China's investments changing its neighbours

Cambodia, Laos, Myanmar experiencing boom, but experts warn of imbalances

BEIJING • China's investments are transforming its smaller South- east Asian neighbours like never before while helping turn Cambodia, Laos and Myanmar into bigger destinations for its exports.

That is driving some of the world's fastest economic growth rates and providing Chinese companies with low-cost alternatives as they seek to move capacity out of the country. It is also helping Asia's largest economy and nations in its orbit adapt to what looks more and more like a new era of waning US commitment to the region from a more inward-looking administration of  Mr Donald Trump.

"China's definitely looking at these countries in general as an area where it can sell products and get good return for its investments," said Mr Edward Lee, an economist with Standard Chartered in Singapore.

"China itself is getting more expensive for its companies, and that's reinforcing this trend."

China is investing in everything from railroads to real estate in Cambodia, Laos and Myanmar - the frontier-market Asean economies.

In Cambodia, China Minsheng Investment Group and LYP Group, headed by Senator Ly Yong Phat, signed a US$1.5 billion (S$2.1 billion) deal last week to build a 2,000ha city near the capital, Phnom Penh, with a convention centre, hotels and golf course, the official Xinhua News Agency reported.

The spending equals roughly one-tenth of the country's US$15.9 billion gross domestic product.

In landlocked Laos, work started last year on the China-Laos railway, which will stretch 414km from the border to the capital, Vientiane. The project, part of Chinese President Xi Jinping's One Belt, One Road initiative, will cost US$5.4 billion, according to Xinhua.

Myanmar, which is liberalising its economy and adopting market reforms after a transition to democracy, is forecast by the International Monetary Fund (IMF) to expand 8.1 per cent this year, the fastest in the world after Iraq.

De-facto leader Aung San Suu Kyi has been quick to engage China since taking office this year, including visiting President Xi in Beijing.

China is its largest trading partner, accounting for about 40 per cent of Myanmar's total last year, and is building a special economic zone, power plant and deep-water seaport on the west coast.

Cambodia's economy is projected to grow 7 per cent this year, while Laos is set for 7.5 per cent expansion.

Myanmar's currency, the kyat, was Asia's top performer in the first five months of the year, but has weakened about 10 per cent against the greenback since June as the US currency strengthened.

As Sino-Cambodian ties have flourished, so has trade, with two- way commerce climbing to US$4.8 billion last year. That is more than double from 2012, the year Cambodia warmed up to China by opposing mention of Beijing's assertiveness in the South China Sea during a regional summit in Phnom Penh.

Cambodia, Laos and Myanmar are becoming more incorporated with China's supply chains, buying intermediate goods from its factories and selling consumer items such as garments and shoes that are often made by companies owned or funded by China.

Chinese imports from the three South-east Asian economies more than doubled in the past five years, IMF data show.

Such dependence on China isn't without risks. Beijing accounts for the largest chunk of foreign investment in Cambodia and also about 43 per cent of the country's total debt stock, mostly in loans from Chinese development banks to Cambodia's government, according to the IMF. Similarly, China's railroad in Laos equals about half of its US$10.5 billion 2015 GDP.

"This reliance on a narrow production and export base has many downsides," the IMF said in a recent report.

"A majority of Cambodian garment factories concentrate on cut-make-trim processes, which are at the bottom of value chain and also small part of the overall production. As a result, firms in Cambodia have limited leverage and autonomy."

The biggest risk for frontier Asean economies is that Chinese inflows create "extractive" elites who entrench themselves in power, said Mr Song Seng Wun, an economist at CIMB Private Banking in Singapore.

"These economies are getting a lot of money and opportunity from China," he said. "If wealth is concentrated in the hands of a few, that may lead to problems and instability. The key here is developing a middle-income group that Chinese companies will be targeting as a consumer."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 08, 2016, with the headline 'China's investments changing its neighbours'. Print Edition | Subscribe