East and Southeast Asia

East and Southeast Asia—the world’s most ethno-culturally diverse region and the most likely to grow in economic importance—will remain center stage for both economic cooperation and geopolitical competition in the near future. For China, many factors are increasing political uncertainty: a slowing economy; Beijing’s attempt to advance its primacy in Asia; a shrinking labor force as a result of population aging; and President Xi’s concentration of power. This uncertainty casts a shadow over the peace and prosperity of the region, since China is deeply integrated into the global economy and anchors the region economically but also selectively embraces and seeks to shape international norms and rules to advance its interests. China’s assertions of sovereignty on issues such as the South China Sea are provoking reactions among its neighbors and stirring nationalist sentiment at home that could reduce Beijing’s room for maneuver. The interplay between security competition, regime stability, and economic cooperation will color most regional interactions, with middle powers and smaller states alike seeking assurances against Chinese assertiveness that will not sacrifice economic opportunities with China; the risk of a less-robust Chinese economy is a further complication. The actions of the United States and Japan vis-à-vis China, as well as those of emerging powers like India and Indonesia, will also shape the assessment of risks and opportunities by countries in the region.

  • The region’s many longstanding territorial and maritime disputes are unlikely to be resolved in the next five years and will instead keep tension simmering, prompt requests for US assistance, and complicate the maturation of regional institutions and coping mechanisms, such as the Association of Southeast Asian Nations (ASEAN). A further escalation of tension around any of Asia’s fault lines probably would undermine economic confidence, slowing investment and regional economic cooperation
  • Beijing may judge that China has a closing “window of strategic opportunity” to secure greater influence in the region before stronger pushback against its rise develops as a result of increased US strategic attention to the region, the evolution of Japan’s defense policy, Taiwan’s new leadership and growing sense of a separate identity, North Korea’s nuclear program, and China’s own mounting economic challenges. Foreign views of China probably will vary with Beijing’s readiness to abide by widely accepted international rules.
  • Increasingly self-reliant Japan will take on more international engagement—potentially increasing its involvement in regional and global security affairs and becoming a stronger partner of the United States—initially by building on its robust economic relations, especially in Southeast Asia. The growing uncertainty in East Asia—driven primarily by China’s growing power and assertiveness—is prompting Tokyo to ease postwar constraints on its security policies and build capacity for a policy of collective self-defense.
  • India is likely to insert itself further into East and Southeast Asian economic and security matters, especially if its relationship with Japan continues to strengthen. China’s ambitions and disregard for India’s interests fuel New Delhi’s inclination—along with Japan and the United States—to balance and hedge. Although rising Western concern about free trade is limiting the options, a Trans-Pacific Partnership (TPP)-like agreement that included India could turn India into an economic wildcard, potentially deepening its economic integration with the United States and other major Pacific economies, helping to propel domestic economic reform and growth, and bolstering India’s ability to take a more assertive regional economic role.
  • Indonesia has the world’s largest Muslim population and some of the world’s greatest biodiversity, and it could take on a global role by anchoring Islam’s response to the influence of globalized terrorist networks or by leading stewardship of the world’s remaining primary forests, even as it continues to grapple with the challenge of effectively governing a far-flung archipelago. Burning in Indonesian forests contributes to global carbon emissions as well as air pollution and rising death rates from bronchial disease across Southeast Asia. In Malaysia, shifts in racial and religious policies in the democratic, majority Malay Muslim country could have implications for the region’s democratization and social stability trends and could help boost global counter-radicalization efforts. Malaysia and Indonesia, like other Muslim states, face the influence of increasingly intolerant Salafist Islam on traditional Sufi Islamic practices, fueling tension in their multiethnic and multireligious societies. Thailand and the Philippines are struggling with governance issues resulting in emerging preferences for strongman rule.
  • Major economic shifts, demographic changes, and urban stresses—driven by ongoing migration to cities—are likely to become more significant in Asian countries in the next five years and will demand political responses. Aging populations will add to the demands on Asian healthcare systems to confront chronic diseases, adding to governments’ funding needs. Economic inequality could boost public dissatisfaction in China and elsewhere in the region, particularly as firms face greater pressure from low-cost competitors in the region and elsewhere. Beijing will face pressure to meet the aspirations and demands of its growing middle and affluent classes or to manage their disappointment.
  • Climate change—through severe weather, storm surges, sea level rise, and flooding—disproportionately affects East and Southeast Asian countries, whose populations cluster in coastal zones. Ongoing stress will reduce resilience to even modest weather events. According to Pew polling, publics in China, Malaysia, and the Philippines consider climate change their top existential threat, and publics in Indonesia, Japan, and South Korea include climate change in their top three threats. Fears about water security and food security are also among the region’s environmental concerns, with recent drought conditions in Cambodia, Laos, and Thailand, and highlighting these risks. Cooperation on water issues will be crucial in a heavily populated region, with disputes over water flows among Burma, Cambodia, China, and Laos, adding to the list of regional disputes.
  • In public health, several countries in the region are considered hotspots for the emergence of influenza virus of pandemic potential. The highly pathogenic avian virus H5N1 is endemic in poultry in China, Indonesia, and Vietnam, and has a high mortality rate in humans. The highly pathogenic virus H7N9 is also circulating in Chinese poultry, and an increased number of human cases have been seen since 2013.

Geopolitical Relevance of Region in Next Five Years: Whither China. All countries in the region have much riding on China’s economic and political prospects. The next few years will test whether Beijing can continue to raise living standards and expand the number of economic beneficiaries while making structural changes in its economy, shifting it from export-driven to consumer- and service-driven and becoming a more-balanced player in global trade rather than an ever-greater consumer of raw materials. In addition to trade and commercial ties, China now figures strongly in the development plans of countries across the region; most East Asian publics—and many in South Asia, Central Asia, and Europe—look favorably on Chinese investment, providing Beijing a way to boost its foreign influence. However, any shortfall in Beijing’s delivery on its promises of economic partnership—as embodied in the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road projects—might sour foreign populations on Chinese engagement and hurt China’s global reputation as well as its efforts to develop its interior and western regions as new export markets.

Beijing’s greatest political test lies in whether it can satisfy an ever-more-empowered and engaged public, which expects accountable government, social mobility, and continued growth, without risking social instability or Chinese Communist Party (CPP) control. Beijing’s recent increased use of surveillance and other advanced communications technologies and its ongoing human rights crackdown reflect a doubling down on social control and a continued rejection of pluralism and of any political alternatives to the CCP.

  • Religious and ethnic tension will also test Beijing’s ability to accommodate and tolerate what it historically has viewed as a threat to its authority. China’s already substantial Muslim and Christian populations are projected to grow further in the next two decades. The government closely monitors and restricts Muslim affairs in Xinjiang Province, exacerbating residents’ resentment toward Beijing, and the tens of thousands of Christians who worship in underground “house churches” also face frequent government persecution. Tibet, where population growth is the fastest in China, could be the scene of unrest similar to that of the past.
  • Public health issues will come to bear during the next few years. China’s rising income levels are shifting living patterns toward Western standards of consumption, leading to higher rates of chronic diseases such as obesity, heart disease, and cancer. With millions more people engaging in unhealthy habits—and the rapid aging of the country’s general population—the anticipated rise of noncommunicable diseases will strain the capacity of China’s national health system, as well as the ability of the government to invest in health infrastructure and train sufficient personnel.
  • Environmental problems will worsen. In many regions, Beijing faces challenges in providing water of sufficient quantity and quality to its citizens. Degradation of agriculturally significant resources and major industrial contamination have worsened air quality in many cities; environmental protests have occurred when these conditions have become locally intolerable. Cancer and other environmentally-induced illnesses are severe enough in some regions that no advanced methods are necessary to diagnose the situation.

These tests will occur in a period of slowing economic growth, structural transformation of the Chinese economy, and bills from debt-fueled building at home and abroad since the 2008-09 global financial crisis. At the same time, the Chinese leadership is increasingly centralizing power and prosecuting an anticorruption campaign that—while popular with the public—has alienated a segment of the wealthiest Chinese. This domestic backdrop will help shape whether China’s growing influence in Asia and the world brings renewed vigor and effectiveness to the international system or results in systemic economic shocks and a heightened risk of regional conflict.

  • Success in meeting these challenges may have repercussions in China’s approach to its East Asian neighbors. A smooth and deft economic transition and a more unified leadership would bolster Beijing’s confidence in its dealings with Japan, the Philippines, and Vietnam. Just as they are likely to defend their territorial sovereignty, foreign corporations, universities, and individuals will complicate China’s adjustment by seeking protection against cyber and intellectual property theft, regulatory harassment, and market manipulation.
  • Beijing will also gain international influence and respect if its new multilateral investment initiatives succeed in boosting employment and livelihoods at home and abroad. Multilateral investment could also threaten China’s influence abroad, however, particularly if coziness with corrupt regimes in Africa gives rise to the kind of popular resentment that the United States has faced in the Middle East.
  • Similarly, Beijing could benefit by playing a leadership role in helping the region manage greenhouse gas emissions and build resilience to sea level rise, pollution, extreme weather, and biodiversity loss. Environmental issues will remain key quality of life concerns and pathways to civil society activism across the region, opportunities for governments’ responsiveness, and innovation.
  • As the ethnic Russian population in the Far East plummets and eastern Russian cities stand largely empty, it would be natural for Chinese interest and appetites to turn northward, potentially increasing friction in the area. Large numbers of Chinese have already been filtering into the region on a variety of pretexts, visas, and business interests.
  • Whether Beijing wields its ties with Islamabad and Pyongyang more effectively against protracted threats in Afghanistan and North Korea’s nuclear program will have a significant impact on peace and stability in South and Northeast Asia.

Other Considerations: Partnership Management. Partnership and alliance management will be the primary East Asian task for the United States, with free trade agreements such as the Trans-Pacific Partnership (TPP) offering the potential to help the region diversify away from overdependence on China. However, many TPP participants—as well as business elites, working publics, and political leaders in some Asian countries—see more opportunity than threat in China and are uncertain about the US approach and commitment to the TPP. China’s size, level of development, and particular needs, including resources and high-end capital goods, make it an economic prospect for other countries in the region as a market, investment source, and production location in ways and degrees that the United States cannot necessarily match.

  • US allies and partners also remain uncertain about the future of the US “rebalance” to the region, given Washington’s domestic and other international preoccupations and potential resource constraints.
  • In Northeast Asia, Beijing, Tokyo, and Seoul will remain economically interdependent, even while they improve their individual security capabilities. They will need to manage security risks resolutely and avoid security-dilemma dynamics and the reciprocal escalation that can occur when defensive measures are interpreted offensively.
  • Political posturing and longstanding historical issues are likely to hinder a deepening of Japan-South Korea security relations in the next five years despite some progress. South Korean frustration with China’s reluctance to rein in North Korea will drive Seoul toward cooperation with Tokyo and Washington, even while Seoul continues to view China as a crucial partner for tourism, trade, and investment. Meanwhile, Japan will continue to pursue active diplomatic and security engagement in the region and beyond. Japan’s economy, while stagnating in aggregate terms, remains the third largest in the world, and—despite the declining population—continues to provide material advances for most of its aging population.

In Southeast Asia, growing economic interdependence will be the backdrop to great-power rivalry, internal strife, religious radicalization, and domestic political uncertainty, including struggles between democratization and authoritarianism. Some combination of these could threaten the open, stable, and developing regional community with stagnation, authoritarianism, and instability, but such outcomes remain unlikely. Nationalism will remain a powerful force but is unlikely to disrupt the region’s growing economic integration by itself.

  • India, Indonesia, and Vietnam will become far more prominent players in Asia than in the past several decades, in part due to their own development achievements, rapidly growing trade relationships, and favorable demographic profiles relative to many of their competitors. The blueprint for economic integration in the region will be the ASEAN economic community and its goals of trade liberalization, harmonization, and improved customs procedures; trade in services; investment and capital market liberalization; and infrastructure connectivity.
  • Security challenges will motivate continued buildup and potential use of military instruments in the region. With economic growth at or near current levels, countries around the region will boost military spending, partly for domestic reasons and partly to hedge against China and uncertainties about US attention to the region. The maritime disputes in the East and South China Seas will continue, and ASEAN countries will spend greater resources cracking down on Islamic radicalism.
  • Governance deficiencies affect authoritarian as well as democratic regimes in the region, and both will continue to find it a struggle to implement policies, address corruption, and manage often problematic relationships between national-level policymakers and local officials in charge of executing policy. How well governments provide public goods and meet rising demand for better standards of living will strongly influence levels of stability in the region.

Thinking About a Rebalanced China

“Rebalancing” China from an investment-driven and export-led economy to one that relies more on domestic consumers will require years of adjustment, with far-reaching consequences for day-to-day life in China as well as for its economic partners around the world. Beijing has long stimulated growth with unusually high investment in infrastructure and equipment—much of which has been underutilized or ineffective—as part of a now-unsustainable model that nevertheless will be hard to replace soon with consumption-led growth.

  • In 2015, China’s investment amounted to more than 40 percent of its GDP, well beyond the 30-percent average among other developing Asian economies and little changed from recent peaks. Such high investment spending is otherwise unprecedented among major economies during peacetime.
  • Even with real investment growth at only 1 percent per year—something that last happened in 1990, the year after the Tiananmen Square crisis—bringing China’s consumption-investment balance in line with those of its Asian peers would take a full decade of private and government consumption growing at 8 percent yearly .

Even if Beijing succeeds in rebalancing, the change would disrupt longstanding patterns in China’s domestic economy.

  • Greater private consumption would expand opportunities for private firms, which are more responsive to consumer demand than state-owned companies, but it would increase pressure on Beijing to make long-avoided improvements in the rule of law and intellectual property rights protections and to develop private consumer finance.
  • Equally important, reducing the role of China’s heavy-industry-oriented, state-owned enterprises (SOEs) in the economy would weaken one of the government’s main levers of economic control, something Beijing has shown little willingness to do in recent years.
  • Private consumption has lagged in China because of high individual saving rates, which are unlikely to shift unless Beijing strengthens social safety net programs, particularly healthcare and retirement benefits. However, such increases would compete against spending on military modernization and domestic security.

A rebalanced Chinese economy certainly would remain a major player in the world economy and be better positioned for long-term growth, but it would also be a substantially different trade partner, both in the region and in the wider world.

  • With less focus on infrastructure and heavy industry, China’s imports could be expected to include fewer capital goods—such as machinery and manufacturing equipment—and a smaller share of raw materials, like iron ore and copper, which are more intensely used in investment goods than in consumption goods. These accounted for nearly $800 billion, or 47 percent of China’s total imports in 2015, with Germany, Japan, and raw-materials exporters worldwide among the largest suppliers.
  • A more-developed consumer sector would almost certainly mean greater imports of consumer goods, food, and agricultural products, categories that in 2015 accounted for only about $90 billion, or less than 6 percent of China’s imports. Worldwide, excluding China, the leading exporters of these goods are led by the United States and Germany (for consumer goods) and the United States and the Netherlands (for food and agricultural products); these most-competitive exporters probably would see the greatest gains from strong Chinese demand growth. Even if a more-consumption-directed Chinese economy could meet much of its own needs, demand for such goods would increase worldwide, benefiting producers in China and elsewhere alike.
  • Rebalancing’s effect on China’s imports of intermediate goods—parts used for production and assembly of goods for export or domestic use—is less clear. A substantial share of the consumer goods China now produces would probably appeal to a rapidly growing domestic consumer sector, although the country’s low-value-added production would face increasing competition from other countries, including elsewhere in East Asia, as well as South Asia and even Africa.

Beijing has ample resources to help smooth the transition, using government and directed SOE spending to prop up growth while efforts to spur private consumption take hold, and might even be able continue dragging its feet for the full five years. But the transition—and the imbalance that has forced it—will become more costly and disruptive the longer it is put off; the coming years, even with growth already flagging, probably will be Beijing’s best window of opportunity.

  • In the next 20 years, China’s median age will increase from 37 to nearly 46 and will continue to rise rapidly thereafter, as its workforce-age population actually declines. China’s retirement ages were set in the early 1950s, when life expectancy was very low, and open discussion of changing these arrangements is underway, but rising healthcare costs for the aging population will add an additional burden.
Infographic - China's Population Projection of 1,408,316,000 in 2035

aEstimates for religious affiliation are based on data from the World Religion Database and are rounded to the nearest one-tenth of a percent.

bTotal Fertility Rate is the projected average number of children born to a woman if she lives to the end of her childbearing years.

Note: Demographic data is presented for countries estimated to have the largest population in each region in 2035.

Infographic - Indonesia's Population Projection of 304,847,000 in 2035

aEstimates for religious affiliation are based on data from the World Religion Database and are rounded to the nearest one-tenth of a percent.

bTotal Fertility Rate is the projected average number of children born to a woman if she lives to the end of her childbearing years.

Note: Demographic data is presented for countries estimated to have the largest population in each region in 2035.