Why Hun Sen needs China now more than ever

Pending US and EU sanctions threaten to sink Cambodia’s economy. Will China come to the rescue?

Op-Ed: Asia Time

By DAVID HUTT, PHNOM PENH

In multiple and mounting ways, from aid to trade to diplomatic protection, China keeps its geopolitical ally Cambodia afloat. That patron-client relationship was on full display late last month when Cambodian Prime Minister Hun Sen made a hat-in-hand four-day state visit to Beijing.

The leader came away with what he sought: More money, more promises and more comradely assurances. Beijing reportedly pledged to provide Cambodia with US$588 million in aid over the next three years, to import 400,000 tons of rice, increase bilateral trade from $5.7 billion last year to $10 billion in 2023, and broadly more investment.

“At present, China-Cambodia relations are facing new development opportunities,” China state-media outlet Xinhua quoted President Xi Jinping as saying after his meeting with Hun Sen last week. Hun Sen, for his part, wrote in a post-visit Facebook post that Xi “praised [China’s] special cooperation with Cambodia and vowed to make the relationship even stronger” and that its future development assistance for that country will be “twice more solid.”

China’s patronage is arguably more important now than ever, as the United States (US) moves to sanction Hun Sen’s regime and the European Union (EU) looks to withdraw the country from its duty-free Everything But Arms (EBA) trade scheme. Both are punitive responses to Cambodia’s recent democratic retreat, exemplified by the dissolution of country’s main opposition party in November 2017, a move that drove many of its members into exile.

Hun Sen’s ruling Cambodian People’s Party (CPP) thus won all the seats in the National Assembly at last July’s general election, a result many Western observers and governments saw as rigged and illegitimate. The CPP has claimed that any Western criticism of its rule is an assault on the country’s sovereignty and insult to its independence, claims the long-ruling party has played up to nationalistic effect.

China, it seems, is now backing that anti-Western narrative. Its new ambassador to Cambodia, Wang Wentian, recently asserted that Western nations want to “attack the cooperation between Cambodia and China.” Geopolitical shifts partly explain why Beijing has appeared to indulge the Cambodian government’s worst anti-democratic instincts and move to a de facto one-party state after years of Western-favored multi-party democracy.

Elections last year in Pakistan, Maldives and Malaysia all saw skeptics of China’s $1 trillion infrastructure-building Belt and Road Initiative (BRI) rise to democratic power. Other regional countries have also started to air misgivings or stalled on BRI-related projects. While some reports of BRI downsides and debt traps have been exaggerated, there is a rising regional backlash against Chinese investments that are perceived to erode nations’ sovereignty and finances.

Xi stressed at a high-level symposium to mark the BRI’s fifth anniversary held in Beijing last August that its projects aim to “improve the global governance system” and build a world “community of shared destiny.” It’s a message China aims in particular for neighboring Southeast Asia, where big BRI plans for connecting infrastructure to promote and facilitate more regional trade are on the drawing board.

“Belt and Road reflects Beijing’s vision of its role as a great power atop a China-centric regional order – one free of the liberal rules, norms, and values that Beijing rejects as relics of an unfair and obsolete order led by the West,” Nadège Rolland, a senior fellow at the National Bureau of Asian Research, a US-based research institution, wrote in the Foreign Affairs journal this month.

Cambodia is Beijing’s strongest proponent of that China-centric order in Southeast Asia. Laos is arguably a close second, and Myanmar is quickly reorienting towards Beijing as Western criticism remounts against its rights abuses. The Philippines, too, is moving in a more overtly pro-China, anti-US direction.

Most other Southeast Asian nations have managed to position themselves between the US and China while also keeping Japan and Europe close for hedging purposes. Cambodia understands the need for great power balance, but is increasingly being pushed into China’s orbit due to ramped up Western pressure on its rights and democracy record. But it still needs Western markets to maintain fast economic growth.

Since the 1990s, international assistance aimed at restoring Cambodia’s financial health after decades of civil war and mismanagement helped to create an export-driven economy that was heavily reliant on Western trade. Today, more than 60% of Cambodia’s gross domestic product (GDP) derives from exports, with the vast majority coming from garment and footwear shipments.

Last year, Cambodia’s exports to all international markets were worth just over $12.1 billion, up 10% from the previous year, and could tip the $13 billion mark at the end of 2019, according to Ministry of Commerce reports released this month. Its two largest export markets last year were the EU and US, representing 29% and 24% respectively of its total shipments. The United Kingdom, which is soon to leave the EU, came in third with a 9% share, followed by Japan at 8%.

In 2017, China imported a little under $700 million worth of Cambodian goods; the US imported $3.1 billion and the EU $5.7 billion, most of which came under the EBA scheme. Exports to the US rose by about US$700 million last year, the same as China’s total annual imports from Cambodia.

When Hun Sen returned last week from China, he announced that Beijing promised to raise bilateral trade to $10 billion by 2023, or nearly double the amount record in 2017. As trade has grown at around 20% annually, that target is feasible on a straight-line projection.

It would be readily facilitated if the two countries entered a free trade agreement, which Hun Sen has lobbied for in recent years, though Beijing appears hesitant because it already has a free trade mechanism with the wider 10-member Association of Southeast Asian Nations (ASEAN).

But even if bilateral trade touches $10 billion by 2023, it might work more in China’s than Cambodia’s favor: the nation’s exports to China tend to be worth six times less than its imports. Moreover, the biggest Chinese import to Cambodia is textiles, chiefly fabric, cotton and embroidery, which are used by Cambodia’s garment factories. As of 2015, almost a quarter of imports from China were classified as “light rubberized knitted fabric.”

That means that most of the goods Cambodia imports from China are raw materials, which are transformed into manufactured garments at local factories and then exported chiefly to the EU and the US. If Cambodia’s exports to the US and EU collapse under new sanctions, there is slim chance that China will come to the rescue considering it has its own low-cost garment sector to keep in business.

Still, some optimists think that China could become a major importer of Cambodia’s other goods. Beijing, for example, promised last week to increase the quota of rice it purchases from Cambodia to 400,000 tonnes annually, up 100,000 tons from last year.

This would be a boon for Cambodia’s problematic agricultural sector, but China has already failed to live up to past promises to import more of its rice. Last year it raised its quota to 300,000 tons yet only imported 170,154 tons, official statistics show. Rice exports to China actually decreased by 14.8% last year compared to 2017.

The shortfall has been blamed on logistical problems involving the Cambodia Rice Federation (CRF) and the China National Cereals, Oils and Foodstuffs Corporation (COCFO), the two nations’ respective industry bodies. But this, among other difficulties, will need to be quickly fixed if China is actually to meet the new quota set for this year to double the amount of rice it currently imports.

It’s a particularly urgent issue in the Cambodian countryside. Cambodia’s rice exporters are now looking for new markets after the EU – the main purchaser of Cambodian rice which last year bought 40% of the 630,000 tons exported – reintroduced tariffs this month on Cambodia-produced Indica rice, a move to protect European producers.

Even if China does manage to meet its new import quota, it is unlikely to boost the sector; any increase in exports to China are likely to only offset decreased exports to Europe. Productivity problems in Cambodia mean that it is unlikely to export more than around 600,000 tons of rice.

If Cambodia’s economy falters from new Western sanctions, it’s not clear China will step up enough to subsidize the lost markets and earnings, particularly as its own economy comes under rising stress from its trade war with the US.

Latest estimates from the National Bank of Cambodia published this month say Cambodia’s global trade deficit grew by 22% last year to $5.2 billion, meaning it imported $18.8 billion worth of goods but exported only $13.6 billion. Almost 40% of Cambodia’s imports come from China.

While Cambodia relies heavily on China for growth and finance, the relationship is a rounding error for China’s massive economy. Nor does Cambodia possess significant energy fields or mineral deposits that China’s import-dependent giants require.

But Cambodia is a loyal ally, significantly at a time the US is pressing countries to take sides. It has twice come to Beijing’s aid in recent years by pressing ASEAN to drop aggressive statements on China’s expansionist activities in the South China Sea. It is also a strong proponent of BRI.

Whether that loyalty and lobbying will be enough for Beijing to come to the rescue of a potential economic collapse in Cambodia is an important question without a clear answer.