China, Japan in race to construct infrastructure, expand influence

BY By Zhang Ailian, Liu Bai | 01-25-2016
(Chinese Social Sciences Today)

Jin Liqun, president of the Asian Infrastructure Investment Bank, said the AIIB’s door has been opened and will stay open to Japan and the United States at a press conference on Jan. 17.

 

In the past two years, China and Japan put forward competing initiatives to increase investment in infrastructure throughout Asia in a bid to expand their influence in the region and promote economic integration.


In 2014, 21 Asian nations signed a memorandum of understanding establishing the Asian Infrastructure Investment Bank (AIIB) proposed by China. Last May, Japanese Prime Minister Shinzo Abe also announced a $110 billion investment plan for infrastructure projects in Asia at the banquet of the 21st International Conference on the Future of Asia.


Because they are strong economic powers in Asia, the competition between China and Japan will reshape the Asian landscape.

 

Vigorous competition
Increasing China’s influence in Southeast Asia is an important component of its Pan-Asian strategy, but it must first establish and facilitate transportation in the region. Due to the complexity of the political environment in Vietnam and Myanmar, Thailand has become China’s primary destination for expanding its economic circle and constructing a trans-Asian railway network. However, Thailand does not depend entirely on China, and it is also reaching out to other possible partners, including Japan.


In the meantime, vast infrastructure investment opportunities in Africa are attracting many countries to the continent. China’s presence in particular has caught the attention of many. China has built 2,233 kilometers of railways and 3,530 kilometers of roads in Africa. In recent years, China has contributed seven times as much direct investment to Africa as Japan.
 

In Europe, the competition between China and Japan is by no means less intense. German railway company Deutsche Bahn AG is poised to purchase train products manufactured by China in the future to expand its pool of global suppliers. At the same time, Japan is actively seeking to participate in the race, and the company has confirmed it as a potential supplier.

 

Cost-benefit analysis
In the highly intertwined world, the game between China and Japan is intended to maximize profits and minimize costs on the basis of taking into account each other’s strategies. It is noteworthy that economic gains are not the only thing at stake. The pursuit of profits is not the ultimate goal of the AIIB and Japan’s new fund. These institutions are designed to support infrastructure construction in developing countries in Asia as a way for China and Japan to further expand their clout in the region.


China and Japan are two of the world’s top economies, so their mammoth foreign exchange reserves are the source of such a vast amount of investment and financing. The difference is that the establishment of the AIIB was motivated by strong demand for infrastructure in emerging Asian economies. It is a multinational cooperation platform centered on China that consolidates more than 50 countries to share the burden of funding, largely splitting costs and achieving an effective allocation of resources. On the other hand, Japan’s new fund appears to be a single-state solution that will be unable to effectively share costs.
 

At the current stage, most members of the AIIB are countries along the “Belt and Road,” and investment in infrastructure construction will increase trade links among these countries. In a way, the AIIB and the “Belt and Road” initiative form an effective interaction.
 

By contrast, Japan, as an island country, cannot build connections with other countries through railways and roads. Though benefiting from infrastructure construction, the new fund may not work much magic when it comes to enhancing trade links.
 

As previously mentioned, China and Japan are more interested in gaining international influence than they are in reaping economic benefits. The China-proposed multilateral financial institution will help boost China’s status as a global power. In turn, China’s impact on the global arena will elevate the AIIB’s position in the world finance system, reshaping the international landscape.
 

As for Japan, the new proposal is mainly a move to counter China’s growing influence in Asia as well as an attempt to defend its leading role in the region. Therefore, it is vital for it to maintain and expand influence through investment projects. 

 

Dilemmas on each side
In addition to competing with each other, the AIIB and Japan’s new mechanism both face many challenges and dilemmas.


First, the China-led AIIB has attracted more than 50 member states, so balancing the needs and capacities of different types of countries will be a thorny task.


Second, compared to developed countries, China’s financial sector is relatively underdeveloped and stunted by an insufficient financial system and market, which will restrain the capital operations of the AIIB.
 

In addition, though China has a vast amount of foreign exchange reserves, the majority of the capital is from open regular accounts. Because capital and financial accounts are not freely accessible, they contribute little to the total reserve. The limited openness of the Chinese economy to international capital markets will take a toll on the investment projects of the AIIB.
 

Moreover, despite the internationalization of RMB, its application cannot stand on par with traditional international currency. According to the Society for Worldwide Interbank Financial Telecommunication, the proportion of the RMB in the international reserve system accounts for about 2 percent, while the top two—the dollar and the euro—account for more than 40 percent and 30 percent, respectively. It is evident that there is much room for improvement in the future. The AIIB is closely linked to the international market, so it will inevitably face the risks caused by fluctuations in pricing, payment and settlement.


Finally, the AIIB represents China’s rising power and international influence, which raises the specter of the “China threat” in the international community. The new fund announced by Japan is a good example of a response to this perceived threat. These concerns will hinder the further development of the AIIB.
 

Japan is one of the world’s most indebted countries, with a debt ratio of more than 200 percent that is disproportionate to its external investment scale, which may cause a dilemma for Japan and a vicious cycle in financing and investment. In the event of an economic downturn, infrastructure investments triggered by foreign competition would put Japan under enormous financial pressure.
 

Due to its limited land resources, Japan depends on an export-oriented growth strategy for economic development. The United States, China and South Korea are Japan’s three largest export destinations, so those countries have a significant say in determining Japan’s imports and exports. Any change in a country’s imports will affect Japan’s exports. Therefore, Japan’s targeted competition with China may put itself in an intransigent dilemma with its major trading partners.

 

Reshaping Asia
The AIIB is an emerging institution set up within a complex and interactive system, altering the stable pattern in Asia. It depends largely on China’s trillions of dollars in reserves, its global trade influence and its status as the world’s factory. However, Japan has an edge in science and technology as well as a strong external financial capacity. The two parties have differentiated strengths that make them pursue different courses in Asian infrastructure investment. If anything, they should be able to meet the needs of different countries and regions.

 

If China and Japan cooperate in the field of infrastructure, they will expand the scope of investment, make use of each other’s advantages and heterogeneous resources, reduce costs, and improve productivity as well as the efficiency of resource allocation.
 

In fact, the competition and struggle for market share between China and Japan in Asia will result in multiple positive effects, such as increasing financial support, boosting regional economic growth and enhancing Asia’s overall capacity to compete in the global economy.
 

At the same time, the establishment of the AIIB supplements the lending of the World Bank, the Asian Development Bank and other international financial organizations, bolstering infrastructure investments in the region.
 

China’s rise has challenged Japan’s position in Asia, breaking the economic ladder Japan has built in Asia based on its economic strength while rocking the international financial system, which has the United States at its core. China is looking to elevate its status, but Japan is determined to maintain its traditional leadership. As a result, there will be competition between the two countries  in many areas.
 

However, in light of the increasingly close trade and investment ties, conflicts in other areas are likely to be minimized. In the interval, mutual checks and balances between the two sides will help avoid the monopoly of one country at the international level, preventing hegemony.
 

The AIIB and Japan’s infrastructure fund are merely a profile of China and Japan’s competition in infrastructure construction. The mutual containment and competition in the economic sector and areas such as science and technology will exist for a prolonged period of time. However, as long as the competition is healthy and effective, it will be conducive to the overall development of Asia.
 

 
Zhang Ailian and Liu Bai are from the Business School of Jilin University.