Power play in Asia leads to a shift in economic and political allegiances

Asia-Pacific's post-World War II US-sponsored regional security umbrella is being seismically altered by the rise of China as an economic and military superpower.

China's growing influence is a natural consequence of rising confidence in its unique economic and political model and a willingness to export it, encouraged by a potential power vacuum left in the wake of a withdrawal by the West. President Xi Jinping has seized the opportunity to fill the void left behind by the Trump administration's isolationism exemplified by America retrenching from its commitment to Asian (and global) free trade and the decades long implicit US military security guarantee in Asia.

The geopolitical tectonic plates are shifting. While tension is diffusing in the Korean peninsula, it is escalating in the South China Sea – witness the close naval encounters between Chinese and other blue-water and regional navies as the latter press home their freedom of navigation rights under the United Nations Convention on the Law of the Sea (UNCLOS).

The pinnacle of China's growing influence is the projection of its financial firepower. The strategy is multifaceted yet tightly coordinated. The November 2015 decision to include the Chinese renminbi as one of the (now five) currencies that form the IMF's Special Drawing Rights (SDR) basket effectively internationalizes the renminbi as a reserve asset, allowing China to seek the settlement of a growing component of international trade in its own currency.

The Belt and Road Initiative is transformational, ...

By far the most potent manifestation of China's economic heft beyond its borders is President Xi Jinping's Belt and Road Initiative (BRI), a recreation of the maritime and overland Silk Road routes using debt-financed infrastructure to integrate supply chains stretching from China into Eurasia, thus connecting two thirds of the planet's population.

A 2017 study by the Asian Development Bank estimates that to maintain its growth momentum, eradicate poverty, and respond to climate change, Developing Asia will need to invest USD 26 trillion in infrastructure between 2016 and 2030, spending on average USD 1.7 trillion annually.

The BRI answers this call. With the December 2014 launch of the Silk Road Fund, the Chinese government mobilized an initial USD 40 billion of its foreign exchange reserves to deploy into Eurasian infrastructure investment, supported by other financing vehicles available under its jurisdiction. Moreover, the Asian Infrastructure Investment Bank (AIIB), launched by China in October 2013 as a counterweight to the suite of established development banks such as the World Bank and Asian Development Bank, is increasingly being drawn into BRI project financing.

A study by the China-Africa Research Initiative at the Johns Hopkins School of Advanced International Studies identifies the scale of China's lending to 56 African nations – cumulatively USD 143 billion since 2000, facilitated principally by the Export-Import Bank of China and the China Development Bank. By sector, close to a third of loans were directed toward financing transport projects, a quarter toward power and 15% earmarked for resource mining including hydrocarbon extraction. Just 1.6% of Chinese loans were dedicated to the education, healthcare, environment, food and humanitarian sectors combined.

Just seven countries – Angola, Cameroon, Ethiopia, Kenya, Republic of the Congo, Sudan and Zambia – accounted for two thirds of total cumulative borrowing in 2017 from China. Angola reached a loans-for-oil settlement, with Beijing tying the country's future oil production to shipments to China in order to service the country's burgeoning infrastructure debt. According to an April 2018 IMF study, about 40% of low-income Sub-Saharan African countries are now in debt distress or assessed as being at high risk of debt distress including Ethiopia, the Republic of the Congo and Zambia.

… but has lately been attracting controversy

Nevertheless, Asia has seen some losses in economic sovereignty related to China's BRI financing. In Sri Lanka, difficulties servicing USD 8 billion of infrastructure-related borrowing from China led to the handing over of a controlling equity stake and a 99-year operating lease for the country's second-largest port at Hambantota to a subsidiary of a Chinese state-owned enterprise in December 2017.

Thus some political pushback on China's showpiece foreign policy initiative has begun. On being elected Prime Minister of Malaysia in May 2018, Mahathir Mohamad announced the deferral or cancellation of USD 22 billion worth of projects, including the 700-kilometer-long high-speed East Coast Rail Link, stating that "there is a new version of colonialism happening."

Incoming Pakistani Prime Minister Imran Khan's government has also announced a review of BRI-related projects.

China's rising hard power is shifting regional military alliances

In PPP-adjusted current US dollar terms, Chinese military spending is now close to three quarters of that of the USA, almost double that of India, and more than double that of the rest of Asia combined (excluding India). This is reflected in a strategic build-up of the Chinese People's Liberation Army (PLA) Navy assets. Moreover, China's militarization of the South China Sea to enforce its claim of maritime sovereignty in direct contravention of the UNCLOS (ratified by China in 1996), demonstrates China's growing assertiveness in projecting its newfound regional hard power.

In the midst of this jostling for regional supremacy, entrenched historical allegiances between the minor Asia-Pacific powers are shifting to secure their best interests.

The Philippines has buried the hatchet over its territorial dispute with China concerning the Spratly Islands, receiving significant inbound investment in the process and thus damaging a generations-old alliance with the USA. Paradoxically, Vietnam is leaning toward embracing the USA to provide security for its littoral fishing and mineral extraction interests in the South China Sea.

Other nations are vying to remain non-aligned despite their natural maritime claims. Malaysian Prime Minister Mahathir Mohamad stated that he would follow a neutral foreign policy not favoring any country to maintain access to as many markets as possible.

This is a short version of an article that was published in the "Asia in Transition" report by the Credit Suisse Research Institute looking at the changing nature of Emerging Asia.