Charming the neighbors

China's strategy to demonstrate its potential to become a global and regional player is more pronounced in Southeast Asia than anywhere else. Over the last few years, Beijing has stepped up its outreach campaign in the region. In 2003, China became the first non-ASEAN member to formally accede to the Treaty of Amity and Cooperation of the 10-member Association of Southeast Asian Nations (ASEAN).

Another milestone was reached in 2004, with the signing of the China-ASEAN Free Trade Agreement. Last July, in accordance with the agreement, China and the ASEAN members – Singapore, Thailand, Indonesia, the Philippines, Malaysia, Vietnam, Brunei, Myanmar, Laos and Cambodia – began to reduce or remove tariffs on 7,000 products. They want to create the world's largest free trade zone by the end of the decade.

Now, in the afterglow of the first-ever "East Asian Summit" held in December, China is on course to draw ASEAN deeper into its orbit. The regional trade, economic and security summit attended by China, Australia, India, New Zealand, Japan, South Korea and ASEAN was billed as a step towards building a trading power to counter the US and EU. Already, ASEAN has much invested in China's economic ascent. Foreign direct investment from China to ASEAN surpassed US$220 million in 2004, while mainland-bound FDI from Singapore, Malaysia, Philippines and Thailand totaled US$2.8 billion over the same period. Trade between the two sides reached US$106 billion last year, growing an average 37% between 2001 and 2004.

Goodwill gestures
In the interest of amassing good will, China for the moment seems happy to run a US$20 billion trade deficit with the bloc, which supplies the manufacturing juggernaut with raw materials and precision machinery. During his Southeast Asian tour in 2005, Chinese President Hu Jintao urged yet deeper economic ties, setting a US$200 billion target for Sino-ASEAN trade by 2010. Clearly, China is using economics as its calling card to court the southeast states, and experts say it's a smart play.

"It's a good strategy and puts China in a good position," said Sheng Lijun of the Singapore-based Institute of Southeast Asian Studies. "By stressing economic relations, there's less resistance. If China were to emphasize political relations rather than trade and economics, then ASEAN would be suspicious."

Beijing scored points during the 1997 Asian financial crisis for resisting pressures to devalue its currency when those of its neighbors were hitting rock bottom, a move that would be capped later by its US$1 billion bailout loan to Thailand. Hu Jintao has promised that China will "Stay on the path of peaceful development " and press ahead with the friendly exchanges and mutually beneficial cooperation with all ASEAN countries." Visiting Brunei, Indonesia, the Philippines and Vietnam in 2005, Hu pledged aid, loans and investment, signing at least 30 agreements ranging from a US$1 billion loan for Vietnam's power plant projects to a US$950 million investment to redevelop a Philippine nickel mining company.

A history of distrust
Despite China's increasingly sophisticated diplomacy, Southeast Asian states continue to regard Beijing with a degree of unease, as relations between them have seen rough patches over the years. Vietnam, China's longtime rival, has been under episodic rule by the latter through the centuries. In Indonesia and Malaysia, discrimination against ethnic Chinese has been widely documented. These countries are wary of China's expansionist aspirations of the past and fear its economic hold over the region could foreshadow its rising military clout in the area.

"What I see are problems and uncertainties based on the relations between those countries," said Anthony Reid of the National University of Singapore Asia Research Institute. "We can expect a good deal of anxiety among China's neighbors because the relationships have not been particularly stable or understood, and because China is famously rising. Anytime a new major superpower rises and seeks a bigger place at the table is always a time of stress. It's a difficult time and people have to be careful."

Professor Ian Holliday, director of the Southeast Asia Research Centre at the City University of Hong Kong, agrees: "While Southeast Asian countries want to align with China economically, there's a concern that China is now present in the region in a way that it wasn't before," he said.

One of the most contentious issues between China and many of its Southeast Asian neighbors is the territorial dispute over the oil-rich South China Sea, which also accounts for 25% of the world's shipping and half of its seaborne oil passes. Over the years, China has locked horns with Brunei, Malaysia, the Philippines and Vietnam over the Spratly Islands and with Indonesia over the Natuna Islands. Recent efforts to resolve the maritime dispute have underscored China's efforts to make good on its rhetoric of stability and cooperation. In November, China, the Philippines and Vietnam completed the first phase of their joint effort to survey oil and natural gas deposits in the disputed waters.

Still, anxieties will linger, if not over the South China Sea then in other areas, as even the economics card being played by China has its limits. Though China has become an engine of economic growth for Southeast Asia, some view it as unwelcome competition. Malaysians and Indonesians, for example, complain that they have lost manufacturing jobs in industries ranging from textiles to footwear. Rattan furniture makers say the Chinese have taken a big bite out of their export share.

Powers in balance
Beijing's "charm offensive" in Southeast Asia has left the US questioning its strategy for the region. Fearing it has focused too narrowly on the region's terrorism problems to the exclusion of economic development and political stability, Washington has been keen to further cement relations with its longtime ally the Philippines. It has also sought greater military cooperation with Singapore and recently committed to modernizing Indonesia's military. Fortunately for the US, its reliable ally Japan has been active in the southeast and is the top aid donor to the bloc, providing 60% of its development assistance.

For China and the US, global and regional interests are linked in the area – and ASEAN members know better than to take sides. Instead, they are hedging their position by maintaining relations with all the heavyweights: China, the US, Japan and India. Despite its multiple allegiances, ASEAN knows it has no choice but to accept China's overtures. "Everyone knows that you have to be friendly with China," Holliday said. "It's such a big beast."

Tensions over China's growing role in the Southeast Asia are to be expected, says Sheng, but it's "comparatively better than several years ago mainly because of trade between the two sides." So, with politics a question mark for now, the economic path appears much less muddled in comparison. And the degree of success China achieves in building its influence in Southeast Asia could be a litmus test of its ability to execute on foreign policy. "China is using the relationship [with Southeast Asia] to promote its relations with other countries," Sheng said. "It wants to use this as a showcase of its success to build its credibility. There will be potential conflicts in trade, but China will take measures to resolve them. Political intentions are important, and so far the signs are auspicious."

At a Glance: ASEAN's building blocks

BRUNEI:
China has become one of the oil-rich country's best customers, buying about 20,000 barrels of oil per day, or 10% of that country's daily oil production capacity. Trade between the two has risen in lockstep, increasing from US$20-30 million per year in the 1990s to US$300 million in 2004.

BURMA:
Key to China's strategy to secure access to naval routes to Middle East oil supplies, as well as being Beijing's foot-hold in the Indian ocean, much to India's concern. While other nations have imposed sanctions on Burma, China remains the country's main economic, political and military supporter. Chinese Vice Premier Wu Yi pledged to expand trade with Burma to US$1.5 billion in 2005 from its current level of approximately US$1 billion.

CAMBODIA:
Since early 1994, Beijing has injected about US$300 million in aid, along with a US$217 million investment into timber, textiles, and food processing industries in 2004. China is the largest foreign investor in Cambodia, according to the Phnom Penh-based Center for the Development of Cambodia.

INDONESIA:
Hu's 2005 visit to Indonesia yielded US$300 million in loans and an agreement to increase bilateral trade to US$20 billion within three years. Trade between China and Indonesia reached US$13.48 billion in 2004, up 31% from 2003. However, issues such as Beijing's South China Sea sovereignty claims don't sit well with Indonesians. There is also resentment for China's support of the Communist Party of Indonesia, which was blamed for an attempted coup in 1965 that cost 500,000 lives.

LAOS:
After a low point in 1979, when the Chinese were reportedly training Hmong resistance forces, relations were normalized in 1989. Chinese aid has paid for road construction in the northern provinces of Laos and Chinese entrepreneurs are slowly venturing into the country.

MALAYSIA:
Beginning in the late 1980s, bilateral trade climbed dramatically, and in 2002, Malaysia surpassed Singapore as China's largest trade partner, racking up US$14.3 billion in two-way trade. In May 1999, Malaysia and China signed the "Framework for Future Bilateral Cooperation" agreement covering comprehensive economic cooperation in dozens of areas from banking to education to technology.

PHILIPPINES:
Relations have been cautious due to Beijing's alleged support of New People's Army, the guerilla arm of the country's communist party formed in 1969. However, last July China pledged loans and investments to the Philippines worth US$1.6 billion. Bilateral trade has increased by an average 26.6% a year since 2000 with the Philippines having a US$2.16 billion trade surplus.

SINGAPORE:
While Beijing may not appreciate the island state's cozy relations with Washington, Singapore is China's seventh-largest trade partner and its eighth-largest investment source in the world, pouring in at least US$2 billion in FDI every year since 2000. Singapore state investment arm Temasek has taken multi-billion dollar stakes in Bank of China, China Construction Bank, and China Minsheng Bank.

THAILAND:
A shared interest in limiting Vietnamese influence in Cambodia, and Beijing's aid to Thailand during the 1997 financial crisis has helped strengthen ties. Thailand is developing logistics operations with China in anticipation of the ASEAN-China Free Trade zone in 2010 while infrastructure projects linking China's Yunnan province with Thailand are also in the works.

VIETNAM:
Despite confiicts in the recent past, China is the largest market for Vietnam's exports and its biggest source of tourists, with 778,000 visitors in 2004, up 26.5% year-on-year. In 2005, bilateral trade between Vietnam and China rose 29% year-on-year to US$6.2 billion in the first nine months, on track to exceed 2004's US$7.19 billion. China has set an annual bilateral trade target of US$10 billion before 2010.