China Is Transforming Southeast Asia Faster Than EverPosted: December 7, 2016
by David Roman December 5, 2016 — 4:00 PM EST Updated on December 6, 2016 — 1:03 AM EST
➞ Rising Chinese labor costs send companies to Cambodia and Laos
➞ Countries becoming more incorporated with China’s supply chain
China’s investment is transforming its smaller Southeast Asian neighbors like never before while helping turn Cambodia, Laos and Myanmar into bigger destinations for its exports.
That’s 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’s also helping Asia’s largest economy and nations in its orbit adapt to what looks more and more like a new era of waning U.S. 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 return for its investments,” said Edward Lee, an economist with Standard Chartered Plc 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 economies of the Association of Southeast Asian Nations.
China Minsheng Investment Group and LYP Group, headed by Senator Ly Yong Phat, signed a $1.5 billion deal last week to build a 2,000-hectare city near Cambodia’s capital, Phnom Penh, with a convention center, hotels, golf course, and amusement parks, the official Xinhua News Agency reported. The spending equals roughly one-tenth of the country’s $15.9 billion gross domestic product.
In landlocked Laos, work started last year on the China-Laos railway, which will stretch 414 kilometers (257 miles) from the border to the capital, Vientiane. The project, part of Chinese President Xi Jinping’s One Belt, One Road initiative, will cost $5.4 billion, according to Xinhua. Xi met last week with Lao Prime Minister Thongloun Sisoulith in Beijing, where he pledged stronger ties.
Myanmar, which is liberalizing its economy and adopting market reforms after a transition to democracy, is forecast by the International Monetary Fund to expand 8.1 percent 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 percent 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 percent this year, while Laos is set for 7.5 percent expansion. Myanmar’s currency, the kyat, was Asia’s top performer in the first five months of the year, but has weakened about 10 percent against the dollar since June as the U.S. currency strengthened
As Sino-Cambodian relations have flourished, so has trade, with two-way commerce climbing to $4.8 billion last year. That’s 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 firms, especially in Laos, said Derek Scissors, Washington-based chief economist at China Beige Book International, who specializes in studying the country’s foreign investment. Chinese construction and investment since 2005 equal about 15 percent of Lao GDP, which it couldn’t have financed from other nations, he said.
“The power sector is basically Chinese-built, bringing electricity to the majority of the population,” while China built several hydroelectric plants to increase electrification, Scissors said. “There were grand plans for Myanmar, but investment and construction actually realized 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 show.
Such dependence on China isn’t without risks. Beijing accounts for the largest chunk of foreign investment in Cambodia and also about 43 percent 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 $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.”
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 One Belt, One Road. Cambodia’s $121 average monthly wage is just a fifth of China’s $613 average, according to the International Labour Organization in Geneva.
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.”
Source: Bloomberg “China Is Transforming Southeast Asia Faster Than Ever”
Note: This is Bloomberg’s article I post here for readers’ information. It does not mean that I agree or disagree with the article’s views.