China’s slowdown exposes ASEAN reliance on Beijing

Domestic challenges in China are leading to a modest rethink of Southeast Asia’s economic and geopolitical strategies.

Children at a China-ASEAN Expo in September 2024 view models of future low-carbon ASEAN cities
Children at a China-ASEAN Expo in September 2024 view models of future low-carbon ASEAN cities that could be built if Beijing continues funding infrastructure projects internationally. China’s domestic economic challenges, however, may crimp Beijing’s funding for big-ticket projects going forward. © Getty Images
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In a nutshell

  • China’s slowdown weighs on ASEAN via trade, investment and tourism
  • ASEAN diversification, regional partnerships aim to reduce reliance on China
  • Global powers like the U.S. seek to deepen ties with Southeast Asian states
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China’s economy is experiencing a downturn that is being felt by households, businesses and state entities alike. Although the country remains a significant contributor to the global economy – ranking as the second-largest economy with a gross domestic product (GDP) of $14.7 trillion in 2024 – its decline creates broader risks, particularly for the countries of Southeast Asia.

Beijing grappling with a slowdown

Several key issues are undermining China’s economic stability. Beijing’s multiple domestic challenges include deflation, a weakening real estate market, rising youth unemployment and significant local government debt. Moreover, consumer confidence is plunging. In an index ranging from zero (no confidence) to 200 (full confidence), consumer confidence fell to 86 in July 2024. This figure is barely above its all-time low of 85.5 recorded during the pandemic in 2022, having peaked at 127 in February 2021.

A vital driver of growth in China for much of the past two decades, the property sector is now a significant contributor to the downturn. In 2020, some 70 percent of household wealth was linked to the housing market, with 80 percent concentrated in major metropolises, such as Shanghai and Beijing. Additionally, the property sector accounted for more than 25 percent of the country’s GDP. The ramifications of the “zero-Covid” policy restrictions further exacerbated the problem of mounting local government debt. At the same time, Beijing’s crackdowns on technology companies through increased regulation also contributed to the nation’s current economic difficulties.

Since China’s embrace of economic reforms kicked off in 1978, GDP has, on average, grown by about 9 percent per annum. However, the average growth rate has declined in recent years. In mid-January, Chinese authorities announced that GDP growth in 2024 was 5 percent, in line with the government’s target. Yet some observers believe that China’s actual GDP growth is well below this level. Such sentiment, challenging Beijing’s official line, is something that President Xi Jinping seeks to muzzle as his government aims to prop up the economy. In September 2024, Beijing announced its largest economic stimulus package since the pandemic to drive the desired future growth. The government has indicated that more fiscal measures are on the way.

ASEAN and China’s economic outlook

The Association of Southeast Asian Nations (ASEAN) is an international intergovernmental organization comprising Indonesia, Vietnam, Laos, Brunei, Thailand, Myanmar, the Philippines, Cambodia, Singapore and Malaysia. These countries have good reason to be concerned about China’s slowing economy. It is no secret that Beijing has heavily influenced the development of the regional bloc. With a trade volume of $722 billion in 2022 and an estimated $911.7 billion in 2023, China is the regional group’s most important partner.

A downside is that countries accepting investments are often saddled with huge debt and at risk of becoming vassal states.

China’s economic influence on ASEAN is evident through its infrastructure funding and foreign direct investment (FDI). Through the Belt and Road Initiative (BRI), China has been investing in the region’s critical infrastructure, including railways and highways. The BRI, which started in 2013, is a large-scale global infrastructure development scheme led by China. It aims to establish new trade routes, reduce the number of intermediaries and connect China to the rest of the globe. Between 2013 and 2022, Beijing invested $679 billion in infrastructure initiatives in nearly 150 countries.

These projects have had a pronounced effect on ASEAN countries, positively boosting infrastructure and digital connectivity in the region. However, a downside of the arrangement is that countries accepting the investments are often saddled with huge debt and at risk of becoming vassal states. China objects to its foreign relations being characterized as “debt trap diplomacy,” which refers to recipient countries struggling to repay the loans. Nonetheless, this label persists.

China in Indonesia

Amid these economic dynamics, infrastructure development remains a pivotal area of focus. A significant project under the BRI is the Jakarta to Bandung high-speed rail in Indonesia, which has been operational since October 2023. By July 2024, it had already serviced as many as 4 million passengers, boosting the local economy and promoting tourism through efficient transportation.

Dancers in dragon costumes perform the lion dance at the Jakarta Bandung High Speed Rail station
Dancers in dragon costumes perform the lion dance at the Jakarta-Bandung High Speed Rail station when it celebrated the Chinese New Year of the Dragon in October 2024. © Getty Images

The economies of both nations are becoming increasingly interconnected as they participate in international collaborations, such as the Regional Comprehensive Economic Partnership (RCEP) and the ASEAN-China Free Trade Area. Like China and other Southeast Asian countries, these two nations have disagreements on maritime issues and maintain their own sovereign currencies, among other divergencies.

China is a major contributor to Indonesia’s FDI, investing over $7 billion in 2023, representing almost 15 percent of the total inflow. Furthermore, Indonesia is a key exporter to China; the value of goods and services sent to China amounted to $22 billion in the first nine months of 2024, making it the country’s foremost export destination and accounting for over 25 percent of total exports.

While there have been positive historical developments, the economic difficulties Beijing now faces may result in diminishing demand for imports from Jakarta, forcing Indonesia to urgently explore options for major alternative export markets.

Of course, Indonesia is not the sole participant in the ASEAN bloc, nor is it the most exposed to a Chinese slowdown.

Will China keep financing Cambodia?

Cambodia, known for its strong affiliations with China, is also a focal point for Chinese infrastructure investment through the BRI. Consequently, the ramifications of China having less cash available for infrastructure projects abroad are unavoidable. Despite China’s vow to help vital projects, questions have emerged in Phnom Penh regarding funding for the Funan Techo Canal construction project, which would connect the Mekong River to the Gulf of Thailand, reducing the Kingdom’s reliance on Vietnam for shipping. The project is expected to cost $1.7 billion, or approximately 4 percent of Cambodia’s GDP.

Furthermore, Beijing’s influence on Cambodia’s economic landscape is evident through the China-Cambodia Free Trade Agreement, which came into effect in 2022. This agreement has significantly improved Cambodia’s economy: 98 percent of Cambodia’s exports to China and 90 percent of imports from China are exempt from tariffs. This represents about 22 percent of Cambodia’s overall trade, establishing China as its foremost trading partner.

In 2023, Beijing was the principal lender to Phnom Penh, extending $300 million in loans. Yet according to the latest available data, in the first three quarters of 2024, China, in contrast to the World Bank, Japan and others, did not announce additional loans to Cambodia. China has subsequently tried to debunk speculation about a slowdown in financial transfers. “Any attempt to discredit or smear China-Cambodia cooperation will be futile,” the Chinese Ambassador to Cambodia, Wang Wenbin, said in a Facebook post on December 17.

Other economic perspectives in Southeast Asia

Laos, much like Cambodia, shares a political ideology closely aligned with China and has incurred substantial loans from its northern neighbor. Vientiane’s total foreign debt amounts to $10.5 billion, with approximately half of that amount owed to Beijing. A major development in this financial relationship is the construction of a $6 billion high-speed rail line, which opened in 2021, transversing the country – another BRI infrastructure project.

Malaysia’s economic progress has slowed over the last two years due to China’s economic downturn, with China being one of its main trading partners.

Hanoi has been among the bloc’s most active in preemptively diversifying its alliances and trade partnerships.

Another spillover effect of Beijing’s poor economic performance is the lower-than-expected Chinese demand for Vietnamese goods. For a country that relies heavily on exports, this poses significant challenges to Vietnam’s growth. Unlike some ASEAN countries taking a wait-and-see approach as to whether trade with China remains sufficient, Hanoi has been among the bloc’s most active in preemptively diversifying its alliances and trade partnerships. Among these efforts are its strategic partnership with ASEAN peer the Philippines, its 2023 elevating of relations with the United States to the level of comprehensive strategic partnership, and the January 2025 striking of its first strategic partnership with a central European country, the Czech Republic.

Read more from Southeast Asia expert Adinda Khaerani Epstein

Tourism in Southeast Asia has also been affected. In recent years, growth in the tourism industry in the ASEAN region has been declining mainly due to the economic hardships facing Chinese nationals. This downturn has significantly impacted economies reliant on Chinese tourism. 

For example, in 2019, before the Covid-19 pandemic, an estimated 12 million Chinese people visited Thailand. Tourists from mainland China are among the largest group of visitors to Thailand. The number of inbound tourists to Thailand from China was stable in 2020, but then it started to decline. By 2024, the number of estimated visitors dropped to  7 to 8 million, well below the Thai Tourism Authority’s target of 9 million. Tourism plays a crucial role in the Thai economy, accounting for 12 percent of GDP and providing over 20 percent of total employment as of 2023. 

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Scenarios

Likely: Chinese slowdown encourages economic diversification

China’s current situation with dogged economic challenges will likely drive ASEAN members to diversify their export strategies by increasing intra-regional cooperation and lessening their focus on serving China. Pursuing international trade agreements, such as the ASEAN-Canada Free Trade Agreement, is expected to benefit the members by reducing their dependence on a single country, no matter how powerful. Additionally, ASEAN will likely engage in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a significant trade bloc encompassing a substantial portion of the global economy, which is expected to create new export routes.

In this context, Indonesia’s involvement in the CPTPP could be transformative. By joining the CPTPP, Indonesia would gain improved market access to key economies like Japan, Canada, the United Kingdom and Australia. In September, Indonesia submitted a formal request to join the CPTPP.

China’s downturn may also encourage ASEAN states to capitalize on the RCEP, the world’s largest trade agreement encompassing nearly one-third of the global population. The RCEP facilitates ASEAN’s integration with other major economies with which it has free trade agreements, including New Zealand, Japan, South Korea and Australia. Thus, ASEAN can reduce its dependence on China and potentially attract additional foreign investment.

Unlikely: Decoupling of ASEAN from China

Despite the economic strain that Beijing is currently experiencing, and while regional countries will diversify, it is unlikely that ASEAN members will decouple from China, their largest trading partner. Although China’s influence on ASEAN might be more moderate going forward, it will nevertheless endure. Consequently, most members, except Vietnam, the Philippines and Myanmar, will continue to recognize China as the bloc’s most strategic partner, as foreshadowed in the Southeast Asia Survey 2024. China is also considered the most influential economic power in the region, particularly by allies Laos, Malaysia and Thailand.

Certain members are less likely to question China’s economic commitment to the region’s infrastructure. During the 79th Independence Day celebration in Indonesia’s new capital city of Nusantara, officials unveiled the nation’s Autonomous Rail Rapid Transit system, which China funded. Indonesia – the largest country in the bloc – wants China’s continued assistance in extending its high-speed train service from Bandung to Surabaya in East Java. Despite China’s economic circumstances, Jakarta (which for now remains the country’s political capital) does not seem overly concerned about becoming too dependent on Beijing.

Cambodia recently refuted a Reuters report that claimed China did not authorize any loans to Phnom Penh in 2024, demonstrating its trust in Beijing remaining the country’s largest creditor.

Possible: Trump administration seizes the opportunity to deepen ties

In the context of the U.S.-China rivalry, Washington considers Southeast Asia a region of considerable strategic importance. China’s current economic hardship could present the U.S. with an opportunity to play a more significant role in assisting ASEAN in diversifying its roster of trading partners, thus reducing the bloc’s reliance on a single economy. For example, Vietnam would like to deepen its bilateral cooperation and economic relations with the U.S., which is the country’s largest export market.

ASEAN countries are cautiously optimistic about President Donald Trump’s return, hoping it could revive serious trade talks. Given his preference for direct, bilateral negotiations, the new Trump administration will likely pursue agreements with individual ASEAN members instead of engaging in multilateral deals with the bloc.

With President Trump back in the Oval Office, direct talks with various trading partners are expected to be one of the objectives of his “America First” strategy. In 2017, on his first day in office, he signed an executive order to withdraw from the Trans-Pacific Partnership, a multilateral trade agreement with eleven other Asia-Pacific nations.

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