The Belt and Road Initiative in Southeast Asia: Risks Amid China's Economic Downturn

The Belt and Road Initiative (BRI), launched by China in 2013, represents a comprehensive strategy aimed at developing global infrastructure and expanding trade and economic connections between Asia, Europe, and Africa. As of June 2023, the initiative has been joined by 152 countries and 32 international organisations, with over 200 cooperation documents signed with China. Chinese investments under the BRI have exceeded $1 trillion in the first decade of implementation, with 59% allocated to infrastructure projects and 41% to non-financial sectors. A key indicator of the BRI’s relative success is the creation of over 420,000 jobs in participating countries. Additionally, in the first quarter of 2023 alone, Chinese companies invested more than $5.7 billion in non-financial sectors, representing a 9.5% increase from the previous year.

Over the past decade, the BRI has significantly impacted Thailand’s economy by strengthening its ties with China through major infrastructure projects, including the Thai-Chinese high-speed railway project. These projects have spurred economic growth and modernisation of transportation infrastructure, enhancing Thailand’s role as a regional logistics hub. However, alongside these opportunities, the BRI has also posed considerable challenges. A primary concern has been the risk of debt dependency, leading to a reassessment of financing terms and a decision to fund the rail project through domestic resources. This approach has helped avoid the “debt trap” experienced by other BRI participant countries, alleviating concerns surrounding direct Chinese control of member nations’ strategic infrastructure. Nevertheless, with China’s economic growth slowing, the importance of the BRI is expected to diminish, opening new avenues for partners to engage in the Global Development Initiative (GDI). The GDI, focusing on the digital economy, sustainable development, and food security, aligns with Thailand’s strategic priorities: modernising its economy and attracting investment in high-tech and environmentally sustainable sectors.

The Belt and Road Initiative (BRI) has also significantly impacted Indonesia’s economy through extensive investments in infrastructure and industry. China has invested over $20 billion in Indonesia under 71 projects, including the development of transport corridors and industrial zones. A notable BRI project is the high-speed rail line connecting Java with the eastern regions, with planned investments of $5.5 billion. Chinese firms have spearheaded Indonesia’s efforts to climb the mining supply chain, which is part of the country’s plan to reduce its exports of raw materials, like nickel ore, and instead export refined products, like finished nickel and EV batteries. The first prong of this effort has been enormously successful, although Indonesia’s great uptick in nickel production has led to a collapse in global prices, leaving producers in developed nations, especially Australia and France’s New Caledonia, in dire straits.

The increased reliance on Chinese investments poses risks to economic stability. In 2023, Chinese investments accounted for 9.2% of Indonesia’s total foreign investment, indirectly exacerbating the country’s debt burden. Indonesia is already facing a rising public debt, which has reached 40% of GDP. Given upcoming investments, such as the $32 billion Nusantara capital city project and the $11.5 billion Rempang Island eco-city project, Indonesia must carefully consider debt-related risks to ensure sustainable economic growth.

Since 2013, Chinese investment in Malaysia has surged from 0.8% to 27% of total foreign investment by 2019. However, by 2022, this share had dropped to 4.9% due to a resurgence of investment from other countries and Kuala Lumpur’s growing scepticism of Beijing-backed investments. Key projects include the Digital Free Trade Zone, investments in solar energy, and the Malaysia-China Kuantan Industrial Park, with a total value of $1.6 billion and the creation of around 1,000 jobs. In the telecommunications sector, investments from Huawei and ZTE amount to approximately $300 million. Solar energy investments, such as Longyi’s solar projects in Sarawak, East Malaysia, total $200 million. Despite the significant increase in Chinese investment, Malaysia faces challenges such as limited local resources and a lack of manufacturing infrastructure, which impede the positive impact of these investments. Projects like MCKIP and CRCC have raised concerns about legal and labour standards, leading to public dissatisfaction. Moving forward, Malaysia anticipates a shift towards smaller, albeit impactful, projects, including those in green and digital technologies, as reflected in statements by Prime Minister Dato’ Seri Anwar Ibrahim.

Since the launch of the Belt and Road Initiative, Cambodia has received substantial investments in road, bridge, and other infrastructure projects, contributing to economic growth. One of the largest projects is the $2 billion Phnom Penh-Sihanoukville Expressway, which has reduced travel time between the capital and the coastal city from 5-6 hours to just 2 hours. Another significant development has been the implementation of technologies for cross-border transfers. Using QR codes and payment systems such as WeChat or Alipay, Chinese tourists have increasingly spent money in Cambodia, boosting the service and retail sectors. However, existing challenges include issues of corruption and a lack of transparency in project management. Cambodia faces the need to improve project management practices under the BRI, enhance local employment, and ensure effective oversight.

Laos is actively participating in the Belt and Road Initiative (BRI); of all Southeast Asian nations, Laos is most reliant on Beijing, with some deeming it a Chinese client state. A key BRI project in Laos is the Laos-China Railway, completed in 2021 at a cost of $6 billion, with Chinese state contractors covering 70% of the expenses. The railway, stretching approximately 1,000 kilometres, connects Kunming City in China to Vientiane, significantly expanding logistics networks and reducing transportation costs. Since its launch, the railway has seen substantial growth in traffic: from December 2021 to April 2022, it transported 14.43 million passengers and over 20 million metric tons of cargo. Cross-border cargo volume reached 4 million tons, equivalent to $2.5 billion. In the first quarter of 2023, cargo volumes surged by 274.4% compared to the previous year. Despite these positive outcomes, challenges persist. Laos’s increasing dependence on Chinese investments may heighten debt burdens. Additionally, improving project management and combating potential corruption are essential to maximise economic benefits. The strategic significance of the railway for Laos lies in transforming the country from a landlocked state into a crucial land hub connecting Thailand, Cambodia, Malaysia, and Singapore. While the BRI enhances economic ties and stimulates development, it requires careful risk management and sustainable governance.

The Belt and Road Initiative has profoundly reshaped the economic landscape across Southeast Asia, creating both opportunities and challenges for businesses. On one hand, the influx of Chinese investment has facilitated the development of critical infrastructure, such as high-speed railways, industrial parks, and energy projects, which have collectively bolstered regional connectivity, improved logistics, and fostered industrial growth. This has allowed local businesses to expand their operations and access new markets, enhancing trade routes and reducing transportation costs. Additionally, the creation of jobs in sectors such as construction, manufacturing, and services has boosted local economies, increased consumer spending, and attracted foreign investment.

However, the heavy reliance on Chinese capital has exposed businesses to significant risks. The growing debt burden in many BRI participant countries, such as Laos and Indonesia, has raised concerns about economic stability and the potential for unsustainable growth. Businesses operating in these nations may face increased taxes or regulatory constraints as governments struggle to manage their public debt. Furthermore, the collapse of global commodity prices, as seen in Indonesia’s nickel market, has caused disruption for local producers and industries reliant on exports. As China’s economic growth slows and geopolitical tensions rise, businesses that depend on Chinese investments or exports are likely to face increased uncertainty, necessitating diversification of supply chains and investment sources.

In addition, concerns over transparency, legal standards, and labour practices have led to public dissatisfaction and strained relations between local businesses and foreign investors. This has prompted governments like Malaysia to reconsider their approach to large-scale projects, favouring smaller, more targeted investments that align with domestic priorities in green and digital technologies. Moving forward, businesses across the region will need to adapt to the changing dynamics of the BRI, balancing the benefits of foreign investment with the long-term sustainability of their economic strategies.