Cambodia's flagship canal in hot water as China funding dries up

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Cambodia plans canal costing nearly 4% of GDP

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Cambodian govt has announced varying levels of Chinese support

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China expressed misgivings, put no money on table, sources say

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Chinese public investment in Cambodia is plunging, tourism down

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China says it has 'ironclad' friendship with Cambodia

(Updates Nov 21 story with comment from Cambodia's ministry for public works in paragraphs 9-11)

By Francesco Guarascio

PHNOM PENH, Nov 21 (Reuters) - At a ceremony in August, Cambodia's leader Hun Manet knelt to receive blessings from saffron-robed monks as fireworks and balloons heralded the breaking of ground for a canal he hopes will transform his country's economic fortunes.

Addressing hundreds of people waving the Cambodian flag, Hun Manet said China would contribute 49% to the funding of the Funan Techo Canal that will link the Mekong River to the Gulf of Thailand and reduce Cambodia's shipping reliance on its neighbour Vietnam.

Cambodia's government estimates the strategic infrastructure project will cost $1.7 billion, nearly 4% of Cambodia's annual gross domestic product.

But months later, China's financial contribution remains in doubt.

Four people directly involved in the investment plans or briefed about them told Reuters Beijing has expressed misgivings about the project and has not made definitive commitments on its funding.

"It is normal business practice for Chinese companies to assist Cambodia in exploring the construction of comprehensive water conservancy projects in accordance with market principles," China's foreign ministry said in an emailed statement to Reuters when asked about the canal.

The Chinese ministry did not answer a direct question about the funding but said the two countries were "ironclad friends," a comment echoed by Hun Manet in late October.

Cambodia's government declined requests for interviews, and its press officers did not reply in recent weeks to requests for comments about the canal's funding.

After Reuters published this article, Cambodia's ministry for public works said late on Friday that the story and other media accounts of implementation problems with the canal were "not true" and were "without clear basis".

"The working group on the project has been actively progressing by cooperating with national and international institutions, contrary to what is stated in the news," the ministry said in a statement. It did not mention China or say anything about funding for the project.

The ministry and a government spokesperson did not immediately respond on Saturday to Reuters requests for clarification.

China's lack of clear commitment could jeopardise the entire plan, given uncertainty over the project's costs, its environmental impact and financial viability, experts, officials and diplomats say.

It also underscores how Beijing is drastically downsizing its overseas investments as its domestic economy struggles, even in countries it considers strategic partners, such as Cambodia.

Once a prime example for Western-backed "nation-building" after the long civil war that followed the fall of the Khmer Rouge regime, Cambodia has in recent times been widely seen by diplomats and foreign policy experts as a Chinese client state, owing to Beijing more than one-third of its total state debt.

But Chinese investment in the Southeast Asian nation is now plunging, after a series of unsuccessful infrastructure projects, amid concerns over criminal gangs targeting Chinese nationals, and dropping tourist numbers.

DIFFERING NARRATIVES

The 180-km (112-mile) canal would greatly expand an existing waterway and divert water from the fragile rice-growing Mekong Delta to the Gulf of Thailand, cutting Cambodian shipping through Vietnamese ports.

In the months after the Cambodian government signed an "investment framework agreement" in October 2023 with China Road and Bridge Corporation (CRBC), a state-owned construction company, Cambodian officials went public about China's financial involvement. The text of the deal is not public.

In an interview with Reuters in May, the minister in charge of the project, Deputy Prime Minister Sun Chanthol, said CRBC would develop the canal and "totally" cover its costs, getting a multi-decade concession in return.

But at the August groundbreaking, the prime minister put CRBC's share in the project at 49%, with the remainder covered by Cambodian companies.

The same day, his father and Cambodia's decades-long leader Hun Sen posted a statement on Facebook calling on Japan to invest in the canal.

China's official Xinhua News Agency did not mention any Chinese involvement in its report about the groundbreaking.

A few days later, a communications officer for Sun Chanthol told Reuters that ownership for the canal's section to be developed together with CRBC remained "to be determined".

When asked about Cambodian assertions that CRBC would have a 49% stake, an official for the company told Reuters in mid-October the figures circulating publicly were not definitive. "It's very complicated," said the official, who did not elaborate.

CRBC and its parent company did not reply to requests for comment.

One person directly involved in the investment plans told Reuters in early November there was no Chinese money on the table at that stage, confirming the account from another official.

A source from one of the Cambodian investors in the project said it would not be a surprise if China did not invest in the canal at all.

A fourth official briefed on the matter said China earlier this year had privately criticised Cambodian officials for announcing Chinese funding for the project that had not been decided.

They all declined to be named because of the issue's sensitivity.

More than three months after groundbreaking, the site of the ceremony on the bank of the Mekong laid abandoned, a Reuters reporter observed.

CHINA INVESTMENT DOWN

Dithering over the canal comes as Chinese official development assistance to Cambodia, including infrastructure funding, is falling.

China's disbursements to Cambodia are projected to drop to $35 million in 2026 from more than $420 million in 2021. There have been no new Chinese loans in the first half of this year, down from $567 million in 2022 and $302 million last year, according to Cambodian official data.

Chinese funding for overseas projects is also falling elsewhere, but in Cambodia the impact "could be very pronounced," said Grace Stanhope of the Lowy Institute, a Sydney-based think tank.

China is still building roads and other infrastructure but has pulled out from the construction of the new Phnom Penh airport, where it had initially committed $1.1 billion.

That disengagement came as an expressway built by CRBC connecting Phnom Penh to the coastal city of Sihanoukville remained under-utilised by Cambodian motorists and truck drivers who to avoid tolls prefer the crowded but free old road, a Reuters reporter observed, confirming accounts from multiple Cambodia-based officials.

Another recently completed Chinese-backed airport at Siem Reap to serve the UNESCO world heritage site of Angkor Wat "is very quiet," said Ou Virak, head of Cambodian think tank Future Forum, noting investors may face losses.

Chinese private investment remains high, but multiple Phnom Penh-based diplomats and financial experts point to once large inflows of Chinese informal funds destined to the gambling industry and real estate sector having dried up.

Chinese tourism, once a major source of income for Cambodia, has also struggled to recover from the COVID pandemic.

That has coincided with a prolonged Chinese campaign warning tourists of risks linked to an online scams industry in Cambodia.

As relations between China and Cambodia evolve, the canal project's fate and its sustainability remain uncertain.

"With so many unknowns, it's no surprise to me that investors are getting cold feet on this project and have yet to show up with their money in hand," said Brian Eyler, an expert on the Mekong region at U.S.-based think tank Stimson Center.

(Reporting by Francesco Guarascio in Phnom Penh; Additional reporting by Liz Lee and Yukun Zhang in Beijing; Editing by David Crawshaw and Lincoln Feast.)