China’s Slow Economy Puts a Strain on Cambodian Exports

Cambodia’s export volume to China has been slipping since May, but economists feel it might not waylay Cambodia’s economic growth much
Factory workers buy food in Phnom Penh. Kiripost/Siv Channa
Factory workers buy food in Phnom Penh. Kiripost/Siv Channa

A slowdown in Cambodian exports to China has been persisting since May this year amid intermittent drops in raw material imports originating mostly from China, which support the Cambodian garment sector.

Based on Customs and Excise Department data, exports to China have fallen 18 percent between January and September this year to $895.5 million from $1.09 billion in the corresponding period a year ago.

In September alone, exports slumped nearly 30 percent to $90.8 million compared to $129.2 million in September last year. At the same time, 25.3 percent of imports from China were shaved off in comparison to last September.

Even as Chinese President Xi Xinping renewed vows for “national rejuvenation” via a “Chinese path to modernisation”, and prioritised economic development during his re-election as general secretary in the ruling Chinese Communist Party, economic growth has been teetering the past few months.

The slump in global demand, compounded by rising interest rates and inflation, and a protracted zero-Covid-19 policy risk pulling down growth as global recession beckons.

Its October Caixin China general manufacturing purchasing managers’ index (PMI), which indicates the health of the economy in relation to industrial activities and productivity, stood at 49.2, just below the 50 point growth marker. Above 50 is a sign of industrial expansion.

While October’s index was an improvement from a 48.1 reading in September, it is not out of the woods yet, given that the overall PMI has remained below 50 since July this year, indicating continued contraction.

However, gross domestic product (GDP) growth has been set by China at 5.5 percent this year, differing vastly from the International Monetary Fund (IMF)’s 3.2 percent and the World Bank’s 2.8 percent 2022 forecast. Last year, China recorded 8.1 percent growth.

‘Millennium-old friendship’

“China’s economic slowdown results from different factors, including its zero-Covid 19 policy and housing market downturn,” Eve Barré, ASEAN economist of Paris-listed credit insurer Compagnie Française d'Assurance pour le Commerce Extérieur (Coface) stated.

Therefore, any slowdown in China would undoubtedly affect Cambodia’s economy given their close ties.

The first being China’s considerable representation in Cambodia’s source of export earnings. Last year, China was its fourth largest export market after the US, EU and Japan, Barré said.

Secondly, China’s Covid policy, and the implied subdued manufacturing production growth in turn impacts Cambodia’s industry since the latter imports a “formidable share”, around 50 percent in 2019, of intermediate goods from China.

“Also, China accounts for the first source of investment inflows to Cambodia. Such inflows could be impaired by the economic situation in China."

“China’s economic difficulties come on top of a global gloomy environment as the rest of the world also faces a slowdown in growth amid climbing inflation and rising interest rates,” she added.

This week, Chinese Prime Minister Li Keqiang is at the ASEAN Summit in Phnom Penh where he meets Prime Minister Hun Sen.

He delivered a written message regarding both nations' “millennium-old” friendship, which has “stood the test of time”.

He mentioned the China-Cambodia Free Trade Agreement and how bilateral trade exceeded $10 billion, “two years earlier than expected”.

“High-quality rice, Basa fish, bananas, mangoes and longan from Cambodia are readily available in Chinese markets and on the menu of Chinese households,” Li said.

Bilateral trade between Cambodia and China has risen significantly at a compound annual growth rate of 13.2 percent from 2017 to 2021, making China its number one trading partner.

A strong rebound in trade in 2021 saw a total of $11.2 billion worth of export-import volume traverse both destinations.

This upward development has carried through to 2022 with January to September bilateral trade up 9.7 percent year-on-year to $8.8 billion.

Ministry of Commerce spokesman Penn Sovicheat and Council for the Development of Cambodia secretary-general Sok Chenda Sophea could not be reached for comment.

Not insulated

Sokchea Lim, associate professor of economics at John Carroll University in Ohio, US, and Mulwick scholar, expects a slower job growth or a decline in the garment sector as raw material imports see continuous drop.

The fall in exports, not just to China, has caught the attention of the Ministry of Labour and Vocational Training Labour Ministry, which has been monitoring the impact of the Russia-Ukraine crisis on Cambodia.

It is particularly concerned with the suspension or closure of garment factories, where some two million workers are employed, if Western demand orders continue to dip.

For example, September export values to the US, which is Cambodia’s largest export destination, lost 17.6 percent year-on-year to $625.7 million.

Ken Loo, secretary-general of Garment Manufacturers Association in Cambodia, has previously said that a quarter of its members would “partially suspend” or “reduce working hours” due to reduced orders in the West in September.

Hence, the reason why economics professor Sokchea does not think that the Cambodian economy is insulated from the slower global economy.

“This year, the economy will also be affected by the tightening in many advanced economies to fight inflation,” he said.

However, he felt that the moderate growth of the economy last year and “maybe an expected slightly better growth this year” should be attributed to the rise in the domestic demand.

The IMF forecast Cambodia’s GDP growth this year at five percent, thanks to stronger performance in the earlier part of 2022.

Next year’s growth could be close to 5.5 percent on the back of tourism recovery and ongoing policy support, although it might be “dampened by external pressures and the impact of rising prices on real disposable income”.

Capital outflows

To be sure, anxieties over stagflation and the onslaught of a global recession are starting to grip emerging economies in Southeast Asia.

Barré of Coface said the global economy has been decelerating in recent months following Chinese wide lockdowns earlier this year and the consequences of the war in Ukraine.

This trend is set to continue and worsen, especially in Europe due to its great reliance on Russian energy.

“Southeast Asian countries would, hence, face an increasingly subdued external demand, which will affect export performance. Latest trade data already showed slowing export growth in several ASEAN countries,” Barré stressed.

She said periods of global economic troubles are traditionally accompanied by lesser risk appetite, encouraging capital outflows from emerging countries.

“Such flows are observed in emerging Asia and are likely to persist while the world economy goes deeper into an economic slowdown. The expected continuation of monetary tightening, especially by the US Federal Reserve, will further support this,” she added.

That said, she pointed out that despite global headwinds, Cambodia's economic growth is expected to continue to strengthen in 2023.

While exports, which are crucial to the Cambodian economy, accounting for 65 percent of GDP in 2021, are set to weaken, domestic consumption is expected to take over and drive GDP growth.

“In fact, it will continue to benefit from the government's treatment of Covid-19 as endemic and the gradual reopening of international borders, with the country beginning to welcome unvaccinated travellers without mandatory testing on arrival in October 2022,” Barré said.

Agreeing that domestic demand would back growth, Sokchea opined that the innovation in the financial sector, for example fintech, has significantly reduced the transaction costs and made it easier for consumers to spend.

Domestic tourists replace foreign travellers, helping boost the demand in the service sector, he said, commending the government for its effective Covid-19 vaccination policy.

“[This] allowed the curfews to be lifted and for the country to return to normalcy. I believe the efforts to boost vaccination should be continued,” he added.