Japan shifts focus of foreign aid from infrastructure to technology 

G7 countries are struggling to present viable alternatives to China’s Belt and Road 

In May, an expert panel in Japan revised the 2025 official development assistance (ODA) plan, retooling foreign aid to focus on advanced technology. This revision envisages providing emerging economies with technological aid in areas including environmental issues, artificial intelligence, quantum computing, infectious diseases and space development. Japan has also committed to streamline research partnerships with Japan’s Science and Technology agency for researchers interested in looking into quantum computing's applications in disaster preparedness, infectious disease, ageing population and labour-saving technologies. 

Japan’s strategy shift is notable for several reasons. Japan has traditionally used its foreign aid to boost demand for domestic goods and services, with 32 percent of Japan’s aid in 2018 – excluding aid for least developed countries – tied to domestic firms, particularly in the infrastructure space. Japan’s updated policy may provide a boon for Japanese technology companies who are mostly experiencing tepid growth in their home market. Japan has also traditionally been Southeast Asia’s largest infrastructure investor. As of 2021, Japan had invested US$259 billion in infrastructure projects in Indonesia, Malaysia, Philippines, Thailand and Vietnam, compared to China’s US$175 billion. As the largest contributor to infrastucture investment in Southeast Asia, Japan’s decision to prioritise technology may well hinder the progress of the G7 Partnership for Global Infrastructure and Investment (PGII) in its efforts to provide viable alternatives to China’s Belt and Road initiative. So far, the US has claimed to have “mobilised” more than US$60 billion over the last three years for PGII investments globally, as part of an overall goal to mobilise US$200 billion by 2027. PGII’s focus on “mobilising” capital rather than directly investing it, arguably makes it appear somewhat nebulous when juxtaposed to the hard capital commitments of China’s Belt and Road Initiative. Japan’s absence will be noted.   

Malaysian states pushing for greater autonomy 

A potential dilution of central power is a dynamic that investors will need to contend with  

A pursuit for greater autonomy is being driven by several Malaysian states, including oil and gas-producer Sarawak and Johor, the country’s largest trade contributor and key logistics hub.  

In Sarawak’s case, concerns are mounting in Putrajaya about the potential for these ambitions to evolve into a push for independence. Culturally distinct from most of peninsula Malaysia, Sarawak has amassed outsized political weight since 2018, extracting concessions from Malaysia’s administrative capital Putrajaya, as more federal powers are devolved. Key wins have included securing a constitutional amendment in 2021 which cemented the political autonomy safeguards originally provided for Bornean states in the ‘Malaysia Agreement’ of 1963. The drive for greater autonomy is being driven by Sarawak’s Gabungan Parti Sarawak (GPS) ruling coalition, who was instrumental in providing Prime Minister Anwar Ibrahim with the parliamentary numbers needed to take office in the 2022 elections. One of the main impetuses for greater autonomy is the perception of an unfair distribution of resource wealth. Sarawak holds more than 60 percent of Malaysia’s natural gas reserves and 40 percent of its crude oil reserves, making it a vital player in the Malaysian economy, yet it remains poorer than most states in the peninsula. In recent years, Sarawak has exerted greater control over its resources, establishing its own oil company PETROS and extracting higher revenue shares of oil and gas resources from national energy giant Petronas.  

At the same time, Johor has been seeking to gain greater legislative and financial autonomy to empower it to pursue its regional economic ambitions. Last week, the Johor regent, Tunku Ismail Sultan Ibrahim’ called for ‘equal partner status’ with the Malaysian federal government as well as an increase in its contributed tax revenue returns from 3 percent to 30 percent. Greater autonomy would provide the state with increased flexibility in developing the proposed Johor-Singapore Special Economic Zone (JS-SEZ). The JS-SEZ seeks to bolster investment in electronics, health, and financial industries and is expected to attract several multinational firms into Johor, including Chinese companies seeking to circumvent US tariffs.  

The rise of state autonomy in Malaysia is likely to remain a permanent feature of national and state politics for the foreseeable future, with the potential to significantly increase the dilution of Putrajaya’s power. This presents a relatively new dynamic for investors to contend with. 

India mulls expansion of manufacturing subsides to target more labor-intensive industries 

Modi facing increasing pressure to address high unemployment in the aftermath of election  

An expansion of India’s Production Linked Incentives Scheme (PLI) is being considered by the government, amid growing recognition that high unemployment was catalyzed the BJP’s poor results in India’s recent elections. Unemployment in India has hit 8 percent and youth unemployment has climbed to 45 percent. While Prime Minister Narendra Modi has sought to pursue manufacturing as a priority for job creation, with plans to increase India’s share of global manufacturing output from its current 3 percent to 5 percent by 2030 and 10 percent by 2047, he has struggled to create jobs in more labor-intensive sectors. A flagship priority of the Modi government has been to establish India as a high-tech manufacturing hub, capitalising on an increased appetite for diversification from China. Significant government funding has been allocated to high-value-added manufacturing industries such as semiconductors, solar panels, storage batteries and IT products and pharmaceuticals, underpinned by the government’s Production Linked Incentives Scheme. Almost US$10 billion in subsidies has been allocated to chip manufacturing. Meanwhile, India's labour intensive albeit lower-value-added sectors have shrunk significantly due to a lack of investment. Of the 23 components of the index of industrial production, exports from 11 labour-intensive sectors were lower in 2023 than 6 years prior.  In the textiles industry, Indian exports now trail Vietnam, Bangladesh and China. 

While the government expansion of the PLI Scheme to incentivise further investments in the lower end of the manufacturing scale may help address unemployment concerns, India faces other challenges in driving job creation and attracting foreign investment. India has sought to position itself as an attractive hub for companies seeking to reduce their risk exposure to China. Yet despite its status as the world’s fastest growing major economy, inflows of FDI have fallen in recent years. India currently attracts gross FDI inflows of less than US$30 billion annually, compared to the US$50 billion it was attracting on average between 2019 and 2022. Manufacturing costs in India are also elevated because of skills shortages, the higher costs of capital and tariffs on imports, including on components for high-end manufacturing. India needs to import about 85 percent of raw materials, including critical minerals, for the manufacture of items like chips and smartphones. Stronger integration of India’s manufacturing sector with global markets and supply chains is also limited by its absence from several trade and investment agreements, including Asia’s Regional Economic Comprehensive Partnership (RCEP).  

Stream of Chinese investments position Gulf as significant solar manufacturing hub 

Polysilicon manufacturing investments suggest a shifting approach to Chinese offshoring 

Chinese solar manufacturers are turning to the Gulf Arab states to expand their production, with investments that could transform the region into the world's largest solar manufacturing hub outside China. This month, the world's largest TOPCon solar cell manufacturer, China’s Drinda New Energy, announced plans to establish a 10GW cell manufacturing plant in Oman. Meanwhile, GCL Tech announced its intentions to build the world’s largest FBR granular polysilicon manufacturing plant in the UAE. These recent announcements follow earlier moves by China’s TCL Zhonghuan and Trina Solar, the world’s second-largest wafer and module producers, to establish manufacturing plans in the region, as well as a Chinese-invested polysilicon plant in Oman. Plans in the Gulf region appear increasingly systematic and ambitious, with announcements that would translate into 135 GW of module production annually. This forecasted output would exceed the combined installation growth of 89GW in the EU and US. Investment in upstream activities like polysilicon manufacturing suggests the region could emerge as a key player across the entire solar supply chain. Chinese manufacturers are tapping into the rapidly increasing energy needs of the Gulf market, which have set ambitious solar targets, particularly to offset losses from shrinking exports to the US and EU due to tariffs. 

While the investments suggest the region is making strong advances towards their goals of decarbonising and diversifying their economies, several potential barriers exist. Modules made in the region are unlikely to be cost-competitive with modules produced in China, where solar production costs have dropped by 42 percent over the last year, declining to 15 cents per watt – 60 percent lower than US price per watt and significantly lower than Europe’s 30 cents per watt. Further, if the forecasted scale of output materialises, existing global overcapacity could be exacerbated. Given this, Gulf-produced modules are likely hoping to export to locations with high tariffs against Chinese solar products - principally the US. The Biden Administration has demonstrated greater resolve to address the offshoring of Chinese solar companies. The recent lifting of a two-year exemption on import tariffs on solar products made across Vietnam, Cambodia, Thailand, and Malaysia, where many Chinese manufacturers had previously flocked (mostly for assembling parts imported from China) is case in point, raising the risk of their potential expansion to Chinese companies in the Gulf. This temptation, however, might be mitigated or at least postponed, due to a growing recognition that despite the surge in development fueled by the Inflation Reduction Act, the US's ability to manufacture at competitive costs and scale is challenged. The increasing localization of the solar supply chain into the Gulf by Chinese companies may also act as a shield from tariffs targeting Chinese trans-shipment. 

China finalises deal for deep-water megaport in Peru 

The US has expressed concern over the megaport’s capacity to dock Chinese  

The China Ocean Shipping Group (Cosco) is building a US$3.5 billion deepwater mega port in Chancay, Peru. The Chancay deepwater ports’ nearly 60 feet of depth will allow the world’s largest container ships to dock in Peru and substantially expedite trade voyages between Lima and Shanghai. Currently, Peruvian companies send cargo on smaller ships to Mexico or California before shipping to China. This direct route will reduce transport time from 35 days to 25. Other countries in Latin America will benefit, including Brazil – which ships two thirds of its iron ore and soybean exports to China.  

The US has expressed concerns that the port may have dual use military applications. For its part, China has insisted that the port’s focus will purely be commercial. However, the 2016 National Defense Transportation Law makes it incumbent upon Chinese infrastructure operators, including those operating abroad, to consider national defence in their operations. Chinese naval ships have docked at over a third of all Chinese operated ports. Regardless of whether Chancay will have military application – most naval visits have been largely ceremonial – the US has undoubtedly ceded a large measure of economic influence to China in Latin America. Brazil has disregarded US warnings and installed Huawei 5G networks with intensions to develop semiconductors with China. Meanwhile, China is building a metro in Colombia’s capital and buying up Argentinian lithium mines. While the US remains the largest investor in South America, it can no longer take for granted that it is the region’s primary economic force.