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THE SOUTH CHINA SEA

DISPUTE AND CHINA-ASEAN
RELATIONS
Zhao Hong
Published online: 18 Feb 2013.

To cite this article: Zhao Hong (2013) THE SOUTH CHINA SEA DISPUTE AND CHINA-
ASEAN RELATIONS, Asian Affairs, 44:1, 27-43, DOI: 10.1080/03068374.2012.760785

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 Asian Affairs, 2013
Vol. 44, No. 1, 27– 43, http://dx.doi.org/10.1080/03068374.2012.760785

THE SOUTH CHINA SEA DISPUTE AND

CHINA-ASEAN RELATIONS
ZHAO HONG

Zhao Hong is senior research fellow at the East Asian Institute (EAI), National
University of Singapore. Before joining EAI, he was professor at the Research
School of South East Asian Studies, Xiamen University, China, teaching
International Political Economy, Big Power Relations, and ASEAN Economy.
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His latest published book, China and India: The Quest for Energy Resources in
the 21st Century, was published by Routledge in 2012,

Introduction
From the late 1990s until only a couple of years ago, China’s approach to
Southeast Asia in general and to its various territorial and maritime dis-
putes in particular was to pursue a ‘good neighbour policy’ and engage
in bilateral negotiations. This reflected Beijing’s concern for the views of
others about China’s rise and the ‘China Threat’. So Beijing tried hard to
be benign and adhere to Deng Xiaoping’s previous guidance to shelve
territorial differences for the later generations, while engaging in joint
development. But more recently Beijing’s actions have become more
‘assertive’ in terms of energy exploration and military activities in the
South China Sea. The concerns of some ASEAN countries about
China’s ‘creeping assertiveness’ and the ‘China Threat’ has led them
to deliberately invite the involvement in the area of other big powers,
in particular to welcome renewed American efforts to revitalise bilateral
security ties with Japan, the Philippines, Indonesia and Vietnam. This,
taken with Indian and Japanese involvement, has resulted in the South
China Sea increasingly becoming a focal point for big power rivalry,
thus complicating the issues. While most of the rival claimants are
ASEAN member states, traditionally China has tried to discuss the
issue bilaterally with each of the rival claimants, not wanting it to
become an issue in the China-ASEAN relationship, which is essentially
economic.

# 2013 The Royal Society for Asian Affairs

 28 THE SOUTH CHINA SEA DISPUTE

The Territorial disputes

Figure 1 (the nine-dash line map) shows the extent of China’s claim in
the South China Sea, which has for many years been a thorn in
China’s bilateral relations with those countries with counter-claims.
China and Vietnam claim the entire area of the South China Sea and
the islands within it, while the Philippines, Malaysia, Indonesia, and
Brunei have overlapping claims to significant areas (see Figure 2 for
the overlapping claims).

But while all these claims in theory give rise to at least eight separate
disputes, this article is mainly about the Chinese claim to the islands
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and other land features in the South China Sea, which is based on histori-
cal surveying expeditions, fishing activities, and naval patrols as far back
as the 15th century.1 As early as 1914, modern Chinese cartographers
included within maps of Chinese territory most of the area of the
South China Sea, delimited by the so-called nine-dash line.2 The area
was included in an official map drawn in 1947 by the Republic of

Figure 1 The nine-dash line

 THE SOUTH CHINA SEA DISPUTE 29
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Maritime Claims

Brunei
China
Malaysia
Philippines
Spratly Islands
Vietnam

Figure 2 Overlapping maritime claims in the South China Sea

China under the Kuomintang government, and the nine-dash line contin-
ued to be included in official maps published by the People’s Republic of
China after 1949

While the Philippines’ claim to the Spratly Islands (Nansha Islands to

China) was first submitted to the United Nations in 1946, its involvement
did not begin in earnest until 1956 when Filipino adventurer Tomas
Cloma proclaimed the founding of a new state, named Kalayaan. The
Philippines’ claims of sovereignty over the Spratlys are based on res
nullius (‘nobody’s property’) and geography. When Japan renounced
its sovereignty over the islands in the San Francisco Treaty in 1951,
the islands became res nullius and available for annexation. The Philip-
pines maintains that, geographically, all the islands it claims lie within
 30 THE SOUTH CHINA SEA DISPUTE

the country’s archipelagic baselines, in accordance with the 1982 United

Nations Convention on the law of the sea.

Vietnam similarly insisted on a historical claim to the South China Sea

based on contact with islands there during the Nguyen dynasty, from the
16th through to the 19th century. In 1956 South Vietnam claimed that
the Paracel Islands became Vietnamese when Vietnam was unified by
the Nguyen dynasty in 1802, and that the Spratlys had been incorporated
by the French into Cochin China in 1929. South Vietnam also claimed
the right of succession for the entire South China Sea from French colo-
nialists as rightful heirs. Not wishing to provoke China, on 14 September
1958 Premier Pham Van Dong in a diplomatic note accepted China’s
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sovereignty over both the Paracels and Spratlys. Reunification in 1975

gave Vietnam the confidence to deal with China from a position of
strength. It repudiated the earlier acknowledgement of Chinese
sovereignty. Prompted by the ongoing UNCLOS negotiations,
Vietnam on 12 May 1977 declared a 200 nautical mile Exclusive Econ-
omic Zone, and included the Paracels and Spratly Islands in its territorial
waters.

But in spite of the many overlapping claims, the South China Sea dis-
putes only became a more serious issue in the early 1970s when it was
discovered that the region may contain significant deposits of oil and
gas and, significantly, it was in 1972 that the Marcos Government offi-
cially incorporated Kalayaan into Palawan island. ( The fishing opportu-
nities also started to loom larger. In 1988 the South China Sea was
believed to account for 8 per cent of world fishing catches.) But it was
the United Nations Convention on Law of the Sea, which came into
effect in November 1994, which sparked more intense conflict in that
it set a deadline for the submission of claims.

Recent incidents
The Philippines, which has had several recent run-ins with China, was
one of several ASEAN claimants to protest against China’s 2009 sub-
mission to the UN of a claim to the South China Sea, based on the
‘nine-dash line’. The Philippines was also one of the more vocal suppor-
ters of US Secretary Clinton’s defence of maritime security and call for
resolution of disputes according to the international law at the 2010
ASEAN Regional Forum in Hanoi.
 THE SOUTH CHINA SEA DISPUTE 31

The Philippines’ latest confrontation with China was the April 2012
standoff over Scarborough Shoal (Huangyan Island), in which Chinese
government vessels blocked a Philippine naval ship from arresting
Chinese fishermen accused of illegally harvesting coral and poaching
sharks in the disputed waters. Both China and the Philippines used the
incident to more boldly assert their sovereignty over the area. China
took the opportunity to normalise its claims of sovereignty over the
South China Sea area, while Manila used the showdown to spark nation-
alist fervour, to internationalise the issue and draw the USA, Japan and
ASEAN into the dispute to counter China’s growing strength.3

Vietnam also has had problems with China. On 26 May 2011, two
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Chinese maritime surveillance vessels cut off the exploration cables of

a Vietnamese oil survey ship searching for oil and gas deposits in Viet-
nam’s EEZ some 120 kilometres off the southern Vietnamese coast. The
Vietnamese Foreign Ministry released videos of a Chinese vessel actu-
ally breaking the cable attached to the Binh Minh, a Vietnamese
vessel.4 Jiang Yu, the Chinese Foreign Ministry spokeswoman, declared
that the Chinese vessel had engaged in “completely normal marine
enforcement and surveillance activities in China’s jurisdictional
area”.5 On 9 June 2011, a Chinese fishing boat similarly rammed the
survey cables of another Vietnamese survey vessel.

Is China getting more assertive? And why?

Beijing’s recent actions are seen by some countries in the region and
beyond as a departure from its previous approach. The Philippines and
Vietnam have been the most vocal and shrill in decrying what they con-
sider to be Chinese assertiveness. A prominent Filipino intellectual and
legislator, Walden Bello, stated “We are entering a ‘post-Deng Xiaop-
ing’ era of greater assertiveness, whereby you have a big neighbor that
is laying claim to the whole South China Sea”.6 Tokyo’s 2011
Defence White Paper also states “China is widely and rapidly modernis-
ing its military force, and it has been intensifying its maritime activities
in the surrounding waters”, and China is “expanding and increasing its
activities in waters close to Japan”.7 The Pentagon also found that “in
recent years China has demonstrated occasional signs of assertiveness
in Asia, particularly in the maritime domain”.8

But while the Huangyan Island dispute is a reflection of the underlying

tension and competition between China and the Philippines over
 32 THE SOUTH CHINA SEA DISPUTE

sovereignty, resources and security in the South China Sea, there are
deeper strategic drivers beyond the immediate zone of potential conflict.
For China, energy security is the main consideration. The recent Arab
Awakening in North Africa and the Middle East has affected China’s
overseas energy strategy, posing potential constraints and raising
costs. China was propelled to further implement an energy diversifica-
tion strategy, and shift its oil and gas development focus to the ocean,
particularly to the South China Sea, which is believed to be a reservoir
of energy, with some estimates of 130 billion barrels of oil and 900 tril-
lion cubic feet of gas.9

Domestically, the Chinese government faces increasing nationalism and

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pressure. Some Chinese scholars believe that the previous somewhat

passive approach of China in the South China Sea is largely due to its
slow resource development process there. They believe that while
China abides by the maxim of “shelving territorial differences and enga-
ging in joint development”, Vietnam and the Philippines do not follow
this principle. This gives rise to statements like “In the face of big
exploration of oil and gas in the South China Sea by those concerned
countries, China must accelerate the speed of its development in the
South China Sea”.10 “If China has achieved effective development and
management of the maritime resources within the traditional intermittent
line, the possibility of the increase in the frequency and deterioration of
the South China Sea dispute would likely have been much lower.” 11

Under such circumstances, it was perhaps inevitable that China would step
up the search for energy resources in those waters and increase support for
the participation of its oil companies in the development of offshore oil
and gas projects. The importance which the relevant ministries and oil
companies in China attach to the development and utilisation of oil and
gas resources in the South China Sea suggests that the South China Sea
will undoubtedly become a main source of China’s oil and gas supply
in the future, particularly if environmental awareness and energy diversi-
fication cause natural gas to gradually replace coal in China.

China is currently Asia’s largest offshore energy producer, followed by

Malaysia, Vietnam and Indonesia. Currently, China’s offshore oil pro-
duction reaches more than 600,000 barrels per day, accounting for
about 15 per cent of China’s total oil production.12 In recent years,
Chinese oil companies have made great breakthroughs in developing
oil and gas resources in the South China Sea. Currently, most of this pro-
duction comes from undisputed areas. The Bohai Gulf is currently
 THE SOUTH CHINA SEA DISPUTE 33

China’s core offshore production zone in terms of oil output. However,

as Chinese oil companies become more proficient and ambitious in deep-
water operations, the South China Sea is set to become an important oil
and gas source. China is targeting oil and gas production of 500,000
boepd (barrels of oil equivalent per day) by 2015 and 1 million boepd
by 2020 in deepwater areas of the South China Sea at depths up to
3,000 metres.13 In May 2012, CNOOC began its first deep-sea project
in an undisputed area of the South China Sea, southeast of Hong
Kong. According to Down Erica, an American scholar with Brookings
Institute, the deployment of CNOOC’s new rig indicates that CNOOC
is beginning to close the gap with major international oil companies in
the area of deepwater drilling.14
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In reality, China is not the only country which is assertive in exploiting

energy resources in the South China Sea. Vietnam is the major oil pro-
ducer in the disputed area, with the state-owned oil company, PetroViet-
nam, producing 24.4 million tons, or 26 per cent of Vietnam’s total
production, from three fields in the South China Sea in 2010.15 With pro-
duction in established fields declining, PetroVietnam has concluded 60
oil and gas exploration and production contracts with various foreign
companies in an effort to exploit new fields. But these Vietnamese
attempts raise the possibility of renewed clashes with China, which
has consistently opposed Vietnam’s attempts to conclude exploration
agreements with international oil companies in the South China Sea.

The Philippines also has ambitious plans and has attempted to boost self-
sufficiency in oil production. It intended to offer 15 exploration contracts
over the next few years for offshore exploration off Palawan Island in an
area claimed by China.16 Despite Chinese objections, both the Philip-
pines and Vietnam plan to go ahead with gas exploration projects invol-
ving foreign companies. PetroVietnam will work with Talisman Energy
and will begin drilling in an area that China awarded to Crestone Corpor-
ation in 1992, which is now operated by Harvest Natural Resources.
ExxonMobil also plans exploratory drilling off Vietnam, while the Phi-
lippines intends to drill in the field where Chinese vessels harassed its
survey vessel in March 2011.17

The Philippines’ strategic response

Among the ASEAN countries, the Philippines was particularly affected
by threat perceptions arising from the drastically changed post-Cold War
 34 THE SOUTH CHINA SEA DISPUTE

strategic environment. In October 1995, former Philippines President

Ramos delivered a speech at the East-West Center in Hawaii postulating
that China posed a threat to regional security and calling on the USA to
retain its military presence in Asia. He said “even if Beijing does not
have the capability to expand beyond its borders, China will inevitably
be a political and military threat to Southeast Asia”.18

The Philippines believes that China’s control of Mischief Reef and other
reefs after the late-1990s constitutes a threat to its national security, and
is thus impelled to rely on the US military to balance China’s behaviour
in the South China Sea. 19 It is clear that after President Aquino III took
over power in June 2010, the Philippine-US relationship has topped his
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government’s foreign policy agenda. In addition to supporting Ameri-

ca’s policy of returning to Asia, the Philippines has changed its previous
stated attitude that “the South China Sea negotiations should be limited
between ASEAN countries and China, and the US or any other third
party should not get involved”.20 In February 2011, Aquino dismissed
former Foreign Minister Romulo, who holds a moderate position in
the South China Sea issue, appointing Del. Rosario, a former ambassa-
dor to the USA, as the new Foreign Minister. He has stated that “US is
the sole strategic partner of the Philippines”, signalling a gradual path
back into the US sphere of influence after years of drifting toward
China during the previous Arroyo administration.21

During the height of Manila’s territorial row with China early in 2012,
the Aquino administration raised the prospect of invoking the 1951 Phi-
lippine-US Mutual Defense Treaty (MDT) if armed clashes were to erupt
in the Spratlys.22 In response, the USA sent a strong signal of support for
the Philippines. In January 2012, Manila announced that it was likely to
grant the US military greater access to its territory for re-supply, refuel-
ling and repairs. Indeed, “without some measures of US backing, the
Aquino administration would be in no position to seek to challenge
China’s claims in the disputed waters”.23 This situation presents
serious challenges for Beijing in trying to keep the tensions from
rising and prevent US involvement in the dispute.

Subsequently, in line with the Obama administration’s ‘return to Asia’

strategy, the Philippines has been trying to demonstrate that it accords
a high priority to relations with the USA. In 2011, the USA benefited
from the tensions in the South China Sea, holding a series of high-
profile naval exercises with the Philippines and other ASEAN countries.
At the height of Manila’s territorial disputes with China in the first half
 THE SOUTH CHINA SEA DISPUTE 35

of 2012, the USA sent a strong signal of support for the Philippines,
speaking out on the issue at several ASEAN forums, selling the Philip-
pines a decommissioned Hamilton-class coast guard cutter in October
2011 and promising another in 2012, increasing troop rotations and
joint training in the Philippines, and committing to expanding port
visits and joint exercises between US and Philippines navies. All these
have led to a new plateau of distrust and tension in Philippine-China
relations.

The hedging strategy of other ASEAN countries

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Vietnam also regards the USA as an important counter-weight to China.

Although Vietnam-US relations cannot go much further beyond the con-
straints imposed by both Vietnamese concerns over Chinese reactions
and the US Congress, which has hindered the government’s effort to
build closer ties with Vietnam, a number of notable visits have taken
place. In August 2010, the Aircraft-Carrier George Washington travelled
along Vietnam’s coastline and received visits from high-ranking Vietna-
mese military officials.24 The US Navy has sought service and re-supply
facilities for its vessels in Vietnam, with three such vessels having been
repaired there over the past years, the last being the USNS Richard
E. Byrd, serviced in Cam Rang Bay in August 2011. In that same
month, the two countries concluded their first military agreement since
the Vietnam War; though this was limited to cooperation in health and
research collaboration in military medicine, it is likely to open the
door to other and wider agreements.25 In June 2012 when visiting
Vietnam, US Defense Secretary Leon Panetta urged Vietnam to host
more US military craft “as the US would shift emphasis to Asia by
working with partners like Vietnam”.26

Indonesia has also moved to strengthen military relations with the USA
as a result of its concerns over China’s regional role and policies in
Southeast Asia, especially its behaviour in the South China Sea and its
growing military capability.27 Although Indonesia does not have a terri-
torial dispute with China in South China Sea,28 it was also concerned
that China’s claims there might infringe upon Indonesia’s sovereignty
over Natuna Island. Thus Indonesia welcomes American involvement.
On 23 July 2010 Washington terminated the ban on ties with the Indo-
nesia Special Forces unit called Kopassus. This ban was introduced in
1997, prohibiting the USA from having contact with foreign military
units that have a history of human rights violations.29 In September
 36 THE SOUTH CHINA SEA DISPUTE

2010, Indonesian Foreign Minister Marry Natelagawa rejected China’s

view that the USA should not become involved in the South China
Sea dispute..

Indian and Japanese involvement makes the situation more

complex
As the tensions in the South China Sea increased, India as an external
player was welcomed by ASEAN countries, especially Vietnam. On
22 July 2011 the Indian naval vessel the INS Airavat moved to Nha
Trang in southern Vietnam and was warned by a Chinese message to
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keep out of Chinese waters. The Indian Foreign Ministry responded

that “India supports freedom of navigation in international waters,
including in the South China Sea, and the right of passage in accordance
with accepted principles of international law”.30 Meanwhile, China has
protested against the exploration activities of India’s Oil and Natural Gas
Corp (ONGC) around the Paracel Islands (claimed by Vietnam), about
which the Chinese are particularly sensitive. ONGC takes the view
that Vietnamese claims are in accordance with international law, and
it will continue with exploration projects in two blocks near the
Paracel Islands.31

Subsequently, on 12 October 2011, during Vietnam President Truong

Tan Sang’s visit to New Delhi, a three-year agreement for cooperation
in oil and gas exploration and production was concluded between
ONGC and PetroVietnam. Significantly, this agreement was concluded
while the Vietnamese Communist Party’s general secretary, Nguyen
Phu Trong, was touring Beijing and professing friendship with his
Chinese counterpart.32 By contrast with some other ASEAN countries,
Vietnam was using its traditional approach to dealing with China –
stressing commonalities and friendship while seeking counterbalance
from other powers.

Japan is another big power getting involved in the South China Sea issue.
Though a non-claimant state in the South China Sea, Japan has great
concern about the dispute. The Japanese media’s interpretation is that
Chinese assertiveness in the South and East China Seas is a sign of
Chinese ‘expansionism’.33 There is a Japanese perception that there is
a linkage between the South China Sea and East China Sea dispute,
and that Beijing’s strategy and actions towards the claimant states in
the South China Sea may have implications for the East China Sea
 THE SOUTH CHINA SEA DISPUTE 37

and the Diaoyu (Senkaku) dispute. Hence, in seeking a more active pol-
itical role in the South China Sea dispute, Japan is strengthening its dip-
lomatic and defence ties with the Philippines and Vietnam, using
multilateral institutions like the ASEAN Regional Forum (ARF) and
the East Asian Summit (EAS) to check perceived Chinese assertiveness
in the South China Sea.

For example, in 2012, as the South China Sea dispute got tense, Tokyo
decided to strengthen its military cooperation with the Philippines and
planned to provide the Japan Coast Guard’s oldest 1000 ton patrol
vessels to the Philippines. According to media report, “[t]he easing of
the arms export restrictions in 2011 may have played a role in the agree-
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ment to transfer these vessels for the purpose of helping the Philippines
in enhancing their maritime security”.34 Japan has also undertaken the
training of Filipino coast guard personnel. Prime Minister Noda
agreed with visiting Philippine President Aquino in Tokyo in September
2011 that both countries would increase bilateral vice-minister strategic
dialogue and would help Manila bolster its coast guard.35

Japan is also providing personnel training and material assistance to

Vietnam to strengthen its maritime capability. In October 2011, the Japa-
nese media reported that Tokyo and Hanoi “have agreed to reinforce
their defense cooperation in light of China’s increasing influence in
the South China Sea”.36 When Foreign Minister Gemba met with Viet-
namese counterpart Pham Binh Minh in Hanoi in July 2012 after attend-
ing ASEAN-related ministerial meetings in Phnom Penh, Vietnam
requested Japanese assistance to help train coast guard personnel and
improve its coastal defence capabilities. In exchange, Hanoi may pur-
chase Japanese nuclear power plants and extract rare earth minerals
for sale to Japan.37

Besides strengthening ties with the Philippines and Vietnam, Japan has
always sought to use the ARF and EAS to deal with the South China Sea
dispute. For example, in October 2011, Japanese Foreign Minister
Gemba Koichiro floated a proposal for a maritime regime for the EAS
meeting to be held in Bali, Indonesia, the following month.38 The key
Japanese idea was a multilateral approach, to include Japan and
ASEAN’s other dialogue partners, to construct a maritime regime in
the South China Sea based on the freedom of navigation, international
law and peaceful settlement of disputes. Not surprisingly, Tokyo’s
attempts to build a new maritime architecture for the South China Sea
has been viewed as ‘muddying the water’ by Beijing.39
 38 THE SOUTH CHINA SEA DISPUTE

Thus, Indian and Japanese involvement in the area and their developing
ties with Vietnam and the Philippines are making the situation in the
South China Sea more difficult and increasing the risk that there will
be a miscalculation by one of the parties.

Will ASEAN-China economic relations be affected?

Given the intractable nature of the problem in the South China Sea, the
strategic approach of the ASEAN claimant countries is to depend on the
USA for the maintenance of the regional security order – to check China
through the USA. Yet, economically, most ASEAN countries have
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China as their major trading partner and largest foreign investor. This
strategic ‘dual dependency’ on the USA and China has led to a strategic
ambivalence and a dilemma for ASEAN as a regional organisation and
for the individual countries. This has inevitably complicated their econ-
omic cooperation with China.

The Philippines is a good example. Throughout most of the 1980s, the

Philippines was beset by political instability and economic malaise,
and was in dispute with China over the South China Sea. Therefore it
was not in a position to take advantage of China’s economic liberalisa-
tion. The country fell behind most of its ASEAN neighbours, whose
trade and investment ties with China expanded remarkably during the
period. The situation did not change until 2000 when former Philippine
President Estrada visited China, signing a joint declaration on the Frame-
work of Bilateral Cooperation in the 21st Century. After that, China-Phi-
lippines bilateral trade rose more rapidly. Between 2003 and 2011,
bilateral trade rose steadily from US$9.4 billion to $32.3 billion, an
increase of 244 per cent, making China the Philippines’ third largest
trading partner after the USA and Japan. 40

Yet compared with other ASEAN countries, the growth in Philippines’

trade with China was much slower. In 2011 Philippines’ trade with
China was lowest among ASEAN-4, only about one-third that of Malay-
sia’s trade. For the degree of wariness toward China increased as the
tension on the South China Sea heightened. In the Philippines there
was an increasing worry among the country’s business and economic
leaders that economic competition from China could spell trouble for
certain sectors of the Philippines economy. This perception has largely
constrained the expansion of its economic cooperation with China in
terms of trade and investment.
 THE SOUTH CHINA SEA DISPUTE 39

In bilateral investment, although the Philippines was one of the earliest

foreign investors in China, its FDI value in China was insignificant when
compared with that of other ASEAN countries. For example, in 2010 the
value of the Philippines’ FDI in China was US$138.1 million, account-
ing for only 2.2 per cent of ASEAN-6’s total value of FDI in China.41
For China, its overall investment in the Philippines also remains com-
paratively small. In 2011, China’s total outward FDI reached US$74.7
billion, while its FDI in ASEAN reached US$5.9 billion, a 63.3 per
cent increase from that of the previous year; on the other hand,
China’s FDI in the Philippines was US$294 million, accounting for
only 4.5 per cent of China’s total FDI in ASEAN.
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Compared with the Philippines, the other ASEAN claimant countries

hold more positive attitudes to economic cooperation with China, and
economic integration has been deepening. From 2008, especially after
the global financial crisis, ASEAN has become an important destination
for China’s outward investment. In Vietnam, in 2011 alone, Chinese
actual investment amounted to $0.2 billion, with the cumulative
amount being $1.3 billion. In fact, as a large proportion of Vietnam’s
FDI inflows originate from Hong Kong and the British Virgin Islands,
a considerable proportion of Chinese FDI in Vietnam was realised
through Hong Kong. In view of Vietnam’s foreign investment liberalisa-
tion commitment following its entry into the WTO in 2007, the potential
is considerable.

Obviously, Vietnam has a comparative advantage in labour forces,

mineral and agricultural sources; while China has a substantial compara-
tive advantage in industrial products, capital and technology. These
economic complementarities show that there is substantial intra-industry
trade, and that both sides are closely linked in the international pro-
duction chain. Hence, China exports capital goods and key industrial
intermediate products to Vietnam to exploit cheap labour and raw
materials there, while Vietnam exports finished products to the USA
and EU. This result would actually suggest that Vietnam holds a positive
attitude to its economic relations with China, and this bilateral
cooperation has actually helped this country by enhancing the regional
division of labour, strengthening its competitiveness, and expanding
its export markets.

Unlike the Philippines, Vietnam’s rapid industrialisation process and

general optimism have restrained its domestic economic nationalism
against the expansion of Chinese investment and trade. Vietnam’s
 40 THE SOUTH CHINA SEA DISPUTE

self-confidence has been enhanced by its own economic achievements

and political reform, including rapid economic growth, trade expansion,
inflows of foreign investment, and progress in the domestic political
system. Apparently, Hanoi’s strategy is not to restrict investment from
China but to develop new and expand existing export markets.
Vietnam hopes, therefore, that in the long run it will upgrade its indus-
tries, introduce more complementary FDI and enhance its competitive
edge over other Asian countries by using Chinese investment inflow.42

Conclusion
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As China rises as an economic and political power, some ASEAN

countries remain uncertain about China’s long-term intentions in South-
east Asia. This uncertainty, their rising domestic nationalism and their
active search for energy resources in the South China Sea will continue
to create tension in their bilateral relations with China.

China’s economic rise has boosted national confidence to levels unpre-

cedented since the Cultural Revolution. Chinese nationalists increas-
ingly blame the government for perceived inaction and are pressing
for a more muscular stance, while the USA is reasserting its presence
in the Asia-Pacific region and making efforts to strengthen ties with
the Philippines and Vietnam. The involvement of India and Japan has
also served to raise the temperature. It is to be hoped that the increasing
bellicosity of recent statements does not foreshadow a more difficult
situation on the ground, or rather on the Sea.

However, at this stage there is no reason to regard military confrontation

as likely or inevitable. Economically, China and ASEAN countries have
become increasingly interdependent, as China is currently the second
largest trade partner of ASEAN, and ASEAN is the third largest trade
partner of China. In the light of increasing economic ties and mutual
desire for regional peace and stability, China and ASEAN-related
countries are likely to make every effort to stabilise their bilateral
relations. President Aquino stated during his state visit to China in
August 2011 that China-Philippines relations will not be affected by
the dispute over the South China Sea, reiterating the need “to deal
with the disputes through peaceful dialogue, and to continue to maintain
regional peace, security and stability, creating a favorable environment
for economic growth”.43 And it is important to note that some procedural
progress was made in 2011. In November 2011, China made a goodwill
 THE SOUTH CHINA SEA DISPUTE 41

gesture of providing US$475 million to establish the China-ASEAN

Maritime Cooperation Fund, and there are several working groups
now in place.

Indeed, the expansion of economic ties and the growth of common inter-
ests have laid the foundation for partial settlement or management of the
territorial disputes. To move beyond the South China Sea dispute,
Beijing and the ASEAN claimant countries need to focus more on
enhancing mutual trust and bolstering economic cooperation, rather
than on being assertive or displaying military muscle over territorial
disputes.
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NOTES

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 42 THE SOUTH CHINA SEA DISPUTE

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 THE SOUTH CHINA SEA DISPUTE 43

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