China’s continuing influence over Cambodia’s economy

For decades, China has influenced global supply chains and has had a major impact on the economic landscape of Asia. Due to its advantageous geographic position and expanding economy, Cambodia has drawn significant interest from China, which has influenced Cambodia’s integration into global supply chains.

Better connectivity, closer economic ties with the rest of the world and the region, and attracting foreign direct investment are all advantages of China’s infrastructure projects. But Cambodia ought to consider diversifying its investment portfolio rather than relying solely on funding fromChina.

China has provided infrastructural support to Cambodia as part of the Belt and Road Initiative. Due to these multibillion-dollar investments, vital infrastructure — such as a vast network of highways and bridges — has been developed. Enhancing Cambodia’s logistical capacities will require significant projects. These include the Sihanoukville Special Economic Zone, the Funan Techo Canal waterway, Techo International Airport and the recently opened Siem Reap–Angkor International Airport. These multibillion-dollar infrastructure projects not only increase Cambodia’s connectivity, but also strengthen its ties to Western countries and regional alliances like the Regional Comprehensive Economic Partnership (RCEP) bloc.

Because of a manufacturing shift brought about by China’s rising labour costs, many sectors have moved to Southeast Asia. Cambodia stands to gain significantly. China’s significant investments in the textile and electronics industries are enabling this transformation, turning Cambodia into a booming manufacturing hub. Chinese companies now own 90 per cent of Cambodia’s clothing factories, underscoring Cambodia’s integration into the world’s manufacturing supply chains.

The garment industry, which accounts for 40 per cent of the country’s GDP, is proof of Cambodia’s growing significance in the global supply chain. Cambodia’s economy has expanded rapidly over the past 20 years, reaching 7.7 per cent growth in 2019 — mostly due to exports of textile and apparel items to both local and foreign markets.

Cambodia’s strategic position in the global supply chain is influenced by China’s status as one of Cambodia’s principal trading partners. The China–Cambodia Free Trade Agreement, which went into force in January 2022, has completely changed the game. Tariffs on 90 per cent of Chinese exports to Cambodia and 97.53 per cent of Cambodian exports to China have been removed. The countries’ economic exchange has risen with the removal of trade barriers.

A deeper integration into the regional trade ecosystem is shown by Cambodia’s membership in the Regional Comprehensive Economic Partnership (RCEP). Trade volumes have increased significantly since the establishment of RCEP — in 2023 alone, trade with RCEP member countries increased by over 28 per cent, reaching US$8.172 billion, up from US$6.34 billion in 2022.

These numbers demonstrate how important trade agreements are to raising Cambodia’s profile in international supply chains and enhancing its trade profile. Cambodia rose from ranking 11th in 2021 to 8th in 2022 as a major exporter of clothing. Chinese companies operating in Cambodia have created employment opportunities for over one million Cambodian workers.

Apart from financial contributions, China’s involvement in Cambodia encompasses technology transfer and skill enhancement, augmenting the labour force’s capacity and expediting the integration of novel technologies. More than 4500 Cambodian students have studied in China, with more than 800 receiving financial aid from the Chinese government, notably via the Belt and Road Initiative scholarship program. For Cambodia to maintain its competitive edge in global supply chains, this contribution is essential.

But as of early 2023, Cambodia’s governmental debt was US$10.27 billion, with China holding the lion’s share, at approximately US$3.9 billion. China’s major impact on Cambodia’s economy extends to how important Chinese loans have been for the country’s infrastructure development.

The Cambodian government stated that, even if the debt has slightly increased, it is still manageable thanks to a thorough operational management system, policies, plans and legal framework. The Prime Minister of Cambodia, Hun Manet, said, ‘I wish to remind our citizens … We are committed to prudent borrowing, well within the limits set by our annual budget laws, ensuring we never reach a debt trap while supporting our economic growth’.

While Chinese funding supports Cambodian infrastructure, it also serves China’s strategic interests. Former Cambodian prime minister Hun Sen’s government demonstrated strong support for China’s preferences — as evidenced by the closure of Taiwan’s embassy in 1997, the deportation of Uyghurs to China and the failure to issue a joint ASEAN communique in 2012 due to criticism of China’s actions in the South China Sea. Cambodia also refused to allow the display of the Taiwanese flag in 2017 and issued an official statement in support of China in 2019 regarding the Hong Kong political crisis.

To ensure economic resilience, Cambodia must diversify its investment sources and lessen its reliance on China. To avoid a debt trap and promote sustainable growth, Cambodia also needs to strengthen its debt management initiatives. Expanding export markets requires trade diversification beyond China, particularly through regional accords like RCEP. Cambodia can also become more competitive by working with China to invest in education and skills development.

Protecting Cambodian sovereignty requires a balanced strategy that engages more with other international players while also preserving ties with China. For infrastructure projects to be implemented and resources used effectively, more transparent governance is essential. These actions will allow Cambodia to secure better long-term security and sovereignty while optimising its economic relations with China.

Mom Mit is a Master’s Student in Management and International Business at the Financial University under the Government of the Russian Federation in Moscow, Russia.

Source: East Asia Forum