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Background Brief China Makes Economic Inroads in Southeast Asia Carlyle A. Thayer October 9, 2013

[client name deleted] Recently, China has taken new steps to expand its influence in Southeast Asia. We request your assessment of the following issues: Q1. The Chinese President Xi Jinping just visited Malaysia and Indonesia- one of the most crucial members of ASEAN and achieved some significant results: China established the comprehensive partnership with Malaysia, reached a swap deal to support the value of Indonesia s rupiah, and suggested the idea of establishing the Southeast Asia infrastructure bank. What is your assessments of these developments? What are Chinas main motivations? ANSWER: China is using its economic wealth to promote its political influence in key Southeast Asian states. For example, China and Indonesia signed a 100 billion yuan currency swap deal to support Indonesias rupiah that has fallen in value in recent times. Chinas growing economy needs access to overseas resources and markets and Indonesia and Malaysia are important. China-Indonesia two way trade has increased from $16.5 billion in 2005 to $66.2 billion in 2012. China-Malaysia two way trade reached $94 billion in 2012 and the two sides have set a target of $160 billion by 2017. It is important, however, to place Chinas economic relations with Indonesia and Malaysia in a regional context. China and ASEAN are comprehensive strategic partners and both are working to expand trade through the China-ASEAN Free Trade Agreement. During President Xis visit relations with both Indonesia and Malaysia were upgraded to comprehensive strategic partnerships. Earlier this year Vietnam upgraded its relations with Indonesia to a strategic partnership (and with Thailand and Singapore as well). Q2. One of the reasons China has been able to increase its influence recently in Southeast Asia is because of the deadlock in the US Congress. This may undermine the US commitment to pivot towards Asia. Can ASEAN continue to rely on the US to balance against Chinas power? ANSWER: There are two answers to this question. If the U.S. Congress does not raise the debt borrowing limit, there will be severe consequences for the U.S. and global

2 economy. This will impact on many areas including defence and funding for the rebalancing towards Asia. The U.S. will lose political and economic influence in Southeast Asia but the U.S. will retain its military dominance for over a decade to come. If the U.S. Congress approves an increase in the debt borrowing limit the immediate crisis will be over. But the U.S. will continue to experience domestic turmoil and this will impact on the Obama Administrations ability to give Southeast Asia the priority attention it deserves in the short term. If the U.S. economy continues to grow, as expected, the U.S. will emerge as a stronger economic player in Asia. Even President Xi Jinping called on the U.S. to end its political squabbling and get its economy in order. China needs the U.S. to grow so it can continue to sell to the United States. The answer to this second question is that the Obama Administration will continue to give priority to Asia and this in turn will mean greater U.S. commitment to ASEAN. Q3. How should Vietnam respond to these developments? ANSWER: Vietnam should work within ASEAN to ensure that economic integration with China continues on an equitable basis in which all sides benefit, and special attention is paid to the developing members of ASEAN. Vietnam should also work to strengthen ASEANs three communities: political-security, economic, and sociocultural. An ASEAN Community that grows in strength will have better bargaining power with China than a weak ASEAN. Vietnam must also reform its economy and stop delaying the reform of state-owned enterprises. Vietnam must also tackle entrenched large-scale corruption. And Vietnam should reach agreement with other partners, especially the United States, and join the Trans-Pacific Partnership. Vietnam should also negotiate with Malaysia to raise their bilateral relations to strategic partners and adopt a long-term plan of action. Vietnam cannot easily overcome its massive trade deficit with China. That is why it must maintain diversified economic relations with the other centres of economic power, in addition to the U.S., Europe, Japan, South Korea, India. And Vietnam should continually strengthen its institutions so that no external country can use its economic relations as leverage to influence Vietnam politically. In summary, Vietnam must promote international integration in order to strengthen itself, it should cooperate on economic matters for mutual benefit, and Vietnam should struggle to maintain its political independence.

Suggested citation: Carlyle A. Thayer, China Makes Economic Inroads in Southeast Asia, Thayer Consultancy Background Brief, October 9, 2013. All background briefs are posted on Scribd.com (search for Thayer). To remove yourself from the mailing list type UNSUBSCRIBE in the Subject heading and hit the Reply key.

3 Thayer Consultancy provides political analysis of current regional security issues and other research support to selected clients. Thayer Consultancy was officially registered as a small business in Australia in 2002.

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