Bank of China, the most active Chinese state bank on the international stage, celebrated the grand opening of new branches in Cambodia’s Siem Reap and Sihanoukville last month. Strategically placed, they have two missions: to support Chinese commercial activity and facilitate yuan internationalization.
China remains Cambodia’s leading foreign donor. In 2016, Chinese direct investment in Cambodia amounted to US$511 million, down from 2015’s US$865 million. Chinese firms of all types, be they state-owned conglomerates, state-backed non-public enterprises, or small and medium private businesses, are setting-up shop in Cambodia, attracted by trade-friendly policies and stable bilateral relations.
Chinese investment touches all key sectors of the Cambodian economy— agriculture, garment-making, construction, tourism. In Siem Reap, the Chinese SOE Yunnan Investment Holdings Ltd. will begin construction of a new US$880 million airport in 2020. The Sihanoukville Special Economic Zone, situated 12 km away from the country’s only deep-water port, is a joint Cambodian-Chinese venture run by a Chinese general manager. There are 109 businesses in the Zone making textile, clothing, luggage and leather products, and 94 are Chinese-funded. In June, China’s Shenzhen Win-Win Decoration Design Engineering Co., Ltd. announced plans to build more than 100 budget hotels in Cambodia to accommodate the growing number of Chinese tourists.
Infrastructure is an important focus of Chinese investment. So far, China has built and renovated 20 roads in the country, totaling 2,669 km, or 35% of Cambodia’s total highway mileage. Eight super-size bridges, six hydropower stations, and three power grid networks have also been completed.
But China is looking to build more. New bank branches in Siem Reap and Sihanoukville, respectively the heart of Cambodian tourism and the country’s window to world maritime trade, will strengthen the financial support network for incoming and existing Chinese businesses.
Promoting yuan internationalization is and will continue to be the main task of Chinese state banks operating in Cambodia. However, China faces an unusual situation in an economy where the dollarization rate is between 80 and 90 percent.
Unlike in Russia, where yuan internationalization is gradually picking up steam, Cambodia has a liberal economy that is well integrated with world markets and is not under Western sanctions
Cambodia is a country with multiple circulating currencies. The US dollar and Cambodian riel are the two most widely exchanged, while the Thai baht and Vietnamese dong are also used in border towns. The riel has greater circulation in rural areas and is used more for small and medium-scale transactions. The dollar, however, dominates commerce in Cambodia’s cities and is the preferred currency for large-sized transactions.
According to a study by the National Bank of Cambodia and the JICA Research Institute, 82.5% of respondents said they preferred dollars for real estate sales and 81.4% for motorcycle and car sales. Loans, revenues, expenditure, and price quotations are all highly dollarized: 90% of financial sector transactions are dollarized, as are almost all loans (95%). Loans in riel are rarely available since its exchange-rate risks are high. The dollar remains the main settlement currency in all sectors except agriculture.
At present, the yuan is not a circulating currency, except in a few tourist venues. According to a Cambodia investment guide by China’s State Administration, Chinese companies cannot use the yuan in cross-border trade and investment. Despite growing Chinese economic presence and government directives asking businesses in tourist towns to accept more yuan, the dollar is still favored. Most Cambodians are uninformed about the yuan and see no distinct benefits in the introduction of another circulating currency besides smoother trade with China, which still lags several times behind the trade volume with the European Union and the United States.
Unlike in Russia, where yuan internationalization is gradually picking up steam, Cambodia has a liberal economy that is well integrated with world markets and is not under Western sanctions. While new Bank of China branches will certainly boost Chinese economic clout, the use of yuan in Cambodia will remain limited. Despite grandiloquent statements from Chinese state media about the renminbi’s challenge to the dollar in Cambodia, therefore, it will not dislodge the greenback from its dominating position in the foreseeable future.
Follow the author on Twitter @MrZiYang.