Booming Southeast Asia in a quandary over U.S.-China rivalry By Martin Petty BANGKOK (Reuters) - A U.S.-China tug-of-war over Southeast Asian influence is proving to be a critical test for Washington's "pivot" East as Beijing strengthens its economic and military clout in its own backyard. Countries of the Association of South East Asian Nations (ASEAN), one of the world's fastest growing regions, are weighing up how to play their cards as the United States plays catch-up with the Chinese juggernaut and tries to reassert itself in Asia. Washington's recent flurry of engagement with ASEAN states - from the Philippines and Thailand to Singapore and Vietnam - is a potential source of friction with China, especially as tempers flare over territorial disputes and the rapid Chinese military build-up in the resource-rich South China Sea. But with longstanding U.S. alliances in the region and China's client-state relationship with several members, the ASEAN bloc is unlikely to agree on issues involving the two superpowers at a meeting of their foreign ministers in Cambodia this week. Individual interests are seen more likely to triumph over consensus at the meeting, which will also be attended by U.S. Secretary of State Hillary Clinton and Chinese Foreign Minister Yang Jiechi. Some countries will be in a quandary about how to balance ties to get the best out of both of the big players, while others will seek to use the rivalry as an opportunity to extract leverage for economic or military advantage. Laos, Cambodia and Myanmar, ASEAN's poorest states, remain in China's orbit as a result of no-strings loans, desperately needed infrastructure development, military support and floods of investment from Chinese firms. Beijing also has close economic ties with Singapore and Malaysia and has been aggressively wooing Thailand - a major ally of Washington since World War Two and the launch pad for its Vietnam War operations - offering loans and technology for a high-speed rail network, hundreds of university scholarships to Thai students and recently agreeing to supply Bangkok with 10,000 Chinese-language teachers. Thitinan Pongsudhirak, director of Chulalongkorn University's Institute of Security and International Studies, said Thailand was a "pivot state" in ASEAN, traditionally close to Washington but now hedging more towards China. China's strategy in Thailand and several other ASEAN countries was not just trade and investment, but building close relationships to serve its long-term strategic interests. "China is already engaged all over Southeast Asia ... they're the resident superpower here," Thitinan said. It's China's stealth power that we've not seen, it's not spoken, it's not aggressive. China can put a lot more in and doesn't need something out of it right away. After largely shunning ASEAN under the Bush administration, the United States may fear it is lagging behind as China taps ASEAN's growth. Some analysts say the new Asian strategy is as much about trying to dispel the notion that Washington's economic clout is shrinking as China continues to boom. The obvious signs of renewed U.S. engagement have so far been military-led, with Defense Secretary Leon Panetta visiting the region last month to announce plans to base 60 percent of U.S. warships in the Asia-Pacific by 2020, allowing the U.S. "to be agile, to be quickly deployable, to be flexible." Part of that would be the use of ports in the Philippines, Vietnam and possibly Singapore, in exchange for training and technical support. The U.S. is also seeking to set up a humanitarian response centre at a former Vietnam War-era base in U-Tapao in Thailand. Washington's charm offensive in the region has emboldened Vietnam and the Philippines, which have taunted China with renewed claims to sovereignty in the South China Sea and prompted talk of possible requests for the deployment of U.S. spy planes there. According to several ASEAN diplomats, China is suspicious of the U.S. motives and has been lobbying aggressively behind the scenes to shoot down a proposal by Vietnam and the Philippines to draft a joint ASEAN communique on the maritime dispute as rhetoric heats up again after a recent cooling-off period. The required consensus is unlikely, however, with ASEAN chair Cambodia - China's biggest regional ally and recipient of billions of dollars of loans and investment - refusing to play ball, diplomats told Reuters. Yet, China and the United States have played down talk of a geostrategic rivalry in the region, welcoming each others' presence and seeking to allay fears in ASEAN that their influence would negatively affect the grouping. "Too often in ASEAN there's a concern ... of dangerous strategic competition between the United States and China," Kurt Campbell, the State department's top official for East Asia and the Pacific, said recently. It's our determination and strong determination to make clear we want to work with China. In an interview with Thailand's Nation newspaper two weeks ago, China's Vice Foreign Minister Fu Ying said ASEAN was an "unquestionable priority" for China, but in a veiled reference to new U.S. engagement, warned the group to stay independent. "If ASEAN takes sides, it would lose its relevance," Fu added. U.S. officials stress that the shift in focus towards Asia is also as much about business. U.S. diplomats say corporate America is increasingly interested in Southeast Asia, encouraged by the plans for the ASEAN Economic Community. The ASEAN region has shown resilience to the global economic downturn and is currently one of the few bright spots in the world, driven by foreign direct investment, public infrastructure spending and strong domestic demand. Morgan Stanley has forecast the investment percentage of GDP for Indonesia, Thailand and Malaysia to rise from 22.7 percent in 2011 to 23.2 percent and 23.6 percent in 2012 and 2013. But U.S. investment in the region could mean muscling-in on China's traditional turf. ASEAN's biggest-ever meeting of U.S. businessmen will take place this week in Cambodia, an event Clinton will also attend. She will also visit Laos, becoming the most senior U.S. official to do so in 57 years. She will announce a U.S. "Lower Mekong Initiative" offering support in education, environment, health and infrastructure in the Indochina region. Additionally, Washington has started easing some sanctions on fast-reforming Myanmar that could eventually allow U.S. firms to tap its vast resources, including timber, gemstones, gas and oil, a sector China has so far dominated to safeguard its massive energy needs. A U.S. business delegation will visit the country later this month. Such moves are good news for China-dependent economies like Laos and Myanmar, which are now reaching out to other countries to try to diversify their sources of investment. Most countries publicly say they won't side with China or the United States. Some see the engagement is a boon because individual states can exploit the rivalry for their own gain. Former Thai Foreign Minister Kantathi Suphamongkhon said there was a misperception Thailand's closer links with China meant a deterioration of its U.S. ties. Thailand, he said, was in a strong position to reap benefits from both countries. "It is important to avoid seeing Thailand's relations with the U.S. and with China as a zero sum game," he said in an email, adding that ASEAN had always wanted a U.S. presence in the region "as a force for stability." But it may have the opposite effect. The indirect U.S. involvement in the South China Sea issue has led to sabre-rattling and growing calls in China for a tougher stance on the dispute, which a U.S. official on Saturday said was complicated by "intense nationalist sentiment" in the countries affected. However, increased tensions, providing they do not escalate into confrontation, could work in favor of ASEAN states. "They don't want China and the United States to be in complete agreement," added Thai academic Thitinan. These tensions and rivalries give them leverage and bargaining power. Though the far-reaching moves by Washington and Beijing to court individual ASEAN countries are likely to mean greater investment, the competing interests of the heavyweights may lead to split decisions on ASEAN policy that could dent the bloc's credibility as its 10 member states and 600 million citizens prepare to be integrated into one economic community by 2015. "The consequence of the U.S. pivot is any prospect for a unified ASEAN is minimal," said Michael Montesano of the Institute of Southeast Asian Studies in Singapore. Its members are all aligned in different ways and it puts ASEAN as a grouping in a very uncomfortable position. Additional reporting by Ben Blanchard and Michael Martina in Beijing and Manny Mogato in Manila; Editing by Jeremy Laurence