3.1. Chinese Economic Statecraft
3.1.5. Outward Foreign Direct Investments
國
立 政 治 大 學
‧
N a
tio na
l C h engchi U ni ve rs it y
find out who is the largest one. The data reveals that as of 2015 Cambodia accumulated net concessional loans worth of US$ 7.6 billion, among 88% were loans for infrastructure purposes.
China represents a 44% share of these borrowings, which is higher than any value achieved by bilateral or multilateral agreements. Only in 2014 Cambodia had to pay US$ 432 million of disbursements to China, which is six times more than to ADB, Cambodia’s second largest creditor, and 95% more than Cambodia had to pay to Japan. It is interesting that Japan is the biggest provider of foreign aid and at the same time the lowest creditor. That is given mainly by the grant form of these financial flows. Cambodia not only had to pay the biggest amount of money to China, it also still owes the biggest amount of money to China. Looking at the figure number eight, 47% of all unpaid debt of Cambodia belongs to China, and this sum is rising every year. While in 2013 Cambodia owed approximately US$ 1.9 billion to China, in 2015 it was US$
2.68 billion – that is increase by 100%. Among compared countries that is the fastest rising debt in the last three years. For instance, unpaid debt to ADB in the same period of time holds steady, slightly under US$ 1 billion. Yet in 2015 it actually decreased by US$ 8 million. All in all, China is the largest Cambodia’s creditor, and most important provider of concessional loans, which surely brings about certain level of economic leverage and influence.
Figure 8: Share of Cambodia's actual amount of unpaid debt by creditors (%)
3.1.5. Outward Foreign Direct Investments
Even though the OFDI are implicitly bounded to the China’s assistance, as the part of the official strategy, it is good to distinguish between the foreign aid itself and OFDI operations. In general understanding of foreign aid, Ohashi (2013, 84-85) divides these operations into three categories based on the nature of their source: 1. Official Development Assistance; 2. Other Official Flows;
3. and Private Flows. China has naturally also played the card of OOF, which consists of export credits, direct investments and contribution to multilateral institutions. However merging the foreign aid with foreign investment might not be such a good solution, mainly because what
0%5%
10%15%
20%25%
30%35%
40%45%
50%
2015
Japan China South Korea ADB
Source: Cambodia Public Debat Statistical Bulletin
‧
China considers of being a foreign aid is exclusively internal affair of the central government – concretely Ministry of Finance, Commerce, Foreign Affairs and EXIM23 bank. In contrast, the direct investments do not have to be necessarily carried out by SOE, which practically handles the business in the name of Beijing. Although since 2003 Beijing has adopted several reforms, which allow private companies to engage in business in other countries, the share of such private companies has been relatively minimal. In 2006 83% of outward large scale projects were taken care by SOE (Gugler and Boie 2009, 30). The rest was split between SOE under regional administration, non-SOE that are owned collectively and minimally by private companies (ibid).
In addition, the expansion is often encouraged by government with massive media campaigns such us ‘Going Global’ or ‘Going South’ campaigns (Nie 2009, 103), and as Gugler and Boie point out, “[…] FDI by any Chinese firm requires the approval of the Chinese authorities” (2009, 30). In fact, Chinese transnational enterprises that expand abroad have to make sure that their plans and operations go strictly in-line with the Chinese government foreign policy (2009, 54).
That is also the main difference between Chinese and western approach toward OFDI. The distinguishing line is not defined in terms of SOE’s motivations. Those are more or less similar with companies from other capitalist market background – it could be either market-seeking, resource-seeking, strategic asset-seeking or efficiency-seeking incentives that make people to invest overseas (ibid). The distinguishing line lies in the fact that outward investments with Chinese characteristic could also be called state-policy-driven, since the government involvement in these investments is tremendous. Such a relationship is mutually beneficial both for companies and for government. For instance, even company revenue goals might be achieved with influence of the right people – in this case the right government. According to Gugler and Boie, Chinese government has a positive effect on companies internationalization (2009, 52). In general, Chinese government can support companies by providing preferential tax treatment, low interest bank loans, and foreign exchange access (Ohashi 2013, 34). In many cases companies coming to new environment can take advantage of connections and political influence of Chinese authorities. Naturally, this works more in less developed poor countries with weak rule of law, high level of corruption and nepotism. According to statistical bulletin of China OFDI, in 2014 almost 80% of all OFDI flew into developing economies. Cambodia is indeed a perfect example, and one cannot be surprised that China has been the biggest investor in Cambodia since 2004 (Solingen 2008, 28).
Cambodia has had the negative current account for more than a decade. However, at the same time, ADB24 data reveal that Cambodia has been running a balance of payment surplus during the last five years. How does Phnom Penh balance the negative record of trade? Simply said, Phnom Penh is open to basically any sort of FDI, grants, and concessional loans. For example, in 2009-2012 the share of grants in total revenue reached 25.4% of GDP. Between 2003 and 2014 FDI was the main source of financial account in Cambodia, and it was rising significantly from
23 Export Import Bank of China – government policy bank that is exclusively managed by the State Council, and embodies a sole administration over concessional loans and its financing operations (Wen and Tu 2013, 139).
24 ADB report (2014): Cambodia Diversifying Beyond Garments And Tourism Country Diagnostic Study.
‧
US$ 74 million to eventually US$ 1.67 billion, that is 78% share of the financial account and increase by more than 2000% since 2003.25 FDI can actually create perfect conditions for win-win situation. Zhou Baogen (in Wang 2013, 127) in his point of view stresses out that “[…] it is the trade and investment, not foreign aid that is the key to developing countries’ economic emancipation and development.” That indicates that we have the reasonable hunger for FDI by developing countries such as Cambodia. On the flip side of the coin, we have the ‘Quaternity Model’ of Chinese assistance, where practically everything leads to gradual demand for Chinese goods, labor, and political presence. Aid to infrastructure causes indebtedness of given country, which is forced to balance this debt by attracting investors, and that along with better infrastructure is the perfect incentive for growing FDI. Growing FDI then leads to accumulation of investing countries’ assets and expansion of Chinese market, which eventually results in bigger economic power in the particular host country. That is the link to the top China’s priority – modernization by stimulating its own growth and rapid economic development.
Looking at the table number six, China obviously did not miss this opportunity to take advantage of an open window. Data provided by ASEAN26 show a big jump of China’s OFDI in 2013-2014 from US$ 287 million to US$ 554 million, up by 93%. In the former year, Chinese OFDI represented 22% of total investment inflow in Cambodia, the following year it rose to 32%.
While in 2013 the second biggest investor, South Korea, pumped roughly 47% less, next year the difference between top two was 68% with the second Vietnam. On the other hand, Vietnam recorded the biggest progress among other countries, improving from the end almost to the top just in one year, accounting a raise by 230%. It is interesting to note the Japan’s performance as a biggest Cambodia’s donor. However, in terms of OFDI Japan did not make it to top five in last two years, accounting only 3% of total Cambodia’s investments in 2013, respectively 5% in 2014. Vannarith (2009, 16) points out that Japan lacks the necessary investment background in Cambodia unlike Chinese investors. I have already mentioned that Tokyo’s foreign policy somehow missed the train, while Beijing has been building its business contacts in Cambodia for decade. Chinese diaspora (discussed later) is one of the reasons why other countries cannot compete with China in terms of the OFDI. In addition, Japanese investors are concerned about the political situation in Cambodia, underlining the poor rule of law, corruption and other indicators of good governance (ibid). Japanese investors are much more interested in Vietnam, where its investments overcome the ones from China (Yoshimatsu 2010, 101). With raising foreign aid, Tokyo hopes to attract more investors to Cambodia; however, the effect cannot be seen yet, definitely not in comparison with China. Second interesting thing is that USA, as the biggest investor in the world, did not make it even into the top 10. ASEAN data also observes that the strongest sector for Chinese investors was the manufacturing industry, attracting US$
166 million in 2013, and US$ 244 million in the next year. Chinese official statistics state that manufacturing is in total the second most popular sector, right after mining industry, which absorbs 31.4% of all Chinese OFDI carried out in 69 countries in the whole world.
25 ADB (2015): Key Indicators for Asia and the Pacific.
26 Data from ASEAN slightly differs from ADB and Chinese statistics.
‧
國立 政 治 大 學
‧
N a
tio na
l C h engchi U ni ve rs it y
However, here occurs the issue of different data throughout the various sources. That can be seen in the figure number nine, which uses the data from official Chinese source. Comparison with Chinese official sources is necessary in order to offer the complete picture of the current situation over Chinese investments as the part of its foreign strategy. First of all, it demonstrates that Chinese OFDI has begun to fuel in GMS mostly from 2007. Before China did not invest as much as one would expect, given that all campaigns like “Going Out” had started five years earlier. Wen and Tan (2013, 108) suggest that this might be due to the political instability in lower Mekong countries, and also as a result of soaring oil prices at that time, which negatively influenced the trade and economic development. The great shift occurred in 2007, when USA and EU imposed trade restrictions on China. China had to avoid a catastrophic influence on their export and South East Asia suddenly rang the bell. Lower labor and transport costs; culturally close environment, where people listen when money talks; advantage in exporting regulations to USA and EU – all of these things made Cambodia attractive for Chinese investors to set up factories (ibid). On the other hand, this figure also reveals that although Cambodia enjoys the attention of Chinese investors, it is definitely not the most attractive country in GMS on this matter. That only happened once, particularly in 2011, when inflow of investments reached its peak at US$ 566 million. Since then it was slightly decreasing by 22%, and eventually Cambodia was surpassed by Laos, Thailand and Myanmar. Laos probably estimated the most significant change over the years from barely US$ 1 million in 2003 to more than US$ 1 billion in 2014. If we take into account the total amount of Chinese investments in those years, all countries of GMS except Vietnam crossed the line of US$ 3 billion, with Laos almost attacking US$ 4 billion of Chinese OFDI. That proves that more or less China tries to project its economic means equally into almost all GMS countries. For instance, Cambodia accounts for 20% of all investments between the five countries – that is certainly fair enough. Surely, this is a slightly different picture than in the previous table, however studying the Cambodia’s dependency on China’s OFDI, the other neighbors do not play such a heavy role. The most important fact is that China is the biggest investor in Cambodia, and its overall investments in last decade demonstrated rise approximately by 1897%, and that is crucial from the Cambodia’s perspective.
Among other things, Cambodia definitely has to do something about its negative current account;
it has to do something about its poverty, undeveloped infrastructure, insufficiency of qualified human resources, sophisticated equipment, and lacking know-how and modern technologies.
That is why regardless of political or economic intentions; China will be always welcomed in Cambodia.
‧
國立 政 治 大 學
‧
N a
tio na
l C h engchi U ni ve rs it y
Table 6: The top 10 investors in Cambodia (US$ millions)
2013 2014
China 286.8 China 553.9
Republic of Korea 178.2 Viet Nam 179.7
Taiwan 173.3 Hong Kong 136.2
United Kingdom 116.0 Taiwan 122.2
Malaysia 97.9 Republic of Korea 106.3
Singapore 83.7 Malaysia 85.2
Hong Kong 82.8 Japan 84.9
Thailand 61.8 Singapore 60.8
Viet Nam 54.3 USA 50.3
Japan 38.5 United Kingdom 46.7
Top 10 Total 1,173.2 Top 10 Total 1,426.2
Total FDI 1,274.9 Total FDI 1,726.5
Top 10 Share of Total FDI (%) 92.0 Top 10 Share of Total FDI (%) 82.6
Source: ASEAN Investment Report 2015 (10).
Figure 9: Chinese OFDI in GMS region over time (US$ millions)
0 200 400 600 800 1000 1200
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Millions US$
cambodia Laos Myanmar Thailand Vietnam
Source: Statistical Bulleting about China Outward Direct Investment 2014
‧
國立 政 治 大 學