Southeast Asian leaders gathered in Bangkok last weekend for the 34th summit of the Association of Southeast Asian Nations against a backdrop of rapidly slowing global trade.
If they are to realize Asia's untapped potential for self-sustaining growth, they need to grasp the opportunities represented by China's revamped Belt and Road Initiative to boost trade, encourage inward investment, and grow their economies.
Southeast Asia is the natural test bed for BRI 2.0, the new version of Beijing's vast infrastructure program, that was launched by Chinese president Xi Jinping at the Belt and Road Forum in April.
The region has everything to play for. But if it is to reap the full benefits of China's contribution to hard connectivity, it will have to bring to the table its own contributions to soft connectivity, including accelerating market integration and reducing trade barriers.
Southeast Asia has millennia of shared history and shared trade with China, the advantage of proximity, and will benefit from the fact that as the phenomenon of globalization comes under fire from multiple directions, closer regional cooperation represents the best way forward.
China's next phase of export growth will see it moving up the value chain, producing more sophisticated products appealing to more affluent customers. But to do this, two things need to happen: it needs to free up labor and other resources; and it needs to develop new customers for its new products to compensate for the lackluster growth in trade with its traditional Western markets.
There are multiple aspects to BRI, but from a Southeast Asian perspective two stand out. The first is the one-off benefits of the construction of the hardware of communications: the roads, ports, railways, and digital spines that will knit the broader Asian region together.
There has been a wariness to date among some countries about accepting Chinese BRI offers, much of it generated by the apparent opacity of some of the deals that were signed in earlier years. President Xi addressed the issue head at the forum, promising "Everything should be done in a transparent way and we should have zero tolerance for corruption."
China has a vested interest in delivering on President Xi's commitment.
The Asian Development Bank estimates that Asia needs to invest $1.7 trillion a year in infrastructure to maintain its growth. To date, some 80% of the financing for Belt and Road projects has come from Chinese policy banks and, as deep as the mainland's pockets are, they cannot match the scale of the ambition that BRI represents.
With BRI 2.0, China's contribution is best seen as seed capital that can be leveraged to attract commercial investment from both inside and outside the mainland, including international financial institutions, banks and international bond markets. Yi Gang, the Governor of the People's Bank of China, told delegates at the forum that they would "build an open, market-oriented financing and investment system." This recognizes that if Beijing is to successfully mobilize international capital to realize its dream, BRI projects must generate a commercial return, conform to international standards of transparency, and adhere to global best practices for governance and sustainability.
This would also go a long way to reassure critics in recipient nations, who have argued that in some cases opaque deals have been overpriced and of debatable commercial viability. Although no substantial new deals have been announced since the Forum, Beijing's willingness to renegotiate the terms of a railway project in Malaysia and to continue revising the structure of a similar deal being offered to Thailand demonstrate a new flexibility and responsiveness to concerns in recipient nations. China has also committed to sourcing significantly more labor and resources in host countries.
Beijing has not expressed any clear preferences for deal structure under the new dispensation, but a new focus on encouraging for third-party financial participants has opened the door for a wide range of potential solutions, including commercial funding, public-private partnerships, third country policy bank loan guarantees, and joint government investment funds.
Chinese government guidelines on the financing of BRI signed by countries as varied as the U.K., Switzerland, and half the members of ASEAN lay out a shared role for governments, policy banks, and crucially, the private sector. Private sector involvement will help ensure that projects conform to global standards of viability, transparency and governance.
If BRI can implement these standards, it will represent a rare opportunity for financial markets, particularly in Hong Kong and Singapore, to help structure the financing of a global infrastructure revolution.
The second standout is the long-term benefits that BRI investments will generate in destination countries. With BRI, China is actively encouraging supply chain diversification, particularly the sort of high-volume labor-intensive industries it wants to replace with new high-tech production.
This presents an opportunity not just for regional companies looking to grow, but also international companies which might at one time have naturally gravitated toward China as a production base, but are now willing to consider alternatives.
For regional, Chinese and international investors, China's ever-deepening engagement with Southeast Asia can deliver an economic boost that will ripple out across the region. Growth fostered by BRI has the potential to accelerate the expansion of the region's middle class, increasingly changing the target of investment in manufacturing from exports to local consumption.
But Southeast Asia should do its bit to benefit fully from these opportunities. The region will be more attractive to investors if it can restart the stalled ASEAN integration program begun more than a decade ago.
With a combined population of some 650 million people and $2.4 trillion in GDP, Southeast Asia is an attractive market and a good location for distributed supply chains, but is held back by regional tariff and non-tariff trade barriers.
These drive up the costs for companies wanting to move from component manufacturing to the next stage of the supply chain or to produce finished products for local consumers. The downside of removing barriers is limited given that the variation in economic development within the region means that the different economies are unlikely to be competing directly for the same business. The upside is potentially vast: a recent International Monetary Fund paper estimated that removing trade barriers in Asia would increase intra-regional imports by 76%.
BRI 2.0 represents an unparalleled opportunity for Southeast Asia to enter the next phase of growth. The new commitment to transparency promises a new era of visible partnerships that benefit all parties.
David Liao is the Chief Executive Officer and President of HSBC Bank (China).