Cambodia and its main investor and creditor, China, are fast friends. While BRI has had positive effects, negative impacts must be addressed, a report by ODI suggests

This week, G7 leaders committed to raising $600 billion by 2027 for middle and low-income countries, a move widely viewed as countering China’s Belt and Road Initiative (BRI).

They were clear in their mission which is to invest in countries – not an aid or charity – with returns benefitting everyone.

US President Joe Biden stressed that the Partnership for Global Infrastructure and Investment initiative would “boost all of our economies”, and for global communities “to see for themselves the concrete benefits of partnering with democracies”.

Its main focus are climate, developing information and communications technology (ICT) infrastructure and network, upgrading health system infrastructures, and advancing gender equality.

Coming off the heels of the recently-launched Indo-Pacific Economic Partnership (IPEF) by the US (which excluded Cambodia from the initial list), the action by the West against China’s glowing presence is no longer an understatement.

To be sure, the nearly decade-old BRI has brought benefits to developing nations, particularly in the form of public infrastructure and energy projects, with similar outcomes in several developed nations in Europe.

BRI-participating economies represent over a third of global gross domestic product and more than half of the world’s population, the Organisation for Economic Cooperation and Development (OECD) stated in 2018.

Within the BRI framework, China aims to increase trade and investment, build free trade zones, enhance financial cooperation, access natural resources, strengthen transport infrastructure and deepen cultural exchanges.

In Cambodia, these objectives have been met, and more, according to state leaders. Both nations have forged an ironclad friendship that has helped Cambodia drive its growth and development in recent years.

Since 2010, starting with the Comprehensive Strategic Cooperative Partnership, there have been numerous pacts including the BRI in 2016 and the Cambodia-China Free Trade Agreement in 2020.

All of these agreements cover various segments, from trade and commerce, tourism and technology to military and law enforcement, a report by global think tank ODI titled “Risks along the Belt and Road: Chinese investment and infrastructure development in Cambodia” stated.

The report, released end-April 2022, focuses on infrastructure development at the national level, and investment in the tourism and entertainment sector at the local level, in Sihanoukville.

The report, funded by the UK Foreign, Commonwealth and Development Office, acknowledged that “foreign investment and infrastructure development can open development pathways, stimulating investment and job creation, and promote economic transformation in host countries”.

“Chinese firms, as key players in the investment and infrastructure space, can therefore play a major role. For example, China’s BRI can be an engine for growth and development.

“However, this is not a given, as an external change agent, the BRI, and economic engagement with China more broadly, can also generate economic, environmental and political risks in host countries,” it stated, adding that Cambodia presented “two very different situations” at the national and local levels.

“The areas we found to be potentially more challenging were land and housing speculation, as well as economic fragility and over-reliance on China as an economic partner,” it read.

Land issues ranged from the land sizes, absence of community participation and “inadequate” or “misappropriated” compensation to exorbitant land prices. The report, however, noted that the issue was not exclusive to Chinese investors alone.

The report looked at how some aspects of the BRI, like investment, lending, infrastructure construction, and wider Chinese investment, may create risks for the Cambodian people and the country’s development process. “Identifying risks arising from external factors such as the BRI can be challenging, because they are not always well defined.”

Sovinda Po, senior research fellow at the Cambodian Institute for Cooperation and Peace, opined that the ODI report was “very comprehensive”, although the issues raised are “not new”.

“Problems and opportunities of the BRI projects in Cambodia have been well documented since its inception. The impacts of Chinese investments in Cambodia have also been studied as early as the 2000s. Thus, this report is not new and surprising,” Sovinda said.

Largest creditor

China is Cambodia’s number one foreign direct investor, making up more than 50 per cent stake in total investments in 2019.

In 2021, the Council for the Development of Cambodia (CDC) approved fixed asset investments by China worth $2.32 billion, up 67 per cent from $1.39 billion a year ago.

That year, bilateral trade rose 38 per cent year-on-year to $11.2 billion last year, with Cambodia continuing to register large trade deficits every year.

The imbalance is mostly caused by imports of raw material such as fabrics, yarn, cotton and machinery to support Cambodia’s garment manufacturing segment.

According to the ODI report, imports from China into Cambodia have been growing at a “much faster pace than exports”, though it did not appear to be a problem, as Cambodia exports considerable amounts to other countries.

“China is a small market for Cambodian exports compared to much larger partners such as the US, the UK and Germany, absorbing only six per cent of exports [but] China has been the main source of Cambodian imports since 1998,” it said.

Back in 2016, some 41 per cent of Cambodian imports were from mainland China and Hong Kong whereas Cambodia’s exports to China consisted of finished garments and footwear products, raw materials and agricultural products.

In terms of credit, China is the single largest bilateral lender in Cambodia with an outstanding loan of $4.05 billion as of December 31, 2021, and among the larger official development assistance (ODA), or aid partners.

According to ODI, 101 projects bankrolled by China were completed, ongoing or in the pipeline since 2004. Most were financed through concessional loans – 33 via grants, 66 via concessional loans and two financed through non-concessional loans. Of that, 54 projects were in US dollars, and 47 others in Chinese yuan.

“Over a third [40] of the projects were aimed at expanding or upgrading Cambodia’s road network. The second and third most common types of project were related to agricultural or power infrastructure,” it said.

Overall, Cambodia’s public debt of nearly $10 billion is way below its debt ceiling of 40 per cent, although China’s debt alone represents 42.7 per cent of the debt stock.

Eve Barre, economist at credit insurer Compagnie Francaise d’Assurance pour le Commerce Exterieur (Coface), commented that as in several developing countries, China is the first source of investment inflows to Cambodia. On the back of this, the Cambodian economy’s debt to China rose significantly.

“This situation can lead to a ‘debt-trap’ where unsustainable debt burden [leaves] the debtor in difficulties, giving advantage to the creditor – China – by letting it take control of investments’ resulting assets,” Barre said.

Chinese influence on the country goes beyond investment and debt, with China also being the first destination of Cambodian exports of goods, as well as the top source of international tourists. “As a result, Cambodian economic activity greatly depends on China,” the economist shared.

Although the risk of debt trap is palpable, the ODI report cited findings by studies on the effect of BRI projects on Cambodia which showed that the risk of debt stock rise would not pose dangers in terms of debt sustainability to Cambodia.

Based on interviews with the Ministry of Economy and Finance, the report noted that Cambodia manages its debt through a “very conservative approach”, detailed in its debt management strategy (2011–2018). The ministry is also the “gatekeeper” of government borrowings and the only institution that is authorised to borrow money.

Mixed outcomes

The report notes a “strong dichotomy” or a “fractured” development process in Cambodia. It found that the government was able to manage large-scale financial inflows from China, its public external debt and ensure it receives support from a variety of partners. However, the local government (in Sihanoukville) seemed “overwhelmed” by large capital inflows and did not have support to address the challenges.

The report also identified a similar “fracture” in terms of Chinese capital where large companies and state-owned entities work with Cambodia to achieve developmental goals set by the government.

“Individual investors and private enterprises, whether they invest in real estate in Phnom Penh or casinos in Sihanoukville, do not have quite the same impact.

“This is not to say that Chinese private enterprises behave badly – for instance, in Cambodia, Chinese investment has driven the growth of the garment sector, and the country is now one of the top global producers.

“However, private enterprises do not have incentives, nor are they forced by the government, to align with Cambodia’s development model, and in cases such as real estate or gambling, the outcomes of their investment can be mixed,” it stated.

‘Cancelled loans’

Some concerns lay in relation to economic fragility and reliance on China, suggesting that it would be prudent for Cambodia to maintain and strengthen relations with other partners as well in the long term.

Several recommendations were made to ensure that Cambodia benefits, where the government must ensure that risks are managed properly.

The report advised that Cambodia upgrade its economic model to move away from an over-reliance on low value-add manufacturing, support local governments and improve their capacity to regulate, monitor and enforce rules, and develop a framework to ensure that Chinese and other foreign investors have a more positive impact on local communities.

As for the Chinese government, it should consider improving the quality of outward investment, such as training on local rules and regulations and providing support for investors.

It should also strengthen the role of embassies in supporting Chinese citizens who may face difficulties in host countries, and support firms interested in strengthening local linkages by giving them training and toolkits or connecting them with potential partners in-country.

Sharing his views on the report, policy analyst Sam Seun with the Royal Academy of Cambodia said China believes in “peaceful development and win-win cooperation” and actively promotes the concept of global, comprehensive, cooperative, and sustainable security.

China is similar to a bank, in that it provides loans to individuals who need money to improve their businesses.

“All they need is a clear plan and vision on how to use the loan effectively. If customers use the loan effectively, their lifestyle after taking the loan will be much improved,” he added.

Seun said the world has many times seen that China has “cancelled” loans to developing countries because it does not want to “grow alone” but also wants others to grow with it. “We can say that China wants to grow with other countries.”