By Baron Laudermilk
Cambodia is a fascinating and dynamic Southeast Asia nation with a population of over 14.8 million, making it the 68th most populated country in the world. Its government is unique as the state’s official religion is Theravada Buddhism, in which an estimated 95% of the people practice. The country’s economy has been growing rapidly due to the rise of Asian tourists and also because of its expanding services, agricultural, and manufacturing industries.
But as Cambodia continues to rely on China as an export hub, Chinese investors will have more opportunities to invest in Cambodia’s rapidly growing economy.
Cambodia’s Current Economic Drivers
From around 2004~2008 Cambodia’s economy grew about 10% annually, driven by the growth of its textile center, construction, agriculture and tourism industries. In January 2005, the WTO agreement on textiles and clothing expired. This forced Cambodian producers to compete with cheaper labor from China, India, Vietnam and Bangladesh. But despite this setback, the country has found ways to grow.
Rubber exports in 2011 increased by 50% due to China’s rising demand in rubber, and the tourism industry has continued to boom as more tourist flock to the country. The country’s GDP by composition sector also makes it vulnerable to China and India’s locations. The GDP composition by sector in Cambodia sits at 30% in agriculture, 30% in manufacturing and 40% in services. Its main export partners are the U.S. (54.5%), Germany (7.7%), and Canada (5.9%).
The Asian Development Bank (ABD) predicts that in 2013, Cambodia will grow stronger in garment and footwear exports. ABD’s annual economic publication, Asian Development Outlook 2012, stated that the country’s economic growth would moderate to 6.5% in 2012, down from 6.8% in 2011, with a subsequent slight growth to 7.0% in 2013. This projection predicts that the EU and the U.S. economies – Cambodia’s main export partners – will continue to have an incremental recovery. Cambodia’s expected growths in 2013 will most certainly occur, as China will slowly begin importing more products from that nation and Europe.
As China’s labor becomes more expensive, it’s possible that we may see it importing some cheap goods from Cambodia. But as of now, Cambodia lacks a strong infrastructure to support China’s demand.
Andrew Mertha, a specialist in Chinese and Cambodian politics and who lectures at Cornell University in the United States, said, “It is possible that China might import more goods from Cambodia as labor costs goes up in China. But Cambodia’s ability to satisfy China’s demand for such goods as it shifts away from export-led manufacturing as its principal economic engine is at best limited because of Cambodia’s size and infrastructure.”
Cambodia’s Free Trade Agreements
On November 4, 2002 the Chinese Premier Zhu Rongji and the leaders of the 10 ASEAN nations, including Cambodia, signed a landmark Framework Agreement on ASEAN-China Comprehensive Economic Cooperation, making it one of the largest free-trade areas in the world. Since then Cambodia has been lowering tariffs and establishing economic zones across the country to attract foreign investment.
To diversify its economy and reignite economic growth, in 2005 Cambodia enacted a law called the Establishment and Management of Special Economic Zones (SEZs). This gives certain regions special economic, legal, regulatory, and other advantages compared to the rest of the country. Since then, 21 SEZs have been established, but the World Bank and the Cambodian authorities believe that the full investment potential of Cambodia’s economy has yet to be fully tapped.
The most recent new special economic zone in Cambodia occurred in a coastal area of Sihanoukille province on May 1, 2012 to pull capital from foreign investors. Japanese Ambassador to Cambodia, Masafumi Kuroki, whose country provided $45 million in loans for the project said, “The Special Economic Zone is expected to attract foreign direct investment for the production and the export of the manufactured products. Direct connection of the Port is one of the advantages of this SEZ by reducing the cost and time for transport of materials and products. High quality of infrastructure such as water supply and sewage treatment facilities in the zone is another attracting point of this SEZ.”
There is little doubt amongst analysts that Cambodia’s SMEs will improve the state of the economy and create many opportunities for foreign investors. The key challenge for Cambodia is to continue to reduce its high 25% poverty rate, and to continue to diversify its economy away from agricultural goods.
China’s Opportunities: Investments, Businesses and Ideas
Cambodia’s rapidly growing economy has made many opportunities for Chinese investors and business owners. China is already the largest investor in Cambodia’s infrastructure, which has received $8.8 billion of investments from China from 1994 to July 2011, and this is only expected to continue in the upcoming years.
“China has reactivated several moribund plans for hydropower development in China and has only begun investing in downstream projects in Cambodia and elsewhere in Southeast Asia” said Mertha. “And given that Chinese ‘non-conditionality’ and ‘non-interference’ translate into lucrative long-term operating licenses on the infrastructure projects that it builds on Cambodian soil, I do not see any prospects of slowing them down. And this extends to road-building, the redevelopment of Cambodia’s railway network, and the expansion of its port facilities,” he added.
Chinese investors can spot opportunities in Cambodia’s expanding industries, such as its garment industry, hydropower dams, banking and finance sectors, its tourism industry, mineral resources, and technology sectors.
Chinese businesses already own most of the garment factories in Cambodia compared to other foreign investors. This is expected to continue to augment as the industry expands because of more free trade agreements emerge.
Source: Sophal Ear, Assistant Professor US Naval Postgraduate School, June 17, 2011, City University of Hong Kong.
The steal sector in Cambodia has been growing rapidly in the last few years as the country’s infrastructure continues to improve. Chinese investors have not been sitting on the sideline as this has been happening. As China’s thirst for steal continues to increase as skyscrapers crop up across the country, Chinese banks and investors are making their investments not only in the steal industry, but also in its technologies and infrastructure. In May 2012 The Export-Import Bank of China announced that it would be investing $235 million to modernize Cambodia’s TV and phone systems. The bank also announced that it would build a steel plant by importing raw materials from overseas to be manufactured in Cambodia and supply the products to regional markets. These trends are expected to mushroom as Cambodia makes the transition from an agricultural economy to an industrialized economy.
Tourism is another industry that Chinese investors will find lucrative. Some analysts have predicted that the Cambodian government approves more foreign investments in the tourism industry than any other in the country.
Daniel C. O'Neill, a professor of Cambodian and Chinese politics at the University of the Pacific, said that actually the Cambodian authorities approve most investments in garments and textiles, but Chinese investors will still find rewarding opportunities in Cambodia’s tourism sector as it is expected to rapidly grow in the next few years.
“It is not the case that the Cambodian government approves more investments in tourism than in any other sector. Most approved investments are in industries, such as garments and textiles. Tourism makes up a large proportion of the amount of approved investments because of the massive size of a few investments in this sector. Tourism in Cambodia is expected to double over the next several years, so there is certainly room in this sector for Chinese investors,” said O’Neil.
Share of Approved Investment by Sector, 2000~June 2010
Source: CDC (2010)
Plenty of Opportunities in Cambodia
Cambodia’s authorities is keen on making Cambodia a strong and productive nation, which means that it will continue to implement policies that will attract foreign investments and international businesses. Chinese investors have already been significantly investing in the country’s infrastructure, resources, technology, and agricultural industries. As Chinese business owners continue to look for a relatively cheap place to produce goods and services, and an economy that is expected to grow, opportunities in Cambodia will increasingly become copious and will undoubtedly bring investors satisfying gains.