Why Is China Investing In a $1.7 Billion Canal in Cambodia?

At the groundbreaking of the Funan Techo Canal (FTC) this past August, Cambodian Prime Minister Hun Manet hailed the project as a “symbol of patriotism and national unity.” Cambodia hopes that the canal, funded 51 percent by Cambodia and 49 percent by China, can boost its trade by connecting to deep-water ports along Cambodia’s coastline—some, such as the Sihanoukville port, also funded by China—thus reducing reliance on Vietnam. The $1.7 billion project is over 5 percent of Cambodia’s GDP in 2023 ($31.77 billion, according to the World Bank).

Foreign observers see the FTC as a testament to China’s pervasive and growing influence in Cambodia. Cambodia’s neighbors, like Vietnam, are concerned about its potential negative impacts on the Mekong Delta, a major rice-growing region, and its potential military use, echoing the controversy surrounding the Ream Naval Base upgrade.

Today, China is Cambodia’s largest investor, trading partner, and donor. In contrast, the U.S. government and its allies have imposed sanctions and cut funding for perceived human rights violations, driving Phnom Penh further into Beijing’s arms.

Close ties between the two countries are rooted in history, particularly Cambodia’s dependence on Chinese aid and investment. Bilateral relations warmed after Cambodia gained independence from France in 1953. Seeking to counterbalance the influence of Thailand and South Vietnam, Cambodia pursued stronger ties with China. Official diplomatic relations between the two countries began in 1958 when Cambodia recognized the People’s Republic of China and rejected Taiwanese independence. However, ties soured in the 1960s when China supported the communist movement in the Khmer Republic. The Khmer Rouge, with significant Chinese backing, later overthrew the Khmer Republic. Despite heavy reliance on Chinese aid, Pol Pot’s regime resisted Chinese influence over its military and economic sectors.

After the 1997 coup led by Hun Sen, who would rule Cambodia as the Prime Minister for over thirty years, Cambodia turned to China out of necessity. Hun Sen’s crackdown on political opposition led foreign donors to withhold aid, pushing him towards China. Eager to support a like-minded regime, China poured loans and investments into Cambodia. In 2021, Hun Sen declared “If I don’t rely on China, who will I rely on?”

While Cambodia has clear interests in fostering ties with China through trade, investment, and projects like the FTC, China’s heavy investment in Cambodia is more perplexing. Unlike other economically stronger ASEAN members like Vietnam, Cambodia lacks the economic clout to negotiate against China.  Statistically, present-day Cambodia is not a significant economic partner for China among ASEAN members, making the question “Why Cambodia” even more puzzling.

For example, among the ten ASEAN member states, Cambodia ranks ninth as a source of imports for China, seventh as an export destination, and fifth as a trading partner (at a net surplus for China). In terms of China's outbound FDI to ASEAN, Cambodia ranks sixth. Of the nine ASEAN countries receiving Chinese aid, Cambodia is seventh in aid committed and fourth in aid received. Cambodia fares not much better in people-to-people exchanges among ASEAN members, with the sixth greatest Chinese population by number and fifth in terms of Chinese population as a proportion of the total population. In 2023, it was the fourth most popular destination for Chinese tourists.

Hence, it is easy to conclude at face value that Cambodia is not that important to China—or at least, not as important as its neighbors such as Vietnam and Malaysia. Given these middling statistics, why does China invest in a $1.7 billion canal in Cambodia?

Politically, the Communist Party of China views the regime in Cambodia as “likeminded.” As the CPC promotes its governance and model of development as an alternative to the West, nurturing a politically like-minded regime makes sense. China’s elite-centric approach to diplomacy in Cambodia targets government institutions and the ruling elites of the Cambodian People’s Party, especially its youth leagues. Such close ties act as a lubricant for Chinese investment in Cambodia. They allow Chinese investors to gain direct access to Cambodia’s political elite, which expedites the bureaucratic process and lowers the cost of doing business in Cambodia. In return, Cambodian political elites receive a cut from investment projects.

Such close elite ties have not yielded much business success. Cambodia is not China’s largest trading partner or largest foreign direct investment destination. While Cambodia’s political ecosystem is friendly to Chinese enterprises, the gains for Chinese companies do not justify the billions of dollars in loans and government investment from the Chinese government.

Viewing the Sino-Cambodian relationship in a broader regional context makes more sense rather than viewing the relationship merely through a bilateral prism. Cambodia serves as a conduit for China’s vision to influence ASEAN and shape international trade.

Perhaps more than pure randomness, Cambodia’s foreign policy aligns closely with China’s priorities, considering that the Cambodian People’s Party largely relies on Chinese aid and investment to bolster its legitimacy and reinforce the existing political system. The Cambodian government staunchly supports Beijing’s reunification position on Taiwan and “opposes any attempt to use the Taiwan question to interfere in China’s internal affairs”—a position initiated by Hun Sen in the 90s when courting Chinese aid and investment and continued by his son, Hun Manet, the current prime minister. Within ASEAN, Cambodia consistently backs China’s bilateral negotiation approach for South China Sea disputes, blocking ASEAN statements on the issue in 2012 and 2016, and opposing joint-ASEAN naval drills in the South China Sea. Despite constitutional prohibitions on foreign military bases on Cambodian soil, U.S. analysts are convinced that China’s upgrades at Ream Naval Base are a cover for its naval use. Cambodia has also conducted joint naval drills with China and was recently gifted two warships by China at Ream Naval Base.

While bilateral trade between Cambodia and China is not significant for China, infrastructure investments such as the FTC in Cambodia could divert significant trade away from Vietnam to the Gulf of Thailand, increasing China’s leverage against countries with whom it has territorial disputes in the region. This shift may impact other ports, such as the nearby Laem Chabang Port in Thailand. China has previously helped with the expansion of Laem Chabang Port. China Harbor Engineering Company recently won the infrastructure contract for phase three of its development. The Thai Ministry of Transport estimated that increased freight traffic to Laem Chabang and the Gulf of Thailand from the FTC would boost demand for the Thai Land Bridge project (formerly known as the Kra Canal project), a proposed rail and road transport corridor also backed by China.

The Thai Land Bridge, if materialized, could shorten travel distances for cargo ships by 1,200 kilometers and save four days of shipment time on average. Geopolitically, it is viewed to potentially alleviate China’s Malacca Dilemma and undercut U.S. leverage over China. The Malacca Strait, one of the world’s busiest shipping lanes, sees 60 percent of global goods pass annually and serves as an energy chokepoint for China, with roughly 80 percent of Chinese energy imports passing through.

The Thai government is eager to capitalize on the potential trade diversion to the Gulf of Thailand. At APEC 2023, the Thai Prime Minister claimed hat the Malacca Strait would reach maximum capacity by 2030, necessitating the Thai Land Bridge project. Trade through the Malacca Strait faces multiple challenges, such as high congestion and delays due to climate change-related extreme weather events. However, if launched, the Thai Land Bridge project would likely upset Malaysia and Singapore, the two main beneficiaries of the current trade route through the Malacca Strait.

Despite such geopolitical reasoning, there is no evidence suggesting that China is purposely funding the FTC to divert trade to the Gulf of Thailand so as to increase demand for the Thai Land Bridge and, thus, eventually bypass the Malacca Strait as a way to address the so-called Malacca Dilemma. The degree to which China’s energy security suffers from vulnerabilities due to the “Malacca Dilemma” and to what extent addressing this issue should be a major foreign policy concern have been contested among Chinese scholars and strategists. Some prominent scholars in China argued that the Malacca Dilemma is a “false proposition” for various reasons. Others argued that the so-called dilemma “does not exist at all” and reflects “a typical Chinese engineer's thinking and has no strategic concept."

Moreover, even if China were to envision such a grand strategy as a solution to its geopolitical vulnerability regarding heavy dependence on the Malacca Strait, it would require the CPC and the Chinese government to count on the perfect alignment of many external decisions by foreign governments. Allowing the success of its grand strategy to be subject to forces beyond China’s control is not compatible with the CPC’s pursuit of great power status and its prioritization of strengthening national security.