China's growing its share of Southeast Asia's infrastructure pie

In this photo taken on September 27, 2016, a paramilitary soldier (bottom R) stands in front of a giant flower bouquet that stands on Tiananmen Square to commemorate the upcoming Chinese National Day in Beijing, China. (AFP Photo/Nicolas Asfouri)

China has Southeast Asia in its sights.

Companies from the world’s second biggest economy are increasingly targeting the region for investment, especially into infrastructure. That’s a potential boon for developing economies which need a massive upgrade of roads, rail and ports if they are to meet their economic potential. It also comes amid a wider crackdown by regulators in Beijing on outbound investment.

The Asian Development Bank estimates that emerging economies across Asia will need to invest as much as $26 trillion on building everything from transport networks to clean water through 2030 to maintain growth, eradicate poverty and offset climate change.

That’s where China comes in. Though the share of Chinese foreign direct investment into the Association of Southeast Asian Nations remains relatively small at 6.8 percent of total net inflows in 2015, Chinese corporations are taking up larger stakes in major infrastructure projects across the region, according to Weiwen Ng, economist at Australia & New Zealand Banking Group in Singapore.

China accounted for 14 percent of net FDI inflows into Thailand last year, 8 percent in Vietnam and Indonesia, and 6 percent in Malaysia, according to ANZ. The Philippines received a marginal share of 0.14 percent.

By sector, the bulk of Chinese investments have gone into energy, transport and real estate, ANZ noted. The three sectors accounted for 78 percent of China’s cumulative investment and construction contracts in Asean between 2005 and the first half of 2017.

For China, the opportunities are significant. The 10 Asean members boast some of the world’s fastest expanding economies like the Philippines and Vietnam, with growth rates of more than 6 percent. With a combined population of over 620 million and an economy of $2.6 trillion, the investment potential is huge. By 2020, the region will have the world’s fifth largest economy, the World Economic Forum predicts.

China’s mammoth Belt and Road Initiative will also further enhance its footprint in the region. Projects that may receive funding include a new high-speed rail line that runs from southern China through Laos to Thailand’s industrial east coast, along with rail projects in Laos, Indonesia and Thailand.

Still, the investment isn’t without risk.

“While the host countries stand to benefit from increased investment from China, it further increases the concentration risk given that ASEAN is already heavily exposed to China via trade and tourism flows,” Ng wrote in a note. – Bloomberg