Slower Growth in China Could Trouble Cambodia

China’s cooling economy and rising debt are threatening to derail what is otherwise expected to be continued steady economic growth in Cambodia, in part on the back of foreign direct investment (FDI), according to a new report.

In 2013, China led the way in approved FDI in the country with $435.8 million, 23 percent of total FDI in Cambodia for the year, according to the National Bank. In the first quarter of this year, China has another $190.2 million worth of investments approved, 42 percent of the total for the period.

But a report released this week by Netherlands-based risk assessment company Mantis says China’s economic influence in the region could send ripples through Cambodia and neighboring countries if the world’s second largest economy continues to cool.

“[S]ustained FDI inflows will continue to comfortably finance Cambodia’s current account deficits. However, with China being the main driver of economic growth in the region, the risks are high,” the report says.

“While China has been experiencing real growth of above 7 percent, boosted by strong credit growth and capital spending, declining efficiency of investment and an increasing debt are threatening further growth prospects. If real growth in China deteriorates, regional demand and FDI inflows will decline.”

China’s slowdown comes amid the government’s efforts to rebalance its economy from an investment-driven model to one led by domestic consumption, and to shift from manufacturing to services.

According to a World Bank report released in June, China’s growth was expected to fall from 7.6 percent this year to 7.5 percent in 2015.

“The rebalancing is not smooth, and quarterly growth is volatile. In part this volatility reflects tensions between structural trends and near-term demand management measures taken by the government,” the World Bank says in its China Economic Update.

Cambodia’s rubber sector is one example of an industry falling victim to China’s shifting practices. Last month, Ly Phalla, who heads the Agriculture Ministry’s rubber department, blamed the steep drop in the country’s rubber exports in large part on China’s decision to source more of its supply from domestic producers.

Jayant Menon, lead economist at the Asia Development Bank’s regional economic integration office in Manila, said the slowing Chinese economy will put a drag on Cambodia, which will have to diversify in order to compensate.

“A significant slowdown in China’s growth will have a noticeable impact on the Asian region, including Cambodia. This is likely to operate through a slowdown in factor inflows, both capital and tourism,” he said.

“There is nothing much that Cambodia can do to directly guard against such vulnerability in the short term, unfortunately. In the medium to long term, Cambodia should try and diversify its sources of FDI so that it is not so heavily reliant on just one country.”

Heng Thy, a tax partner at PricewaterhouseCoopers, said Chinese investment was also particularly volatile, adding to the risk.

“Investors from China make decisions very quickly compared to Americans, Europeans and Japanese. If the opportunity is believed to be profitable, they do not care much about assessing risks associated with politics and corruption,” he said.

But Mr. Thy said they were also likely to pull out faster than most.

“If there is any problem, they will go back immediately,” he said.

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