China’s continued influence on Cambodia’s economy

By mom Mit

For decades, China has influenced global supply chains and had a major impact on Asia’s economic landscape. Due to its advantageous geographical position and expanding economy, Cambodia has attracted 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 advantages of China’s infrastructure projects. But Cambodia should consider diversifying its investment portfolio rather than relying solely on funding from China.

China has provided infrastructure support to Cambodia as part of the Belt and Road Initiative. Thanks to these multi-million dollar investments, vital infrastructure has been developed, such as a vast network of roads and bridges. Improving Cambodia’s logistics capabilities will require major projects. These include the Sihanoukville Special Economic Zone, the Funan Techo Canal waterway, the 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 with Western countries and regional alliances such as the Regional Comprehensive Economic Partnership (RCEP) bloc.

Due to the manufacturing shift caused by China’s rising labor costs, many sectors have relocated to Southeast Asia. Cambodia will benefit 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 percent of Cambodia’s garment factories, underscoring Cambodia’s integration into the world’s manufacturing supply chains.

The garment industry, which accounts for 40 percent of the country’s GDP, is evidence of Cambodia’s growing importance in the global supply chain. Cambodia’s economy has expanded rapidly over the past 20 years, achieving 7.7 percent growth in 2019, mainly due to exports of textiles and clothing to local and foreign markets.

Cambodia’s strategic position in the global supply chain is influenced by China’s status as one of Cambodia’s major trading partners. The China-Cambodia Free Trade Agreement, which came into force in January 2022, has completely changed the rules of the game. Tariffs have been removed on 90 percent of Chinese exports to Cambodia and 97.53 percent of Cambodian exports to China. The economic exchange of countries has increased with the elimination of trade barriers.

Cambodia’s membership in the Regional Comprehensive Economic Partnership (RCEP) demonstrates deeper integration into the regional trade ecosystem. Trade volumes have increased significantly since the establishment of the RCEP: in 2023 alone, trade with RCEP member countries increased by more than 28 percent, reaching $8.172 billion, up from $6.34 billion in 2022.

These figures demonstrate the importance of trade agreements in raising Cambodia’s profile in international supply chains and improving its trade profile. Cambodia moved from 11th in 2021 to 8th in 2022 as a major clothing exporter. Chinese companies operating in Cambodia have created employment opportunities for more than one million Cambodian workers.

In addition to financial contributions, China’s involvement in Cambodia encompasses technology transfer and skills upgrading, increasing workforce capacity and accelerating the integration of new technologies. More than 4,500 Cambodian students have studied in China, and more than 800 receive financial aid from the Chinese government, particularly through the Belt and Road Initiative scholarship program. For Cambodia to maintain its competitive advantage in global supply chains, this contribution is essential.

But as of early 2023, Cambodia’s government debt was $10.27 billion, with China holding the lion’s share, about $3.9 billion. China’s biggest impact on Cambodia’s economy extends to the importance that Chinese loans have had for the country’s infrastructure development.

The Cambodian government stated that even if the debt has increased slightly, it is still manageable thanks to a comprehensive operational management system, policies, plans and legal framework. Cambodian Prime Minister Hun Manet said: “I wish to remind our citizens… We are committed to borrowing prudently, within the limits set by our annual budget laws, ensuring that we never reach a debt trap and at the same time time supporting our economic growth. .

While Chinese financing supports Cambodian infrastructure, it also serves China’s strategic interests. The government of former Cambodian Prime Minister Hun Sen demonstrated strong support for China’s preferences, as evidenced by the closure of the Taiwan embassy in 1997, the deportation of Uyghurs to China, and the failure to issue a joint ASEAN communiqué. 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 supporting China in 2019 over the Hong Kong political crisis.

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

Protecting Cambodia’s sovereignty requires a balanced strategy that engages more with other international actors while 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 ensure better long-term security and sovereignty while optimizing its economic relations with China.

Mom Mit is a master’s student at the Department of Strategic and Innovative Development at the Financial University (FinU) based in Moscow, Russian Federation.

News Lens has been authorized to republish this article from the East Asia Forum. East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policies, focused on the Asia Pacific region.

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