China-Japan rivalry: Who will be Asia's master builder?

The economic superpowers are vying to construct megaprojects across the continent. Countries like Indonesia have much to gain.

After arriving at one of the many towering malls in this crowded capital, Saphiera Suwandi rattles off a list of complaints about the congested streets.

“Wasting time, wasting energy, and wasting money because of the gasoline,” she laments as she sips a glass of fresh watermelon juice. “And it’s only getting worse.”

Ms. Suwandi admits she got lucky on this rainy afternoon in early December. The drive from her house in the neighboring city of South Tangerang took an hour and a half. “It wasn’t bad,” she says. “Sometimes it can take three.”

About 30 million people live in Greater Jakarta, making it one of the most densely populated places in the world. The megacity’s notorious “macet” – Indonesian for traffic jam – can turn a normally short jaunt into an hours-long journey. Traffic barely crawls during a rush hour that can last far longer than 60 minutes. Flooded lanes and accidents bring it to a standstill.

Like many Southeast Asian cities, Jakarta has long suffered from a lack of infrastructure development. But that’s quickly started to change over the past year as Asia’s two wealthiest countries and most powerful competitors, China and Japan, have pledged to help build new railways, roads, and the city’s first subway.

The fight over infrastructure projects in the Indonesian capital is just one front in a larger battle between the two Asian giants for economic and political dominance in Southeast Asia and beyond. Lam Peng Er, a professor at the National University of Singapore who studies Sino-Japanese relations, has dubbed their escalating rivalry “a great game,” the 21st-century extension of long-simmering tensions.

On the line are valuable trade routes through the South China Sea and expanded spheres of influence in Asia. The two countries have avoided military conflict. Instead, they’ve waged a multibillion-dollar financial war whose newest player, the China-led Asian Infrastructure Investment Bank (AIIB), has Japan and the United States worried that China could reshape the global economic agenda on its own terms. Dr. Lam and other analysts say it’s too early to declare a winner, but that Southeast Asian countries have much to gain.

“Obviously there are real opportunities here,” says Arne Westad, a professor at Harvard University’s Kennedy School of Government who studies Asian geopolitics. “They could achieve quite a bit in terms of their own aims by playing China and Japan against each other.”

The Asian Development Bank (ADB) estimates that Asia must spend $8 trillion on infrastructure before 2020 to maintain its economic growth and living standards. It's a massive demand that China and Japan are eager to help fill, and one that can bolster their own slowing economies.

In November, the Japanese and Philippine governments signed a $2 billion loan agreement for a rail project, the largest assistance package ever awarded by Japan. Meanwhile, China is building a $6 billion railroad through Laos and recently assured Vietnam that it is ready to finance large-scale infrastructure projects there, too.

For the traffic-choked and power-starved nations of Southeast Asia, the competition between Japan and China for their favor is a welcome boon. The ADB says if the right projects are completed, people in the region could get an extra $4.5 trillion in income in the decade through 2020, and another $8.5 trillion after that.

Overcoming the infrastructure gap

Suwandi dislikes Jakarta’s congested streets both as an ordinary citizen and a business owner. She and her family own a shoe factory in South Tangerang and seven retail stores across the Jakarta metro area.

“The traffic is something we think about a lot,” Suwandi says. “We look at ways to find the roads that are less crowded. We change delivery times.” For small deliveries, the family hires motorbike drivers who can maneuver crowded streets more easily than the van drivers they otherwise rely on.

The World Bank estimates that Indonesia needs to invest about $600 billion in infrastructure over the next five years to keep pace with its rising economy. But over the past two decades, progress has moved as slowly as the traffic it’s intended to fix.

Spending on infrastructure in Southeast Asia collapsed after the 1997 financial crisis and has yet to recover. Indonesia now spends 3 percent of its annual gross domestic product on roads, railways, and other public works projects, less than half of what it spent before the crisis. 

Unable to meet the growing list of infrastructure needs on its own, Indonesia has turned to China and Japan for help. Japan’s Mitsui & Co., for example, is engaged in a major expansion of Jakarta’s main port. And an Indo-Japanese consortium has begun work on a $3 billion mass rapid transit system through the capital’s downtown.

Not to be outdone, state-owned Chinese companies and banks have signed contracts of their own. These include a $2.5 billion deal to upgrade 30 ports in eastern Indonesia and the construction of a $5.5 billion railway between Jakarta and Bandung.

“China and Japan are very much concerned with staying on Indonesia’s good side,” says Gustav Papanek, an economist who has advised and studied Indonesia for five decades. “The competition between these two countries is great for it.”

Southeast Asia on the rise

Despite Southeast Asia’s infrastructure hurdles, analysts predict it will remain one of the world’s fastest-growing regions in the coming years. The Organization for Economic Cooperation and Development estimates the region’s growth will average 4.6 percent through the end of the decade.

Japan, in comparison, has been in recession four times since the 2008 financial crisis. And while China predicts its own economic output will expand by about 6.5 percent this year, economists reckon the real rate is much lower. China’s transition from an export-fueled industrial nation to a service-based economy has slowed its once double-digit growth and sent shock waves through the global economy.

In search of new ways to spark economic growth, the two countries have turned to Southeast Asia for new investment opportunities. A recent survey of Japanese, Chinese, and South Korean business leaders revealed that they consider the region the most promising market for foreign expansion in 2016 amid China’s dimming outlook.

Chinese Premier Li Keqiang pledged to add an additional $10 billion to China’s growing pool of infrastructure lending in the region at an annual summit of Asia-Pacific leaders in Malaysia in November.

Then, in January, the AIIB opened its doors in Beijing. The bank, which has 57 members, though both Japan and the US refused to join, is set to finance major infrastructure projects across Asia with its $100 billion in capital. Separately, China is rolling out the “One Belt, One Road” initiative to revive the ancient Silk Road route through Central Asia to Europe. A maritime equivalent is planned for Southeast Asia.

To help give itself an edge, Japan has vowed to cut the time it takes to approve infrastructure loans from three years to between 18 months and two years. It’s also agreed to take on more financial risk by ending its practice of requiring government guarantees for each loan. Additionally, Japanese Prime Minister Shinzo Abe announced at the summit in Malaysia that Japan and the ADB, which the country backs, would seek to provide $110 billion in infrastructure funding in Asia over the next five years.

Ties between Japan and China have long been strained by historical and territorial disputes. Their face-off in Southeast Asia comes amid rising tensions over a group of islands in the East China Sea known as the Senkaku Islands in Japan and the Diaoyu Islands in China. China has incited a similar row with maritime Southeast Asian countries – and the US – by claiming sovereignty over large parts of the South China Sea.

“Given the relationship that now exists between China and Japan, the Japanese government has a very direct interest in making as many friends as possible in the wider region,” says Dr. Westad of Harvard. In addition to pursuing its economic interests, he adds, Japan “needs to take its own role in the region more seriously now for security reasons.”

Westad says it’s too early to tell which country has the upper hand. Tokyo has long had warmer relations in Southeast Asia, but Beijing’s growing economic and political influence has made it a strong challenger and led to fierce bidding wars.

China beat out Japan for construction of the high-speed train in Indonesia, the country’s first, by promising not to take taxpayer money or loan guarantees from the Indonesian government. But last month Japan was the nation celebrating when it clinched a $15 billion deal to build a high-speed line between Mumbai and Ahmedabad in India.

High-speed trains in Thailand

For residents of Chiang Mai, the largest city in northern Thailand, plans to build a high-speed train to Bangkok are eagerly anticipated. Hotel and restaurant owners expect tourism to rise. Businesspeople look forward to having the additional option when traveling outside the city.

“All the trains now are too slow and they’re always delayed,” says Saksan Apichai, co-owner of Pause Hostel. “A high-speed train will be good for business.”

The train will be built with the help of Japan. Construction is scheduled to start in 2019, after Japanese and Thai officials conduct a detailed survey of the more-than-400-mile route and negotiate how to finance its $8.1 billion price tag.

If the project is realized, it would mark the second time Japan has exported its bullet train technology, a beloved symbol of the country’s technological and economic power. (Taiwan introduced the system in 2007.)

It would also become one of Thailand’s first high-speed trains, meaning the country would have reached a major milestone in its plan to upgrade its railway system after years of neglect. The country’s prolonged political instability in recent years has caused vital infrastructure projects to be delayed or overlooked.

The government hopes to finally fix that with its pledge to spend more than $100 billion on infrastructure over the next seven years. Financing will come from various sources, including Japan and China. The bulk of the projects are planned for the next two years and include train routes that eventually will stretch from China in the north through Malaysia in the south to Singapore.

“The year 2016 and 2017 will be the year of public infrastructure construction, the highest in history,” Arkhom Termpittayapaisith, Thailand’s transport minister, told Reuters.

Any amount of improvement to Thailand’s crumbling infrastructure can’t come soon enough for Akkapon Wanich. The 27-year-old son of a garment factory owner in Chiang Mai, Mr. Akkapon recently moved from Bangkok back to his hometown to help with the family business. He plans to succeed his father in the next couple of years and has big ambitions.

“Business right now is OK for him, but not for me,” he says. “I want to expand the factory and find new clients in emerging markets. I want to make it grow.”

But Akkapon realizes he can’t expand the business on his own. He needs reliable roads and trains to build a supply network. He needs dependable electricity to boost productivity. And he needs serviceable ports to ship products overseas.

Happily for him, Japan and China are all too willing to help.