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China's Large Role in Cambodian Economy Expected to Continue

A customer (R) wears 3D glasses as he views a 3D movie on a Toshiba computer during an exhibition in Phnom Penh, Cambodia on September 11, 2010

Cambodia's economy, after contracting in 2009, due to the global slowdown, has revived as a government rescue package, stronger exports and rising tourism arrivals again fuel growth.

Cambodia's economy is expected to expand by close to 5 percent this year, buoyed by the recovery in tourism and garment exports. Last year the economy shrank by more than 1 percent because of the worldwide slowdown.

The rebound in the garment sector has been particularly important. Garment exports account for 70 percent of Cambodia's export income. At the recession's depth about 50 factories closed and over 60,000 - mostly female - workers lost their jobs. Exports fell more than 20 percent in value.

Sharp turnaround

Asian Development Bank country representative Peter Brimble says the turnaround has been sharp this year.

"Garment exports to the states appear to have increased by more than 10 percent in value terms," said Brimble who calls the outlook positive. "Tourism has gone up by similar numbers - at least in terms of arrivals - a bit less in terms of spending but still a significant recovery. From a purely macroeconomic perspective, the economy looks to be returning to a growth trend [of] five, six, seven percent, and this is even in light of continuing sluggishness in Western economies and Europe and in the states. Possibly Cambodia came out relatively well given everything."

Laurent Notin, a director of Indochina Research in Phnom Penh, says the mood in the business community has improved, although the property sector remains in the doldrums because of credit shortages.

"People are more confident. Business is more confident than last year," said Notin. "Everybody is far happier than last year, except maybe if you're working in real estate sector in which nothing is happening."

Boosting investment

The government wants to boost foreign investment by improving infrastructure, expanding energy production, and upgrading the agriculture, tourism, manufacturing and mining sectors.

The recession hit foreign investment hard, and in 2009, it fell by nearly half, to $5.86 billion.

China remains the biggest source of foreign investment by far. Chinese funds have gone into hydropower projects, river port facilities, irrigation systems, and transmission lines. Other major foreign investment sources include South Korea, Hong Kong, Taiwan, Malaysia and Singapore.

The Cambodian government says it is open to even more investment from China, which officials say will help Cambodia develop its economy.

In February this year Cambodian Prime Minister Hun Sen announced plans to invest $310 million to improve irrigation systems. China is lending $240 million for the project.

Douglas Clayton, managing partner for venture capital firm Leopard Group, says most people welcome Chinese investment, especially in infrastructure and in ensuring employment.

"We're seeing Chinese investment in large infrastructure projects like hydropower dams," noted Clayton. "And generally anything that brings cheaper power is pretty much welcomed to most people."

Transparency concerns

But China's growing investment raises some concerns. Hang Chayya, director for the Khmer Institute for Democracy, says rights groups' worry about the lack of transparency in loans and financial deals.

"It's a huge concern for us because the Chinese tend to have this principle, there's no strings attached where other investments they tend to be multinational, or World Bank, or some other development agency. So there's no proper checks and balances in terms of how they conduct and manage these projects," explained Chayya.

Chayya says a lack of transparency may lead to allegations of corruption.

There also are concerns that China may influence Cambodian decisions in other areas. A year ago, China and Cambodia signed deals worth over $1.2 billion, but only after Phnom Penh expelled 20 Chinese Uighurs who had fled China claiming persecution.

The expulsion came despite pleas by the United States, United Nations and human rights groups.

The ADB's Brimble says for Cambodia, China will remain an important source of development assistance.

"Obviously Cambodians have had a long-time relationship with the Chinese government and the Chinese government is becoming more active in becoming a donor country," added Brimble.

Business analysts say despite the recovery, Cambodia confronts the challenge of alleviating poverty and ensuring sustained growth. It also must adapt to a rapidly changing regional economy and the growing economic reach of China.