The implications of Chinese capital in Cambodia

We know that the BRI creates winners and losers, and that different country governments manage Chinese companies differently, but we still have much to learn about the within-country variations of the BRI. Take Cambodia, where inflows of Chinese capital have led to vastly different outcomes in different regions and sectors.

On the one hand, Chinese financing has helped expand and revamp the country’s road network, devastated by a prolonged civil war. On the other hand, in the city of Sihanoukville, Chinese investment in gambling has led to a parallel economy that delivers very little benefit to the local population.

Why is this the case? In our latest study, we look at two elements to better understand the implications of inflowing Chinese capital:

• On the Chinese side, the type of capital being deployed
• On the within-country side, the frameworks being used to manage this capital.

Cambodia's road network

China is Cambodia’s main provider of development finance and has provided large volumes of official development finance for the construction and revamping of Cambodia’s road network. Since 2002, Cambodia has received nearly USD 3 billion worth of grants and concessional loans from China.

These funds typically pay for Chinese state-owned enterprises (SOEs) to carry out the works. The funds are allocated directly from the policy banks to the construction companies, leaving limited room for corruption. Moreover, SOEs have been the target of anti-corruption campaigns and reforms in China, which means they are very aware of the dangers of engaging in corrupt activities.

Meanwhile, Cambodia has stringent regulations to control the infrastructure sector. The Minister of Public Work and Transport is a competent technocrat who has spearheaded the country’s anti-corruption campaign, initiated by the Prime Minister.

This combination of a strong regulatory framework on the Cambodian side and capital that tries to stay clear of corruption on the Chinese side has led to positive outcomes. Over the space of 10 years, the Cambodian part of the road network has increased from 44,000 km of roads to 62,000 km (+41%). Not all of this is attributable to Chinese capital, but both the improvements and China’s contributions to the sector are undeniable.

The case of Sihanoukville

The story of Sihanoukville is vastly different. The capital of the coastal province of Preah Sihanouk has seen copious inflows of Chinese capital in the gambling sector, especially targeting online gambling. There are no official data on these capital flows, although sources estimate USD 1 billion worth of investment between 2016 and 2018.

If this is correct, it would be in the same ballpark as the money provided by China to the Cambodian government for transport infrastructure. We term this finance ‘profit-driven short-term capital’ – because Chinese investors in Sihanoukville are not there for the long haul, but rather to make quick money in an opaque industry.

This type of capital has contributed to the development of hotels, restaurants, shops and the entertainment industry – all linked with gambling – but also of ancillary businesses like taxi services, beauty salons, car repairs and supermarkets. This has led to rapid economic growth, but not without consequences.

The local government in Sihanoukville struggles to manage these capital inflows. The rapid urban growth accompanying the gambling industry has been unregulated and has put an excessive burden on service delivery, such as water and waste management.

The authorities struggle to monitor building sites, and some buildings under construction have collapsed, causing deaths and injuries. Moreover, the gambling industry has been accompanied by criminal activities, causing problems for locals and tourists alike.

The variegated outcomes of Chinese capital

The most concerning outcome of the inflow of Chinese capital in Sihanoukville is the creation of a ‘Chinese silo’, where the services are offered by Chinese people for Chinese people, with very little benefits for Cambodians.

Despite the economic growth around them, Cambodians in Sihanoukville are left with a handful of jobs, some exports and the feeling that they are not benefitting from China’s presence, while the Chinese are. In Sihanoukville, in particular, the combination of short-term capital and weak local authorities has led to negative outcomes.

To understand what happens on the ground, we should not only look at Chinese capital – or at the BRI – but also at the domestic conditions formed as a consequence. It’s the combination of these two factors that reveal how Chinese capital will contribute to a country’s development.

This piece is based on a longer article by Linda Calabrese and Yuan Wang published in the Journal of World Development. Read the full article.