01 Aug 2018

Lucrative infrastructure projects in East Asia are underway in an attempt to bring the region closer together, but the contest between China and Japan for leadership in the infrastructure sector might derail that process.

As intra-regional trade among East Asian economies grows rapidly, countries within the region are becoming more connected and interdependent. A key driver of regional integration is infrastructure connectivity, according to a recent white paper Infrastructure connectivity and regional economic integration in East Asia: Progress and challenges, written by Dr Yu Hong, Senior Research Fellow at the East Asian Institute, National University of Singapore, in partnership with the Journal of Infrastructure, Policy and Development.

However, while Japan has a world-class reputation for delivering high-tech infrastructure projects in the region, its pre-eminence is now under fierce competition from China who has established itself as the largest trading partner of the Association of Southeast Asian Nations (ASEAN), thanks to its stable economic growth.

It is no surprise that China and Japan are keen to plant roots in Southeast Asia as its population of over 600 million and US$2.3 trillion economy offers immense opportunities. In response to rapid urbanisation in the region, a number of premium projects including high-speed railways have sprung up.

The race for Asian infrastructure financing and construction

China and Japan have been engaged in relentless rivalry since 2010 to not only secure infrastructure projects, but also export their products.

In the light of a stagnating economy, the Japanese government has made the exporting of high-speed railway and related technology a key feature of its policy agenda. Companies trading in the sector have been assured of government assistance, so much so that the Japanese government has taken a lead role in negotiating contracts in the region.

Japan's record in infrastructure development in Asia is second to none. It has established foundations throughout the region with its construction companies, whose cutting-edge technology has made a profound impact in countries such as Thailand, Cambodia, Laos, Vietnam and Indonesia. In contrast, Indonesia has previously raised concerns about the quality of Chinese-built infrastructure.

However, even Japan knows that it cannot underestimate China's regional ambitions. When China announced its plans to target businesses in Asia through the Asian Infrastructure Investment Bank in May 2015, Japan responded by committing US$110 billion to the Partnership for Quality Infrastructure scheme for Asian projects a bid to counterbalance China's rising influence. Rather than undercutting China on price, Japan continues to emphasise its prestigious superiority in technology and safety.

As much as Japan's record of high-quality products cannot be questioned, it appears China may have the upper hand in being the dominant player in the region. For example, China's geographical location borders several ASEAN countries including Vietnam, Laos and Myanmar, allowing China to exert diplomatic leverage while having easy access to local markets.

Furthermore, China has built and managed the world's biggest and longest high-speed rail network for years. This is a testament to the quality and safety of China's high-speed railway system and related train, rail track, control, and operational and maintenance systems.

Perhaps China's greatest advantage is that unlike some privately owned companies with strict budget constraints, its construction companies are state-owned. One of the leading players in Asia is China Railway Corporation, which has unlimited cash funding from the government.

The intense competition between the two states played out when both vied for the Jakarta-Bandung high-speed rail line in Indonesia, which China won in September 2015. It was a momentous victory for China as the project forms part of its grand plan to build the Pan-Asian Railway Network, which would connect several Southeast Asian countries to China.

Is there trouble on the tracks?

China and Japan going head-to-head for regional supremacy without the right checks and balances could cause disintegration in Asia. China's Belt and Road Initiative, which was conceived to promote closer regional economic integration, has been criticised for pursuing projects that deliver political and strategic gains. An example is Mahinda Rajapaksa International Airport in Sri Lanka, which is believed to be commercially unviable and is now incurring losses.

Concerns have also been raised about compatibility as both Japanese and Chinese rail systems use different types of construction. Doubts have arisen about the proposed Kuala Lumpur-Singapore high-speed rail project in terms of efficiency. The Straits Times reported that construction could involve using both Chinese and Japanese materials as Malaysia prefers the former while Singapore is in favour of the latter. In the long run, this could cause connection difficulties and have a detrimental impact.

For full regional integration where all countries collectively reap the rewards of interconnected infrastructure, there needs to be more coordination. There is room to be cautiously optimistic if China and Japan can establish collaboration mechanisms. To implement a robust infrastructure plan across the region that accelerates connectivity, there needs to a shared vision by the powers that be. Dominant powers such as Japan and China will need to work closely together to effectively pool their capital resources for the greater good of the region.

* For a more in-depth look at the infrastructure connectivity in East Asia, read the full white paper, Infrastructure connectivity and regional economic integration in East Asia: Progress and challenges, or visit the Journal of Infrastructure, Policy and Development published by the Lee Kuan Yew School of Public Policy.

The full white paper is available for download at our pop up box.