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Jimmy Gao glides down the broad staircase of a French colonial mansion in Cambodia's steamy capital, Phnom Penh, and lets a self-satisfied grin spread across his face. The Chinese businessman has e very right to feel good. This grand edifice was once the city hall when Paris ruled Indochina. Now, it's the headquarters of the Chinese Chamber of Commerce, and Gao is the chamber's president. Last year, China ranked as Cambodia's No. 1 foreign investor for the first time, and bilateral trade volume rose 50% from the year before. Chinese interests permeate practically every sector of the Southeast Asian nation's economy, with 30,000 mainland Chinese living in the kingdom. Mandarin-language schools compete with English ones for the best Khmer students. "You can't go a block in Phnom Penh without running into a Chinese business," boasts Gao. "Our influence is everywhere." Perhaps the most fitting testament to China's shadow over Cambodia may loom over the capital by next year: a Chinese developer is drawing up blueprints for what it hopes will be the country's tallest building, a high-rise on Mao Tse Toung Boulevard that will dwarf the structure that used to set the height limit in Phnom Penh, the diminutive Royal Palace.

Playing big brother to Cambodia might have been unthinkable for China just recently, given Beijing's support for the murderous Khmer Rouge, which ravaged Cambodian society a quarter of a century ago. But countries across Southeast Asia are hoping to cash in on China's economic boom—and this nation of 13 million is no exception. The relationship is symbiotic: China is reaping political benefit from its growing trade ties in the region. Beijing hopes that tens of millions of dollars in military aid and loans will result in a docking facility on the Cambodian coast for China's navy, giving Beijing better access to the Straits of Malacca, the region's crucial shipping route through which 80% of China's imported oil passes. Gao has played a role in wielding Beijing's new influence. In 1997 the Shanghai native and other Chinese businessmen helped persuade the Cambodian government to shut Taiwan's de facto embassy in Cambodia, as part of efforts to isolate Taipei internationally. Cambodian King Norodom Sihamoni's first foreign excursion after ascending to the throne last October was to Beijing to meet with Chinese President Hu Jintao. "From my heart, I believe it is my responsibility to convince other countries to recognize one China," says Gao. "I want to make money in Cambodia, as do my colleagues, but we also have a political mission to accomplish."

China likes to call its growing global influence a "peaceful rise," and Beijing hopes its prodigious trade and aid will convince Southeast Asian nations of the virtues of tying their futures to China. Just a few years ago, Southeast Asia's export-led economies were terrified that a resurgent China would crush the region's manufacturing sector and leave millions jobless. That fear proved unfounded. From 1994 to 2004, Southeast Asia's manufacturing output actually increased from 25.2% of its GDP to 29.6%. Now, as the region seeks to lure back foreign investment scared away by the 1997 Asian financial crisis, China looks less like a menace than a benefactor. Last year, trade between China and Southeast Asia reached $105.8 billion, and if current growth rates continue, China could eclipse the U.S. as the Association of Southeast Asian Nations' (ASEAN's) biggest trading partner by the end of this year. China's expanding economic and political clout is raising alarm in Washington, which is locked in an increasingly acrimonious trade battle with China over its surging exports to the West (see story).

Southeast Asia's biggest beneficiaries are resource-rich nations that can help sate China's seemingly inexhaustible appetite for raw materials. Already, China is one of the top consumers of Malaysian palm oil, Thai rubber, Burmese teak, Philippine copper, and Indonesian pulp and paper. Just last month, President Hu went on a spending spree in Indonesia, where he pledged to boost trade by $6 billion over the next three years, and in the Philippines, where he promised $1.6 billion of new contracts and loans. "We do not see the rising role of China as a problem but more as an opportunity for gains in areas like trade," says Indonesia's Foreign Ministry spokesman Marty Natalegawa.

But China is shaping far more than Southeast Asia's economic revival. With the U.S. absorbed in its war on terror and many in Southeast Asia feeling neglected by Washington, Beijing may be seizing the opportunity to displace the U.S. as the region's heavyweight. "Historically, Southeast Asia was the domain of China," says Daniel Lian, Southeast Asia economist for Morgan Stanley in Singapore. "It's easy to see how China will want to see the region under its sphere of influence again." Last November, at an ASEAN forum, China sketched out accelerated plans for a regional trade bloc that could be the world's largest by population by 2010—and which Beijing has called a counterweight to Western economic interests. Naturally, China, with its $1.65 trillion economy, will stand at the center of this trading solar system, and Southeast Asia's economies are having to adapt to its growing gravitational force. "The 21st century will be the Chinese century," says Prapat Thepchatree, director of the Centre for International Policy Studies at Bangkok's Thammasat University. "There is nothing to be gained by not recognizing this inevitability."

It wasn't politics, however, that first enticed China back into Southeast Asia. With the country's torrid economic growth outstripping its own natural resources, a nation that was once determined to maintain socialist self-sufficiency has been forced to power itself with global commodities. In 2000, Beijing unveiled a "Going Out" policy that offered financial incentives to some domestic companies willing to invest abroad. Since then, China has secured trade deals as far away as Sudan for oil and Brazil for soybeans. But Southeast Asia remains the first fueling stop for Chinese businesses. It's no coincidence that two of the biggest deals Hu announced during his trip to Southeast Asia last month were a $950 million contract by the Shanghai Baosteel Group Corp. and Jinchuan Nonferrous Metals Corp. to rehabilitate a Philippine nickel plant and a $500 million commitment by state-owned investment fund CITIC to invest in an Indonesian palm-oil plantation. Meanwhile, Chinese state-owned firms are making deals as diverse as a $275 million investment in a liquefied-natural-gas project in Indonesia's Tangguh gas fields and a $1.5 billion aluminum mine in Vietnam.

But China's effort to secure dependable access to natural resources doesn't please everyone in Southeast Asia. Although Hu has urged the region to turn the South China Sea into a "sea of friendship and cooperation," Beijing is embroiled in several territorial disputes in those waters. In March, the Philippines, Vietnam and China agreed to jointly explore for oil and natural gas in the contested area, but none of the countries has given up its territorial claims. And with Chinese state-owned firms snapping up majority stakes in Southeast Asian resource companies, concern is mounting over long-term control of the region's most valuable commodities. "Whenever a country sells off parts of oil companies or coal mines or timber concessions, there's a sense that the country is losing something," says Stephen Frost, research fellow at the Southeast Asia Research Centre at the City University of Hong Kong. "Right now, it's the Chinese—not the Americans or Japanese—who seem to be doing the high-profile buying." Ironically, Southeast Asia's protectionist concerns come just as China is safeguarding its own forests through a ban on most domestic logging. In places like Indonesia, where 40% of forestry exports go to China, environmentalists are worried that the mainland's hunger for natural resources could have a disastrous effect. "The risk to Indonesia's forests is major," says David Kaimowitz, director of the Center for International Forestry Research in Bogor, West Java, who notes that much of the timber destined for China is illegally felled. "China is like a vacuum cleaner sucking up resources in the region."

For China's acquisitive companies, however, the region's raw-material wealth is a potential bonanza. "This is the age of economic globalization, and we want to be part of it," says Li Xiaoming, director general of the Bureau of Geology and Mineral Resources in southern China's Yunnan province, whose corporate arm this year signed a 30-year deal for exploration rights of a 800 million-ton potassium mine in Laos. China imports 90% of its potassium, a key ingredient in fertilizer. As he discusses his investment strategy, Li dissects Southeast Asia with the efficiency of a latter-day colonialist: Vietnam and Burma, he says, have an abundance of nonferrous minerals and relatively friendly governments; Cambodia is still backward but has mineral potential and ports; Laos may be the best of all because its mineral lode is largely undeveloped and the countries share a socialist comradeship. "In Laos, the Prime Minister personally signed the deal himself," says Li. "Because we can deal directly with the top level, things can happen quite quickly. Laos is a good partner for us."

But one nation's partner is another country's pariah state. Chinese firms, many of which are state-owned and don't need to field tough questions on ethics from their boards or shareholders, have invested heavily in places where Western companies face severe restrictions. In Burma, for instance, investments by Chinese state-run enterprises in timber, energy and minerals are helping Rangoon's military rulers counteract Western human-rights sanctions. Last year in a visit to Rangoon, Chinese Vice Premier Wu Yi assured the generals that Burma's internal affairs "should be coordinated and resolved by the government and its people themselves." She then projected that bilateral trade would reach $1.5 billion this year. Given that Burma could give its energy-dependent neighbor easier access to oil through a proposed pipeline from the Burmese port of Sittwe to Yunnan, Beijing's warmth may not be surprising. Furthermore, at a time when China's entry into the World Trade Organization is compelling the nation to raise its labor standards, closed regimes like Burma's and Laos' offer Chinese investors an alternative base for factories that are safe from bureaucratic scrutiny. Says one official with a Chinese state-owned company operating in Southeast Asia: "Since we contract the projects out to local companies, Chinese state firms reduce the burden on themselves by not having to worry about workers' safety."

Southeast Asia lures Chinese investors for an even more surprising reason: cheap labor. Although foreign firms still flood into China because of its low wages, labor costs are rising in the country's twin economic engines of the Pearl River and Yangtze River deltas. In Vietnam, Chinese water-heater magnate Pan Xinghua has been filling out reams of application papers and enduring barbs about China's 1979 invasion of Vietnam in an ongoing effort to open a factory in Hanoi, where labor is one-third cheaper than at home. Pan is also doing a civic duty for his hometown of Wenzhou. Last year, the vice mayor of the Chinese coastal city publicly encouraged local entrepreneurs to move light-manufacturing factories overseas to help clear up the city's air. "I was the first one to leave my government job to enter private business in 1988, and no one believed I would succeed," says Pan, 45, who used to work at the local meteorology bureau. "Now no one believes I will succeed in Vietnam, but I'll prove them wrong again."

The Chinese are investing so quickly in Southeast Asia that official statistics may be grossly understated. The Thailand Board of Investment estimates that China is only the kingdom's 10th largest investor, but much of mainland foreign direct investment (FDI) may be slipping through the cracks. "I hear so many stories of investment from China that never makes it onto the board of investment's books," says Sakkarin Niyomsilpa, senior analyst at Kasikorn Research Center, a leading economic think tank in Thailand. In Phnom Penh, Gao from the Chinese Chamber of Commerce recently hosted a trade delegation from the Chinese province of Anhui. He had no idea that the economically backward province had any interest in Cambodia but was told that Anhui already did $10 million in trade with the Southeast Asian nation. Tracking Chinese investment in Southeast Asia is made more difficult by the tendency of mainlanders to funnel funds through the bank accounts of local ethnic Chinese, with whom they often prefer to do business. "There's really a black hole of Chinese FDI," says Frost from the City University of Hong Kong. "The data are missing lots of small and medium-sized enterprises and one-man bands, as well as money that goes through ethnic Chinese or via other countries. It's impossible to know how much investment isn't being picked up, but I reckon it's a lot."

Though much of the money may fly under the radar, China is learning just how much appreciation high-profile investments can earn from locals. In Phnom Penh, Dr. Chen Bing oversees 12 Chinese doctors at the Li Po Long Hua Hospital, which opened in 2000 with funding from the largest medical facility in China's eastern Hebei province. The Cambodian hospital boasts some of the most advanced medical equipment in the country, such as a C.T. scanner and a laser machine to break up kidney stones. "Before, the Cambodians saw Westerners and Japanese as their only friends," says Chen. "But we want to show that China can help develop poor countries, especially ones in its neighborhood." Chinese construction companies are also busy building a vast network of roads across the region. The transport links help move Southeast Asian goods to China more quickly, but they also improve the livelihood of millions of rural residents. "China has been able to accrue a massive amount of goodwill through economic means," says Frost. "Now the question is, how they are going to use it?"

On Taiwan, at least, Beijing appears more than ready to flex its muscle. Last year China postponed free-trade talks with Singapore after Lee Hsien Loong, who later became the city-state's Prime Minister, visited Taiwan in July. "The Americans can be arrogant in their use of power, but this instance shows the potential for Chinese arrogance, too," says Verghese Mathews, a visiting fellow at the Institute of Southeast Asian Studies in Singapore. But China is Singapore's second largest trading partner, and economic realities have a way of shaping politics. Since he took office last August, Lee has gone out of his way to underline his nation's commitment to a "one China" policy, even going so far as to say that Singapore would not support Taiwan should China invade what it calls a renegade province if the island moves toward independence.

With Southeast Asia pulled ever closer into China's orbit, some are worried that the cozy relations could alienate the U.S., the region's traditional superpower. Last year, the Philippines, a longtime U.S. ally, accepted its first-ever military aid from China, even as President Gloria Macapagal Arroyo invited American forces to help train the Philippine military in the country's restive south. Arroyo "should stop treating China as her new big brother," says retired Philippine Commodore Rex Robles, a security expert in Manila. "She will eventually step on the toes of her traditional big brother, which is the U.S. of A. It's a game too dangerous to play." Still, others in Southeast Asia believe the region will be able to adapt to China's rising influence—and profit from it too. "We have always had confidence in our ability to play the balance-of-power game," says Thammasat University's Prapat. "We did it in the colonial period with the French and the British, and we did it again in the cold war." The Chinese century has begun, and Southeast Asia is once again riding on the dragon's back.

• Hannah Beech
• China's influence in Southeast Asia is growing as its trade and investments boom