ONE BELT ONE ROAD
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Asean

China transforms smaller Southeast Asian neighbours with railway, power plant and property investment

Funding of major projects in Cambodia, Laos and Myanmar is helping boost their economies and to turn them into bigger destinations for Beijing’s exports

PUBLISHED : Tuesday, 06 December, 2016, 12:14pm
UPDATED : Tuesday, 06 December, 2016, 10:53pm

China’s investment is transforming its smaller Southeast 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 United States commitment to the region from a more inward-looking administration of President-elect Donald Trump.

“China’s definitely looking at these countries in general as an area where it can sell products and get good returns for its investments,” said Edward Lee, an economist at Standard Chartered in Singapore.

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“China itself is getting more expensive for its companies, and that’s reinforcing this trend.”

Beijing is investing in everything from railroads to real estate in Cambodia, Laos and Myanmar – the frontier-market economies of the Association of Southeast Asian Nations.

China Minsheng Investment and LYP headed by Senator Ly Yong Phat, signed a US$1.5 billion deal last week to build a 2,000-hectare city near Phnom Penh with a convention centre, hotels, golf course, and amusement parks, Xinhua news agency reported. The spending equals roughly one-10th 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 China’s President Xi Jinping’s “One Belt, One Road” initiative, would cost US$5.4 billion, Xinhua reported. Last week Xi met Lao Prime Minister Thongloun Sisoulith in Beijing, where he pledged to build stronger ties.

China’s ‘One Belt, One Road’ initiative set to transform economy by connecting with trading partners along ancient Silk Road

Myanmar, which is liberalising its economy and adopting market reforms after a transition to democracy, is forecast by the International Monetary Fund 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 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.

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Cambodia’s economy is projected to grow 7 per cent this year, while Laos is set for 7.5 per cent expansion. Faster growth has also translated into rising income levels and lower poverty. Based on the most recent data from the World Bank, the number of people living onUS $1.90 a day in Cambodia dropped to 2.2 per cent of the population in 2012 from 30 per cent in 1994. In Laos, the poverty rate is 16.7 per cent, down from 22.9 per cent in 1992.

As Sino-Cambodian relations 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 Beijing by opposing mention of China’s assertiveness in the South China Sea during a regional summit in Phnom Penh.

Most Chinese money flowing in to Cambodia, Laos, and Myanmar is lending on highly concessionary terms to finance construction projects run by Chinese companies, especially in Laos, said Derek Scissors, Washington-based chief economist at China Beige Book International, who specialises in studying the country’s foreign investment.

Chinese construction and investment since 2005 equalled about 15 per cent of Lao gross domestic product, which it could not have financed from other nations, he said.

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The share of the Lao population with access to electricity rose from 15 per cent in the mid-1990s to almost 90 per cent in 2014, although the power grid increasingly faces new challenges from demand growing by an average of 13 per cent a year, a World Bank report said.

“The power sector is basically Chinese-built, bringing electricity to the majority of the population,” Scissors said:, adding that Beijing had built several hydroelectric plants to increase electrification. “There were grand plans for Myanmar, but investment and construction actually realised is more conventional, in the energy and mining sectors.”

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.

Its imports from the three Southeast Asian economies more than doubled in the past five years, IMF data shows.

INFOGRAPHIC: How ‘One Belt, One Road’ will give China’s developing neighbours easier access to Chinese-made products

However, such dependence on China is not without risks. Beijing accounts for the largest part 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 railway 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 [the] value chain and also [a] small part of the overall production. As a result, firms in Cambodia have limited leverage and autonomy.”

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Cambodia has gained particular appeal for Chinese manufacturers seeking to relocate, which aligns with China’s strategy to export industrial capacity through initiatives such as the “One Belt, One Road”.

This initiative, which will connect trading partners – through railways, roads, airports and ports that link 60 countries, including China and India and other Asian, Middle East and European countries – along the ancient Silk Road.

Cambodia’s US$121 average monthly wage is just a fifth of China’s US$613 average, according to the International Labour Organisation in Geneva.

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The biggest risk for frontier Asean economies is that Chinese inflows create “extractive” elites who entrench themselves in power, said 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.”