CAMBODIA AS A NEW MODEL FOR BELT AND ROAD INTERNATIONAL COOPERATION: A FIELD RESEARCH REPORT ON CAMBODIAN ECONOMY AND FUTURE DEVELOPMENT

WANG WEN

Executive Director and Professor of Chongyang Institute for Financial Studies, Renmin University of China

LIU DIAN

Associate with Chongyang Institute for Financial Studies, Renmin University of China

Cambodia is an important cooperation partner for China in building the“Belt and Road”. Along with the progress of the “Belt and Road” initiative over the past few years, the country has been given great dynamics for development transformation and upgrading.China-Cambodia cooperation is friutfull. Looking into the future, it is necessary for China to envisage and control risks in China-Cambodia cooperation,intensify cooperation, innovate on cooperation mode and deepen cooperation areas so as to make it a new model for international cooperation within the Belt and Road framework.

An Under-Studied Cambodia: an Important Convergence Point in the Belt and Road Blueprint

Situated in the Indochina Peninsula,Cambodia, being an important station of the ancient maritime Silk Road, is an important pivot point for building the 21st Century Maritime Silk Road.In May 2017, the Chinese Government published Building the Belt and Road:Concept, Practice and China’s Contribution, a paper that draws a blueprint for five routes of the Belt and Road. According to the blueprint, Cambodia happens to be the core area where three of the five routes converge. The in-depth cooperation between China and Cambodia provides an important fulcrum for both of the routes of the 21st Century Maritime Silk Road extending to the Indian Ocean and the South Pacific.

In 2016, in China’s Periodicals Full Text Data Bank (or China National Knowledge Infrastructure, CNKI), the amount of documents that can be found by using Cambodia is twice as many as that of the previous year. However, the documents are very dispersing in subjects, lacking practical studies and profound reflections on China-Cambodia cooperation in context with the historical opportunity of the Belt and Road.

In November 2017, Chongyang Institute of Renmin University of China sent a study team to make field research on conditions Cambodian economic and social development, based on which this Report is produced. The Report examines development opportunities and risks for Cambodia, explores the important significance of the Belt and Road initiative to development transformation of the country, considers the direction of innovation on the model of China-Cambodia cooperation and makes constructive suggestions for advancing the Belt and Road in the country. The Report believes that it is necessary to make China-Cambodia cooperation a model of the Belt and Road international cooperation, playing a good demonstrative role in promoting the Belt and Road in Southeast Asia and further a field.

Challenges Facing Cambodia’s Development and Opportunities of the Belt and Road

1.Tourism Helps Poverty Reduction

Since the outset of the new century,Cambodia has made marked achievements in various areas of economic-social development, elevating itself above the ranks of “l(fā)ow-income economies”.However, as one of the poorest countries in Asia, it still faces piling difficulties in poverty alleviation, with about 30 percent of the population living on“near poverty” line (daily income below US$2.3 per person). If the prices for agro products or wages for garment and shoe industries decline, a huge number of people will likely return to poverty right away. Therefore, it is imperative for Cambodia to develop a new pillar industry, where tourism is a favored area for making breakthrough.

Figure 1: 1960-2016 Total number of documents retrieved by keyword as Cambodia in China Academic Literature Database (Unit: Number of documents)

As the Belt and Road initiative progresses in an all-round way, Cambodian tourism has won a valuable development opportunity: Chinese tourists,numerous and lavish in spending,provide a new growth point for Cambodian economy. Spurred by the Belt and Road initiative, major Chinese airliners have continued to open new air routes to Cambodia and add carrying capacity. Accordingly, the Cambodian Government has come up with Chinese Tourists Attraction Strategy 2016-2020,aiming at guiding the local tourism industry to increase reception capacity for Chinese visitors. It is estimated that the importance of tourism in Cambodian national economy will increase rapidly,playing significant role in poverty reduction of the country as well as in promoting people-to-people connectivity between China and Cambodia.

2.Infrastructure Investment Introduces New Development Concepts

After years of war havocs, infrastructure construction is an area of weakness for Cambodia with a serious shortfall of fund. Out of the loans secured by the country from the World Bank, only 38.4 percent is used for infrastructural construction. It is difficult to launch many of the projects in the country in hydraulic power generation, roads, railways and agricultural irrigation. There is even a tendency of continued deterioration in infrastructural facilities such as roads, ports and civil aviation. With backward conditions of infrastructural facilities, Cambodia is not particularly interested in building the Belt and Road.

In recent years, China and Cambodia have conducted extensive cooperation in the area of infrastructural development, of which gratifying results are reported. The special economic zone of Sihanoukville jointly developed by the two countries has successfully attracted more than 100 international companies to move in, creating over 10000 jobs.Chinese companies have signed contracts with the Cambodian Government to build in BOT mode the new Siem Reap International Airport and the Phnom Penh-Sihanoukville Highway.Chinese banks like the Bank of China have provided banking services to new projects like the Sihanouk Power Station, the hydraulic power facilities in the lower Se San River and the Cambodia Petrochemical Co. (CPC) refinery. It is foretold that in the coming years, there will be strong desire and broad space for cooperation between China and Cambodia in infrastructural construction areas such as irrigation, communication, energy and transport.

3.Production Capacity Cooperation Gives Power to the Elbow of Upgrading Industrial Structure

With a low domestic savings rate and a shortfall of government revenue,there is a dire shortage of domestic capital investment in Cambodia. For the time being, it is difficult for the Cambodian Government to come up with an industrial policy independently whereas most foreign investment tends to flow to the “hottest” economic sectors. This results in a very irrational sectoral structure in Cambodia’s national economy,manufacturing being relatively weak and export products being very limited beyond garment and shoes. In general,the country is positioned at mid and low end of the value chain in international division of labor. Its principal export products have low added value but are highly replaceable, prone to be affected by changes in supply-demand relationship and variations in labor cost of the international market.

The key to address Cambodia’s economic structural problem is to actively take up industrial transfer so as to realize industrial transformation and upgrading of the economy. It so happens that China and Cambodia are highly complementary in production capacity cooperation, which serves the interest of both countries. In recent years,China has joined hands with Cambodia in organizing several events of production capacity cooperation. A number of priority projects of production capacity cooperation have made remarkable progress. In 2017, both countries have jointly sponsored China-Cambodia Forum on Production Capacity and Investment Cooperation and the Lancang-Mekong Economic and Technological Exhibition in Nanning and Phnom Penh respectively, both countries reaching extensive consensus on establishing intergovernmental mechanisms, expanding areas of cooperation, interfacing industrial strategies and deepening experience sharing. On practical level,both the acquisition of Cambodia Cement Chakrey Ting Factory Co., Ltd by Huaxin Cement Co., Ltd and the Sihanoukville Special Economic Zone have achieved initial results, production capacity cooperation greatly benefiting both countries.

4.RMB Internationalization Provides Cambodia with Plural Liquidity

Figure 2. Dollarization of Cambodia (measured by percentage)

Cambodia is the most “dollarized”economy in terms of its currency in today’s world, at the moment the US dollars accounting for more than 80 percent of liquidity in its financial system. With rapid development at hand,the problem of excessive dollarization of the economy becomes even more outstanding. On the one hand, using the dollar for settlements means that the competitiveness of Cambodian export products is linked to the trend of the dollar: a strong dollar will severely weaken the competitive advantage of Cambodia. On the other, the loss of seigniorage in addition to a less than independent monetary policy makes it imperative for the Cambodian central bank to attempt “de-dollarization” and reform the financial system on this basis. No doubt, this presents an opportunity for the Chinese currency, Renminbi (RMB) to enter the country.

In 2016, RMB officially joined the SDR currency basket of the IMF, providing objective conditions for the central banks of various countries to hold RMB in their foreign currency reserves. As the Belt and Road initiative progresses in an all-round way, a considerable amount of investment will be made in RMB and the Chinese Government also tries to encourage concerned enterprises to make trade settlements in RMB. Not only will trade settlements in RMB help drive RMB internationalization and promote transnational flow of the currency, it can also help enlarge trade volumes and close the ranks with trading partners. As the Cambodian currency only takes a small proportion of trade settlements, the conditions are relatively ripe for promoting the process of RMB internationalization in trade and investment between China and Cambodia.

5.Mutual Political Trust for Jointly Meeting Risks of Globalization

There is a long standing affinity between China and Cambodia. In the 1950s, Chairman Mao Zedong and Premier Zhou Enlai built invaluable friendship with Prince (King) Norodom Sihanouk. No matter how turbulent the regional situation becomes and no matter how domestic politics changes,China-Cambodia relations have steadily moved on all along, carrying forward the long standing affinity. Against the grand background of the times, both China and Cambodia are impacted by the wave of globalization, which brings about both opportunities and challenges. Therefore, it is necessary for both countries to build on their ties with the Belt and Road, “deepening mutually beneficial, practical cooperation,strengthening the interfacing of development strategies and enhancing coordination on multilateral matters”. By so doing, the two countries join hands in meeting challenges of globalization and contributing to regional prosperity and stability.

The “policy coordination” called for by the Belt and Road initiative bears important and positive significance both for developing China-Cambodia relations and for Cambodia’s own development. On the one hand, interaction between the two sides helps deepen cooperation between them on regional hot-spot issues and provide support drive for maintaining the regional pattern of peace and development. On the other, the policy coordination and interfacing can help Cambodia learn“Chinese experience” on domestic development matters as a guide to its solution to social issues about which its people concern most such as economic and livelihood issues.

Envisage and Control Risks Facing China-Cambodia Belt and Road Cooperation

In the Belt and Road framework, China-Cambodia cooperation has achieved plentiful results. However, it cannot be overlooked that there are quite a few risks facing China-Cambodia cooperation. It is critical for deepening the Belt and Road cooperation between the two countries to analyze, assess and control such risks.

At present, Chinese companies making investment in Cambodia face four kinds of risks.

First of all, political risks: recently, the Hun Sen government has disbanded Cambodia National Rescue Party, the largest opposition party in the country,which gives rise to change in political situation and likely brings uncertainty to economic outlook of Cambodia. China-Cambodia relations and Chinese investment in Cambodia may be affected by domestic political struggle there.

Secondly, debt risks: in recent years,the fiscal deficit of Cambodia has kept rising and it is estimated that by 2018,the fiscal deficit will approach US$1.5 billion. Ever increasing fiscal deficit undermines independence and sustainability of Cambodia’s development. Should major creditor and investor countries be on economic slowdown or change their direction of investment, Cambodia’s foreign investment, foreign assistance and foreign trade will be seriously affected and it is very likely for a sovereign debt crisis to breakout.

Third, financial risks: in the past few years, the Cambodian bank credit system has expanded rapidly, national balance of loans inflating to US$12 billion and domestic financial risks staying at a high level. At the same time, owing to high dependence on foreign investment and high dollarization, Cambodia’s financial system is prone to be impacted by the fluctuation of global financial market, whereas the monetary policy of its central bank lacks regulating capacity. In the future it is highly possible for a financial crisis to happen in Cambodia.

Fourth, goodwill risks: in recent years,Chinese companies going global face severe challenges, some of the projects being shelved or blocked, some of the companies needing to rethink their goodwill. Companies are the backbone of joint construction of the Belt and Road. As Chinese companies go global on a large scale, it is necessary for them to think rationally, avoid blindness, correctly handle the relationship between economic return and social responsibility and promote localization of their investment projects. All this will raise China’s goodwill in its neighborhood,on which hinges future success or failure.

Shaping China-Cambodia Cooperation as a New Model for Belt and Road International Cooperation

1.Promoting Mutual Political Trust,Enhancing Policy Coordination and Strategic Interfacing

At present, Cambodia is implementing its Rectangular Strategy. In regard to economy, it gives priority to agricultural production, private sector, infrastructure and human resources. There is high relevance between the Belt and Road initiative and the Rectangular Strategy of Cambodia, and it is necessary for both governments to actively promote strategic interfacing in between, bring into full play China-Cambodia Intergovernmental Coordination Committee and establish and improve coordination and communication mechanisms between national governments, local governments, companies and NGOs of the two countries.

2.Highlighting Belt and Road Production Capacity, Economic and Trade and Financial Cooperation

Centered on the framework of Belt and Road construction, it is necessary for China and Cambodia to conduct more practical cooperation in production capacity cooperation, economic and trade and financial areas, giving new impetus to such cooperation.

First of all, it is necessary to bring about demonstrative effects of China-Cambodia Special Economic Zone in Sihanoukville, achieve win-win results and mutual complementation between Chinese and Cambodian companies in joint development and gain development experience for more industrial parks and zones to be built with the Belt and Road construction.

Secondly, it is necessary to vigorously promote the interfacing between Made in China 2025 and Cambodia Industrial Development Policy 2015 – 2025 and by using the Belt and Road development platform, to help Cambodian industrial development and transformation of industrial structure while achieving China’s goal of becoming a strong manufacturing country and to realize mutual benefit and win-win situation between the two countries in economic development.

Third, it is necessary to strengthen China-Cambodia financial cooperation and promote the process of RMB internationalization. It is necessary for both countries to deepen cooperation in financial area, increase the circulation of RMB in Cambodia and provide the country with plural liquidity while averting exchange-rate risk. The Chinese Government should encourage Chinese companies operating in Cambodia to use RMB for pricing purposes in economic and trade relations with their upstream and downstream partners so as to further promote the construction of exchange mechanism between RMB and the Cambodian currency.

3.Promoting People-to-People Connectivity and Strengthening Cultural Exchange Mechanism Construction Like Think Tank Diplomacy

People-to-people connectivity is the basis for building all other components of Belt and Road connectivity as well as the important guarantee for deepening cooperation between the two countries.It is necessary to achieve people-to-people connectivity through cultural exchange and mutual learning, enhance mutual understanding between the two peoples and train folk envoys for China-Cambodia friendship.

On the one hand, it is advisable to promote people-to-people exchanges through tapping the potentials of tourism investment and cooperation between the two countries. Both sides should increase visa facilitation in order to enable the general public of both countries to deepen mutual understanding, enhance mutual approbation,deepen mutual affinity and promote people-to-people connectivity through exchange of visits.

On the other, it is advisable to build platform for exchange and cooperation between think tanks of the two countries, bringing into full play the advantage of think tanks in social influence and international communication.To strengthen think tank exchange and cooperation both helps build a channel of policy communication on think tank level between the two countries for better policy coordination and mobilizes the huge social influence of think tanks.To disseminate results of think tank cooperation helps the general public of both countries to enhance mutual understanding and reach consensus.

4.Drawing a Blueprint for Future Development and Building a Community of Shared Destiny between China and Cambodia

National conditions, levels of development and social system may vary between China and Cambodia. With the Belt and Road serving as a bond,both countries can allow full play to the advantage of mutual political trust, economic complementarity and people-topeople connectivity in building a “community of shared development destiny”featuring mutual benefit and mutual interdependence to benefit the two peoples.

The construction of a community with a shared future between China and Cambodia will inject new dynamics to economic development of Cambodia and help narrow development gap among Southeast Asian countries.At the same time, an intimate China-Cambodia cooperation will also play an important demonstrative role for building a community with a shared future between China and ASEAN countries,a community with a shared future for Asia at large and in turn that for mankind.