Cambodians wary as Chinese investment transforms their country

Chinese investment is fueling a construction boom in Cambodia, but it is also bringing headaches. (Photo by Akira Kodaka)

Hun Sen, ruler for 33 years, faces little opposition in upcoming election

PHNOM PENH/SIHANOUKVILLE, Cambodia — As boom-mounted cameras swept the horizon, a drone hovered above more than 50,000 party faithful who had begun streaming noisily through the Cambodian capital well before dawn, dressed in white shirts and caps, and waving blue flags.

The modern technology captured an old and familiar scene: the unshakable Cambodian People’s Party elite out in strength ahead of a controversial general election that most observers believe lacks a credible opposition. The main Cambodian National Rescue Party was dissolved by Supreme Court order, and its leader Kem Sokha is in prison.

Kicking off the campaign for this month’s election was the longest-serving prime minister in the Asia-Pacific region: Hun Sen, the 65-year-old party chairman. Singers performed rousing favorites, monks dispensed petals and blessings, and troupes of dancers — apsaras, rowers and ducklings — softened up the crowd. At 7:15am, Hun Sen began reading from a prepared text and did not stop for 70 minutes. He was interrupted only once by a brief, almost auspicious sprinkling of rain.

There were none of the prime minister’s trademark digressions and tirades; he looked trim, well-rested and confident as he spoke of how the war-stricken country had evolved into an “island of peace.” He stressed the importance of sovereignty and of avoiding foreign interference, but mentioned no foreign powers by name. He reminded the crowd that under CPP rule, the economy has seen steady growth, with most people lifted from poverty. As he spoke, his audience sat patiently in the cool morning, some chatting quietly, taking selfies, or dozing, only to be roused for well-prompted cheers every 10 or 15 minutes.

Cambodian Prime Minister Hun Sen and his wife, Bun Rany, release doves at an election rally in Phnom Penh on July 7. (Photo by Akira Kodaka)

Among the distinguished guests was China’s ambassador to Cambodia, Xiong Bo. His presence at a party rally was remarkable given that China constantly protests its political neutrality and no-strings-attached approach to foreign relations. No other ambassadors were to be seen — certainly not William Heidt of the U.S., who has a Cambodian wife, Sotie, and speaks Khmer. Not that Heidt, who has been lambasted to his face in public by Hun Sen, would ever attend so political an event.

Xiong and Hun Sen are known to be close. They frequently appear in each other’s company, breaking ground on projects and opening infrastructure funded by China. On the agenda are a new airport for Phnom Penh in neighboring Kandal Province, and a four-lane expressway to Sihanoukville slated to start in 2019.

China overtook the U.S. as Cambodia’s main trading partner in 2014, and there may be no going back. Ironically, Hun Sen’s Vietnam/Soviet Union-backed regime spent the 1980s battling the China-backed Khmer Rouge based along the border with Thailand. Japan was the biggest contributor to the $2 billion United Nations operation that in 1993 sought to bring peace and establish liberal democracy in Cambodia. Hun Sen has accepted substantial Western aid and staged elections every five years since, but even with 20 parties participating, most observers regard Cambodia as an authoritarian state.

The rally’s setting was a fitting symbol of how China has eclipsed the other nations that hoped to shape Cambodia’s political and economic development. Koh Pich, or Diamond Island, is a reclaimed silt island of about 68 hectares that not long ago was home only to a few impoverished market gardeners. Today, Diamond Island City has been transformed by riverside restaurants, office blocks, condominiums, serviced apartments, international schools and upmarket gated communities. It connects to the capital across a narrow channel by four bridges and has a footprint about 60% larger than London’s Canary Wharf.

A tribute to the Arc de Triomphe in Paris is under construction, but little of this exuberance has anything to do with France, the old colonial power. A sign for China State Construction on one of the massive construction sites nearby alludes to the driving force behind the property explosion. Chinese characters are splashed across new commercial buildings, and road signs are in Chinese, English and Khmer.

After the rally, Hun Sen and his wife, Bun Rany, departed from Diamond Island in a minivan. Ambassador Xiong made his own way through the friendly crowd to a Chinese restaurant. He was escorted by a uniformed policeman, who pocketed the cash tip slipped to him with a broad smile.

Diamond Island City is spectacular, but it is only the tip of Chinese investment in Cambodia. In another speech on July 2, Hun Sen noted that China is now the biggest foreign investor in the country. Last year, it pumped in $1.644 billion officially. China estimates the total construction contracts signed by the end of 2017 were worth $17.54 billion in a country where nominal GDP is just over $20 billion.

Diamond City, a small reclaimed island in Phnom Penh, has been transformed by recent Chinese investment. (Photo by Akira Kodaka)

“For beautiful Phnom Penh, we respectfully present an even more beautiful lifestyle,” Guangzhou R&F Properties, a Hong Kong-listed major mainland Chinese developer, declares in a banner across a premium condominium under construction and valued at over $2 billion. The company is building on 7 hectares of reclaimed swamp bordering a four-lane street named after Hun Sen. The company started selling its 5,000 units in May and the following month was already reporting first sales of 215.2 million yuan ($31.6 million).

Across from Diamond Island sits NagaWorld, the only legal gambling house in Phnom Penh. Its massive new hotel annex several hundred yards down the road is accessible through an underground passageway lined with airport-style shops selling alcohol, tobacco, jewelry and designer clothes.

A Rolls-Royce is often among the luxury vehicles parked outside the new building, where security officers check everybody. Mostly Chinese tourists crowd the gaming tables and slot machines. Very few of the goods on sale in the subterranean paradise come from China, however. “If you talk to young Cambodians, they will still pick American brands and products,” a government official told the Nikkei Asian Review on the condition of anonymity as he switched his phone off for fear of bugging.

“Seventy percent of people here don’t really like the Chinese. They remember the Khmer Rouge period and think the Chinese are very tricky people,” he said. “Cambodia has become a stepping stone to counter Western influence in Southeast Asia. That is why Hun Sen always advocates consensus in ASEAN. ASEAN is divided, and by maintaining consensus, you paralyze it. That’s good for dictators.”

Siphan Phay, the government spokesman, acknowledged that Cambodians complain about the Chinese but noted they also “make a lot of money from them.”

“The Chinese are giving money, and they want something — that’s normal,” he told Nikkei. “We need the money, but we don’t want the Chinese to split us apart in ASEAN. We don’t want to use ASEAN against China or against the U.S. Our constitution is very clear that we have to keep ourselves neutral. We don’t see anyone as our enemy. Only Cambodians can successfully change their own country.”

Breakneck growth outside the capital

China’s presence is nowhere more obvious than in Sihanoukville, or Kompong Som, the main port about 220 km southwest of the capital along Highway 4, the nation’s most important arterial road. Two lion statues at a central roundabout are about the only things that remain sedentary. Everywhere else is under construction, from the towering hotels built too close to the beaches to failing drainage canals with shoddy houses encroaching.

Sihanoukville’s casinos light up the night. There are so many that nobody knows the number. A tourism ministry source believed 42 have been registered. Cheap Sotheary, the local head of the NGO Cambodian Human Rights and Development Association, or Adhoc, told Nikkei that there are actually 81 according to an official document she has seen.

Sihanoukville already boasts dozens of casinos, and more are being built. (Photo by Akira Kodaka)

Whatever the number, there are many more Chinese-owned businesses — hotels, restaurants, massage parlors, barbers, karaoke bars, garages, money changers, pawnshops. Rents have skyrocketed, and some NGOs fear they will be forced out of town when their leases are up. “People in Sihanoukville will have nowhere to live,” Sotheary warned.

Countless stores are stocked exclusively with goods from China. In some, the only non-Chinese items are bottled water, Cambodian beer, Scotch whisky, and French wine.

The tourism ministry recorded over 1.2 million Chinese tourists visiting Cambodia in 2017, a 50% increase year on year, making China now by far the country’s leading source of tourists. Sihanoukville has issued 4,498 work permits to Chinese nationals. Last year nearly 160,000 Chinese tourists visited the city, which according to the World Population Review has a population of 157,000.

The amount of Chinese money splashing around certainly benefits some. Vanny, 27, moved from Phnom Penh about a year ago after her husband found better pay on construction sites in Sihanoukville. He now makes $11 a day building a Chinese-owned casino, the Xihu Resort Hotel, and she works as a waitress in a nearby Chinese restaurant. “I am paid better than before,” she told Nikkei. The couple nevertheless live in a shack, and water and electricity supplies are spotty, as in most parts of town.

A mother carries her child at a building site in Sihanoukville. Chinese companies are pushing up wages for construction workers. (Photo by Akira Kodaka)

Employment opportunities are much better for Mandarin speakers. Chinese translators can make between $700 and $1,200 a month working at hotels and casinos, according to a billboard in the city center. The official minimum monthly wage for a garment factory worker is $170; a civil servant gets $250.

Kheang Mey Neang, 22, doubled her pay as a clerk after attending a Chinese-language school for four years, and expects to soon be making $300 a month. “My Chinese helped me get this job, and my parents are happy,” she said.

The Sihanoukville Special Economic Zone was established in 2008 with local partners by Hongdou Group, a Wuxi-based private enterprise. Zhao Shanshan, an SSEZ staff member, said that 125 companies have signed up; 107 of them are actually in operation. Most are from China, with a few from Europe and the U.S. These companies manufacture textiles, garments, bags, leather goods, machinery and wood products. The 1,113-hectare zone has so far created over 21,000 jobs — and that number could rise to as high as 80,000 by 2022 with 300 tenants, according to the zone’s blueprint.

The SSEZ has received lavish praise from visiting Chinese leaders. In 2016, President Xi Jinping described it as a “model of pragmatic cooperation.” In January, Premier Li Keqiang called it a “symbol of renewed China-Cambodia friendship delivering real benefits to the people.”

China’s Hongdou Group established the Sihanoukville Special Economic Zone in 2008 with local Cambodian partners. (Photo by Akira Kodaka)

Sihanoukville’s deep-water port, heavily funded by Japan, is also feeling the China effect. It handles 70% of the country’s surface cargo, and throughput during the first six months of the year increased 22.42% year on year.

Lou Kim Chhun, chairman of the port operator, told Nikkei that there was a substantial hike in cargo since the middle of last year, apparently owing to increased Chinese activity. The major export destinations remain the U.S. and the European Union for garments and footwear, thanks to preferential tariff arrangements that may now be at risk as Cambodia’s nascent democracy falters. Cambodia’s main importing country of origin by far is China, which ships in raw materials for the textile industry and construction.

People are also flooding in. Arrivals at Sihanoukville International Airport jumped 115% last year to 338,000 — with many passengers coming from seven Chinese cities with direct flights. A terminal expansion expected to be completed later this year will give it capacity for 500,000.

The sudden deluge from China has brought numerous headaches. “We are not ready,” Sotheary of Adhoc said. Apart from the mounting garbage problem, strained utilities and soaring rents, there has been a deterioration in peace and tranquility, with frequent reports of brawls, mostly among Chinese gangs, some swinging large blades.

In a letter to the interior minister in January, Provincial Governor Yun Min assessed the Chinese influx. He lauded the number of new jobs, but confirmed the social strains described by Sotheary and others. The governor worried about small businesses being squeezed out, and said many Chinese are  working on construction sites illegally.

Signs in Chinese are a common sight in Cambodia these days. (Photo by Akira Kodaka)

“It seems to be going too fast,” Siphan Phay acknowledged. “Money has no smell. What are we supposed to do? We don’t want Kompong Som to become a Chinese territory. There is a culture shock there between Cambodians and Chinese. It will take about 10 years to settle down.”

“Above the law”

China is Cambodia’s largest bilateral creditor, accounting for about 50% of its known external debt in 2017, which overall has risen 142% in the five years through 2016 — the biggest increase in Southeast Asia. It remains, however, the sixth-fastest-growing economy in the world and the top performer in ASEAN. The World Bank forecasts 6.9% GDP growth this year.

Some Cambodians have made a killing selling property. In 2010, property laws were tightened to restrict leases to 55 years, but these can be easily circumvented through proxies, and the purchase of citizenship. At $100,000, becoming a citizen legally is cheap for big players. There remain immense problems with land titles, particularly with factories, industrial estates and property developments beyond the city limits.

“Many people shed tears because they have lost their land,” one Cambodian official told Nikkei. “The farmers are not happy with the corrupt courts. I love democracy, justice, the rule of law, but the Cambodian judiciary is completely useless.”

“The quality of growth is not just imperfect, it has divided the country,” warned Lao Mong Hay, one of the few Cambodian social critics still prepared to speak out. “Sihanoukville is the start of the Belt and Road Initiative here. If you are powerful and rich, you can be above the law. This government has promoted the market economy without the rule of law.”

Chinese Foreign Ministry spokeswoman Hua Chunying insisted that China has always been “equal, open and transparent” in all the projects under the Belt and Road Initiative. Responding to the media at a daily briefing on July 16, she said that Beijing-led projects have “helped break financial bottlenecks for many developing nations.”

The World Bank sounded a warning for Cambodia in April, pointing to risks coming from the prolonged construction boom evidently led by China, the country’s rising real wage levels alongside rivals like Bangladesh and Myanmar, and uncertainty related to the coming general election, scheduled for July 29.

Matthew Circosta, an analyst at Moody’s Investors Service, described Cambodia’s debt burden of 35% of GDP as “moderate.” Moody’s gives the country a B2 rating, which is below investment grade, but with a stable outlook. Appreciation of the dollar against other currencies, including those of Cambodia’s competitors, “would erode the competitiveness of the export sector,” Circosta said.

Although the government has talked about mandating 10% of lending in riels, Cambodia has one of the world’s most highly dollarized economies; over 90% of bank deposits are in greenbacks. Foreign investors have always been free to move funds in and out of the country, so it is not just the Chinese who are bullish.

At a recent economic review hosted by the Australian and Indian chambers of commerce in Phnom Penh, speakers were upbeat, noting better regulation, higher tax collections — and amazing growth.

“Let’s not talk about politics,” said Stephen Higgins, a managing partner at Mekong Strategic Partners. “This is one of the fastest-growing economies in the world. It is not developed. It is emerging.”

Dominic Faulder is Nikkei Asian Review associate editor, and Kenji Kawase is Nikkei Asian Review chief business news correspondent.

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