not only China’s push but also Southeast Asia’s pull. Domestic politics greatly affect the implementation of the two initiatives. The ruling elites across Southeast Asia perceive that output legitimacy or performance legitimacy defines the survival of the regime (especially amidst the rising trend of authoritarianism in many countries in Southeast Asia). Complex political-business ties between Chinese entrepreneurs and local politicians partially explain the responses of the ruling elites towards BRI and LMC. However, there are some internal factors that may constraint the realisation of China’s regional projects such as the opposition movement against the establishment, which labels China as a threat to national economic sovereignty, democracy and human rights, and good governance. Coupled with the lack of transparency, grassroots movement and local losers are forming political forces to challenge the presence of China.
BRI and LMC are the nuclei of China’s regional economic diplomacy. They serve as two vehicles or even catalysts in boosting China’s economic footprint in Southeast Asia and gradually in the long term, to realise Sino-centric regional order. Countries in mainland Southeast Asia are going to be under a stronger influence of China compared to countries in Maritime Southeast Asia due to geographic proximity, land connectivity, and the intensity of sub-regional cooperation.
However, China needs to work closely with regional countries to address some of the concerns such as political anxiety caused by power asymmetry and over dependence on China, trade imbalance, anti-China national sentiment (mainly due to some malpractices of Chinese enterprises and over exploitation of natural resources), the questions relating to transparency and quality, a lack of people’s participation and fair distribution of benefits, and a lack of social and environmental safeguards and standards. China needs to understand the local dynamics and be more sensitive to local concerns and grievances.
 Yos Santasombath (2018) Chinese capitalism and economic integration in Southeast Asia. Trends in Southeast Asia №7. Singapore: ISEAS-Yusof Ishak Institute.
 John Ikenberry and Darren Lim (2017) China’s emerging institutional statecraft: The Asian Infrastructure Investment Bank and the prospect for counter-hegemony. Washington DC: Brookings Institution
 Ministry of Foreign Affairs of the People’s Republic of China, http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1547620.shtml
 Liu, W., Dunford, M., and Gao, B. (2018) A discursive construction of the Belt and Road Initiative: From neo-liberal to inclusive globalization. Journal of Geographical Sciences, 28(9): 1–17.
* This post has been published as part of a series of papers that were presented at the LSE Southeast Asia Forum (SEAF) in May 2018. This annual event provides a unique opportunity to engage with Southeast Asia’s most critical issues, network with renowned experts and participate in high-level debate. For more information, please click here.
* The views expressed in the blog are those of the authors alone. They do not reflect the position of the Saw Swee Hock Southeast Asia Centre, nor that of the London School of Economics and Political Science.
*Banner image is from Akuppa John Wigham, Mekong Sunrise.