Japan and China are racing to invest in Asia

Such Geopolitical wrangling between the economic powers can also be beneficial for emerging countries. If it doesn’t work out well with one funder for infrastructure projects, you can turn to the next. Indonesia’s President Joko Widodo made use of this luxury.

China is showering the region with money as part of its huge “One Belt, One Road” infrastructure program. But the great power has just sent its coast guard and a small fishing fleet to a sea area that also claims Indonesia. And so the angry Widodo asked China’s rival Japan last week for money for fishing projects on the Natuna Islands. “I would like to invite Japan to invest in Natuna,” he said, according to media reports, to his guest, Japan’s Foreign Minister Toshimitsu Motegi.

If Widodo has its way, Japan would top up an investment program for ports and fish markets in the region, which construction has not even begun. And it is not out of the question that the Japanese government will comply. After all, Motegi stated that Japan and Indonesia shared serious concerns over China’s attempts to use force to change the status quo in the South China Sea.

The episode highlights the increasing rivalry between China and western states in Asia and also Africa. Until a few years ago, Japan was the undisputed number one donor in Asia, either directly or indirectly with the Asian Development Bank (ADB) initiated by Japan. But then the Middle Kingdom opened its bulging treasury to buy itself into a great power.

In 2013, the Chinese government announced that it would build a new “Silk Road” with large infrastructure projects. “One Belt, One Road” was born. Unlike the historic Silk Road, China wants to connect with Europe not only on land, but also by sea. In addition, Africa is also in the sights. China’s copy of the ADB, the Asian Infrastructure Investment Bank (AIIB), followed in 2016.

Not only is money needed for infrastructure

Both ideas were well received. Because the region needs more money for traffic routes, schools, hospitals and other infrastructure than was previously available. But it’s not just about infrastructure, it’s also about geopolitical influence: the control of resources, military and civil ports, rail links and governments.

Japan therefore did not join the AIIB, but countered from the start. As early as 2013, Japan’s Prime Minister Shinzo Abe gave the order to stop his country’s development aid for the new rival. And so by 2016 the strategy of “high quality infrastructure” and the “free and open Indo-Pacific” emerged. Japan’s most important sea routes run through it.

For Purnendra Jain, economics professor at the Australian University of Adelaide, the reason is clear: “The impetus to act comes mainly from China.” The new rival seemed to be gaining the upper hand with its “checkbook diplomacy”. And with every China victory, Japan lowered previous restrictions and increased the sums.

For Jain, 2015 marks a major turning point in Japan’s strategy. At that time, the country lost the construction of the Indonesian high-speed train to China, which tied fewer requirements to the order. After that Japan gave up its sanctions against India in order to at least block its technology there.

In addition to an economic impact, this naturally also has a “strategic dimension,” says Jain, who is currently traveling to India. Japan has recognized that by selling hardware, the country is creating the ability to control the construction of infrastructure in the region, or at least to be part of it. And this ability costs Japan a lot.

Focus on financial sustainability

With its promise of quality, Japan wants to ensure that projects are primarily financially sustainable, i.e. that the countries can manage and finance the projects themselves. And because quality and influence are known to cost money, Abe nearly doubled export aid in 2017 – to $ 200 billion a year.

For Tobias Harris from security consultant Teneo Intelligence, this combination of money and concept pays off: “Japan remained an important alternative source of finance for the financing of development projects.” Despite China’s “Belt and Road” initiative and the AIIB. In addition to China’s aggressive territorial claims in the South China Sea, many countries are also frightened by China’s sometimes aggressive investment policy, the “debt trap diplomacy”.

The Hambantota port in Sri Lanka is a prime example. China used a payment crisis in the country to lease 70 percent of the shares in the giant port for 99 years in return for a payment of 1.1 billion dollars. China thus controls a location that is not only on the most important waterway in the region, but also in the sphere of interest of its regional rival India.

But the race for the developing countries is no longer a duel, but a mix of cooperation and competition from many powers. For example, Japan has been officially cooperating with many “Chinese” projects since 2017, says Martin Schulz, economist at the Fujitsu Economic Research Institute. Because both sides complemented each other. “China’s companies build the ports, Japan’s provide the ‘smart infrastructure’ such as logistics and software,” says Schulz.

But Japan quickly noticed that these projects were also being carried out via China, says economist Schulz. “Japan therefore looked for an alternative and found it in the European Union (EU).” In September 2019, Japan and the EU decided to cooperate in “third markets”, specifically in the Balkans, Eastern Europe, Central Asia, Africa and the Indo-Indian pacific area. It is difficult to get European and Japanese companies to work together, says the expert. German medium-sized companies would then have to negotiate with large Japanese corporations, said Schulz. “But there is potential in cooperation.”

More: The head of the Asian Development Bank expects weaker growth in China and the USA. The Japanese recommends Beijing to build a better social system.

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