Analytical materials / Kyrgyzstan, Uncategorized

Sheradil Baktygulov: China and Kyrgyzstan: main challenges and trends of cooperation

05.04.2016

“Cooperation between Kyrgyzstan and China is long-term and strategic in nature. Any constraints, existing today, are temporary and do not impede deepening the all-round cooperation. However, the success of this cooperation depends to a greater extent on the activity of the Kyrgyz authorities, on their willingness to timely develop various versions of projects and programs of joint activities”, Sheradil Baktygulov, Central Asia problems researcher (Bishkek Kyrgyzstan), discusses the trends of cooperation between China and Kyrgyzstan, exclusively for CABAR.asia.

sheradil2At the beginning of March 2016, detailed comments by leading analytical structures of the developed countries of the world were dedicated to the 4th session of the National People’s Congress (NPC) of the 12th convocation, which began to review the draft of the 13th Five-Year Plan (2016-2020) and discussed the problems of the Chinese economy on March 5, 2016.

The focus is on the consequences of slowdown in the Chinese economy for their countries and for the global economy. During the period up to 2020, the Chinese government expects the average annual GDP growth of at least 6.5%. By the end of the new five-year plan, China’s GDP will reach about 90 trillion Yuan (13.8 trillion US dollars).

After decades of spectacular growth, China’s economy is slowing. The government gives priority to the sectors of services and consumer spending, as a source of economic growth, pushing production and investment into the background (resulting in the growth of debt). Thus, the government’s efforts will be focused on stimulating domestic demand.

In addition, China has become the largest exporter of capital. China invested abroad 118 billion US dollars, which is 14.7% more than in 2014. [i]

How the new development trends of China’s economy will be taken into account by the authorities of Kyrgyzstan remains an open question.

Chinese investment in Kyrgyzstan

During the years of independence, Kyrgyzstan has signed more than 10 public investment agreements with China worth over 1.812 billion US dollars (excluding grants).[ii]In the early 1990s, there were major commodity loans and loans for the construction of the Kyrgyz-Chinese paper mill, rehabilitation of road infrastructure, particularly the road Osh – Sary-Tash – Irkeshtam. During the last 10 years, China also invested into the construction of a highway Bishkek – Naryn – Torugart. There were signed new Kyrgyz-Chinese agreements for the coming years on reconstruction of two road sections in the regions, and the funding is more than 129 million US dollars.

One of the most important projects in the energy sector is the modernization of the Bishkek thermal power station. Chinese partners are committed to contribute $386 million to this project. This money is already being spent for the extensive renovation works at Bishkek TPP. The construction of the 500 kV transmission line “Datka-Kemin” and substation “Kemin” (389 million US dollars) has been completed. Projects of reconstruction of mountainous lines and other projects are being implemented in the south of the country.

The first phase of construction of the “North – South” alternative road with length of 154 km is taking place now (valued at $ 400 million).

It should be noted that China is allocating loans to Kyrgyzstan on favorable terms, the agreements provided for a grant component of at least 35%, and the maturities are ranging from six to twenty years.

According to the National Statistical Committee of the Kyrgyz Republic, the inflow of foreign direct investment (FDI) from China in Kyrgyzstan during the years of independence has exceeded 1.2 billion US dollars.[iii]

The most attractive sectors for Chinese investors are the manufacturing industry (27.74% of total incoming FDI); trade, repair of motor vehicles, household goods and personal items (7.95); financial investments in transport and communications (3.16) and other industries (3.76%). Over the years, 57% of the total flow of investments to Kyrgyzstan were the transactions related to real estate, leasing and services for consumers. In addition, China is increasingly interested in investing in the field of professional, scientific and technical activities.

In January 2016, the Prime Minister of the Kyrgyz Republic Temir Sariev said that during his official visit to China (December 2015), he singled out three of the most promising areas of bilateral cooperation – the construction of the railway China-Kyrgyzstan, the construction of ring road around the lake Issyk-Kul and the transfer of a number of manufacturing facilities from China to Kyrgyzstan.

Global cause – local impact

Despite the significant achievements in bilateral relations, there are some disagreements in development of bilateral trade approaches.

Kyrgyzstan’s accession to the Eurasian Economic Union (EEU) in August 2015, Ukrainian crisis and anti-Russian sanctions by US and European countries, as well as the situation on the Korean peninsula, have changed the nature of the trade cooperation with China.

Kyrgyzstan’s accession to the EEU marked the beginning of the dismantling of the re-export model of development of the Kyrgyz economy. The flexible tariff and tax policies, rather than the extended Kyrgyz-Chinese border (1072 km), have created a re-export model of economic development, whose symbols were the wholesale centers “Dordoi” and “Kara-Suu”, which became widely known far beyond the borders of Central Asia.

The Russian economy, which is the locomotive of the EEU, began experiencing significant difficulties associated with the introduction of the US and EU sanctions against Russia. In 2015, the Russian ruble was almost equal to Kyrgyz som, and the World Bank experts revised their forecast for the development of the Russian economy to the downside. In 2016, GDP contracted by 0.3% in the baseline scenario (previously, it was expected to grow by 0.1%). In addition to the low oil prices, the main constraint is the sanctions regime. As a result, Russian companies are denied access to foreign financial resources, and they are forced to seek government support. However, in 2016, the contingency fund and NWF will not be enough to finance infrastructure projects and to support the banking sector.

The North Korean nuclear test and missile launches in early 2016 and China’s, Russia’s and America’s reaction to them confirm the macro trends of the global development, the center of which has shifted to the Asian part of the Asian-Pacific region. According to the former Prime Minister of Singapore Lee Kuan Yew, «the 21st century will be marked by the contest for supremacy in the Pacific”… “If you do not hold your ground in the Pacific, you cannot be a world leader”. Focusing the interest of world powers on the Asian-Pacific region will reduce attention to Central Asia, which means lower investment, including in Kyrgyzstan.

Removing the re-export model of economic development and following in the footsteps of protectionist trade policies of Russia and Kazakhstan have led to a decrease in Chinese investment in Kyrgyzstan.

The total volume of direct foreign investments in Kyrgyzstan for the first 9 months of 2015 increased by 1.5 times compared to the same period in 2014. 74% of these funds were invested in exploration, energy and gas industry. This investment is made in the industries not focused on the markets of the EEU. Meanwhile, investments in the processing and industrial sector, whose products are mainly directed to Russia and Kazakhstan, have decreased.

Thus, the volume of direct investment from Canada increased by 1.6 times, from the UK – by 4.5 times, from the United States – 4.6 times, from Turkey – 2 times. Investment from China decreased by 75%. These figures also show that investments from China hit a ceiling. The companies focused on the domestic market are full of Chinese investments.

Kyrgyzstan’s accession to the EEU, the devaluation of the Russian ruble and Kazakh tenge have led to the fact that business oriented to Kazakh and Russian markets is faced with the transition period associated with adaptation to the requirements of the EEU and the monetary policy of the authorities of Russia and Kazakhstan. It is expected that this forced lull will be completed by the end of 2016, however, we should not count on substantial inflow of investments and profits in 2016-2017.

A further increase in investment income is possible in the energy and mining sectors, which are very sensitive to people and government of Kyrgyzstan. Sensitive relations with local residents and the associated unpredictable growth of non-productive costs are a deterrent to potential investors.

“Delayed railway construction”

Kyrgyzstan has to seek a balance between the transit interests of the neighboring countries, at the same time, defending its priorities in the creation of transport corridors. The most vigorously debated issue over the last decade is the construction of the rail corridor China – Kyrgyzstan – Uzbekistan. In 2013, this idea was supported at the level of the heads of the States. However, the debate about the feasibility of the construction of this railway continues today – someone wants to build it faster, and someone says that this railway will be a channel of Chinese expansion. Meanwhile, the cost of construction of the railway has increased from 2 billion USD (in the early 1990s) to 6.5 bln. USD. Kyrgyz transport companies offered to reduce the cost of construction to up to 4.5 bln. USD at the expense of reduction of the length of the tunnels and bridges. However, this variant assumes the extension of the railway by 40 km.

Meanwhile, in February 2015, the Minister of Transport and Communications of KR Kalykbek Sultanov said that the two countries had agreed to build a broad-gauge railway.[iv] It was about the construction of the railway from Torugart (north) to the south of Kyrgyzstan. Branches are possible from the settlement of Kara-Suu in the direction of Uzbekistan, as well as through Karamyk and Irkeshtam to Tajikistan. However, in February 2016, Prime minister T. Sariev said that the Chinese side insists on a narrow gauge.[v] Further, the Prime Minister spoke about the need to build the railway China -. Kyrgyzstan – Uzbekistan. Thus, it is too early to talk about the agreement of all parties concerned – documents have not been signed, finances have not been allocated.

The debate is about the return of investment and a hypothetical military threat. The issue of return of investment is associated with the need to return the borrowed funds, as China allocates budget funds, not private investment. Accordingly, these funds become part of the external debt of Kyrgyzstan. However, road exploitation should substantially reduce the debt burden. It all depends on the scheme of operation of logistics companies.

Speaking about the military threat or expansion, it should be remembered that the arguments about the role of the railways are based on the experience of the first and second world wars. However, at that time the history, the railway transport was the most advanced form of transport for transporting high volume of goods and a large number of people. In the 21st century, there are transport planes, trucks and armored vehicles that would quickly throw personnel of military units in the medium and long distances.

Also, it should be noted that Kyrgyzstan is not the aim for China’s military expansion. Therefore, the use of the railway for military purposes is an exaggeration, if not an attempt to eliminate a competitor. After all, while politicians in Kyrgyzstan are arguing about the feasibility of construction of a one-track railroad line, two double-track railways (station “Dostyk” (RK) and “Alashankou” (China) and “Altynkol” (RK) – “Horgos” (PRC)) have already been built in Kazakhstan. It is expected that in 2020, 15 million tons will be transported via the station of “Altynkol”. More than 156 million tons of cargo was transported via the station of “Dostyk” since 1991.[iv] So, the talks about China’s military expansion or the massive entry of Chinese citizens in Kazakhstan are groundless.

Meanwhile, the following facts speak in favor of Kyrgyzstan:

– In Kazakhstan, according to official estimates, the wear-out of tracks reaches 64-70%. A similar situation is in other Central Asian countries. Obsolescence and lack of wagons and locomotive fleet, the backlog of existing infrastructure and technology are also noted.

– Procedure of wheel handling takes two or more hours and is conducted twice: during the transition from narrow to wide gauge and vice versa. However, the problem is a common drawback of rail routes in the territory of the CIS countries, not only in Kyrgyzstan.

– Road transport and infrastructure in the countries of Central Asia causes serious concern. Motor vehicles of carriers are so worn out that it leads to accidents and shortages of vehicles. The Central Asian countries are net importers of transportation services, and their transport fleet cannot fully meet the growing demand for transport services. It should also be noted that motor transportations over long distances are traditionally less profitable compared to rail and sea transit. Therefore, in the long term, rail transport will maintain its key role in the transit of goods in the Central Asian countries.

– The route through Kyrgyzstan to Iran is reduced by approximately 1000 km.

Prospects for cooperation

In May 2015, Russian President Vladimir Putin and President of China Xi Jinping signed a joint statement on the combination of construction of the Eurasian Economic Union (EE) and the Economic Belt of the Silk Road (EBSR).[vii]

Thus, the Russian and Chinese parties agreed on mutual cooperation. A number of researchers and observers noted that fact – on behalf of the EEU, the statement with China was signed only by Russia, not by the leaders of all countries of the Union (although all were in Moscow on May 8). The Eurasian Economic Commission (EEC) did not participate in the signing of a document either, which raises the question of its viability as an independent supranational authority.

However, the pair of the EBSR and the EEU has good prospects, as they are two different project. The EEU is a Russian integration project, and the EBSR is a transport and infrastructure project initiated by China. Thus, the countries- participants of the EEU do not have to face the choice of “us – or they”, as in the case of Ukraine. Therefore, the different nature of the EBSR and the EEU, in our opinion, complements one another, since movement of goods, services and people (as stated in the documents of the EEU) requires an appropriate infrastructure, the creation of which is one of the tasks of the EBSR. Granting to China of trade preferences should also lead to lower prices for Chinese goods and products, because entrepreneurs lay the expenses for payment of trade duties and taxes in the cost of goods, for which the final consumer pays.

To date, the most promising direction for cooperation between Kyrgyzstan and China is the Chinese concept of “one zone, one way”. The projects and cooperation programs implemented at the moment are consistent with the provisions of this concept. Existing areas of cooperation can be classified as follows:

  1. Upgrading the existing network of railways and roads for the transit of Chinese goods to Europe, the Caucasus and the Middle East.
  2. Construction of new railways and roads, pipelines and logistics infrastructure.
  3. Energy Transit to China – in particular, of the Turkmen and Uzbek gas.
  4. Creation of Chinese enterprises in the territory of the country to export products to China and the countries of the EEU or to consume in the local market.
  5. Investments from China.
  6. Trade with China.
  7. Cross-border cooperation on Kyrgyzstan’s border with China (free trade area).

Another promising area of ​​cooperation is the Asian Infrastructure Investment Bank (AIIB), which began its work in January 2016. Beijing that traditionally preserves neutrality in foreign policy battles is consistent with the role of a new financial sovereign. Moreover, AIIB is intended to complement the activities of the International Monetary Fund and the World Bank.

Ways to improve the efficiency of cooperation

China is the second largest economy in the world. The inclusion by the IMF of Chinese Yuan in the currency basket since October 2016 is the recognition of this fact. As a close neighbor of such a country, it would be unwise not to take advantage of China’s opportunities to ensure the growth of the Kyrgyz economy and the welfare of Kyrgyz people. To do this, the following basic steps should be made:

  1. Carefully study the conditions and calculation formula for loans and credits. Investments are loans that must be repaid with interest. About one-third of the external debt (around 1 bln. US dollars) of Kyrgyzstan are obligations to China.
  2. Improve environmental legislation, the imperfection of which may suspend co-operation. Environmental legislation has remained virtually unchanged since the Soviet period and does not meet the conditions of a market economy. Frequent changes in the boundaries of the sanitary protected areas also increase production costs. It leads to a decrease in investment attractiveness of objects.
  3. Improve the migration legislation, the use of which leads to violations of quotas for migrant workers and other consequences.
  4. Develop and adopt legislation on economic and trade cross-border cooperation. The only document of its kind in Kyrgyzstan is the Concept of inter-regional and cross-border cooperation of the states-participants of the Commonwealth of Independent States, in which the country joined in 2005. However, this document speaks about cross-border cooperation between the CIS countries.
  5. Improve the technical capabilities of railways and locomotives. The existing fleet of locomotives and wagons does not allow to form trains for the transportation of the volumes of cargo, which carry trains in the US, Europe and China.
  6. Promote a positive image of China. Over 25 years of experience of successful cooperation with China, the country stills preserves the Soviet perception of China as a potential enemy. The fear of the threat of Chinese military intervention is complemented by the fear of crowding out by Chinese of other companies from various sectors of the economy. Both approaches have no grounds for concern.

China’s military doctrine does not envisage a military intervention on the territory of another country. China does not seek to protect democracy or their interests around the world by force of arms. In addition, Kyrgyzstan and China have no territorial claims to each other.

Speaking of business, it should be remembered that companies are forced out of the market because of competition for consumers. The consumer, not the money, is a key factor of a company’s existence. In the end, the consumer is not interested in the origin of the initial capital, which created a product or service for him.

  1. Improve the banking legislation. Progressive rules for business development are no use, if there are banking restrictions, such as the size of the amount of transferred funds, bank charges and others.
  2. Take into account the different levels of strategic thinking: the Chinese are planning for a much longer period than people in the countries of Central Asia.

Collaboration is better than isolation or confrontation. Kyrgyz citizens are aware of it. For example, in spring 2010, Kazakhstan and Uzbekistan closed the border with Kyrgyzstan. Closing borders had almost led to a humanitarian catastrophe – stocks of medicines, food and fuel were at a critical point. China did not follow the example of the northern and western neighbors of Kyrgyzstan – food, clothing and other goods delivery from China did not stop for a single day.

Cooperation between Kyrgyzstan and China is long-term and strategic in nature. Any constraints, existing today, are temporary and do not impede deepening the all-round cooperation. However, the success of this cooperation depends to a greater extent on the activity of the Kyrgyz authorities, on their willingness to timely develop various versions of projects and programs of joint activities. The slogan of the day should be “More well-developed cooperation projects”.

Author: Sheradil Baktygulov, researcher of Central Asia problems (Bishkek, Kyrgyzstan).

 The views of the author may be different from those of Cabar.asia

[i]  China-2016: confidence in economy, orientation to people. 07.03.2016// http://russian.people.com.cn//n3/2016/0307/c95181-9026346.html

[ii] Brooks of investments from China turn into rivers. 03.04.2015. // http://slovo.kg/?p=42469

[iii] National Statistical Committee of the Kyrgyz Republic http://www.stat.kg/ru/statistics/investicii/

[iv] Begaliyev N. Russian gauge was chosen for railway China – Kyrgyzstan. http://www.vb.kg/doc/304479

[v] Prime Minister Temir Sariev: “Kyrgyzstan is interested in cooperation with China in three areas” http://www.gov.kg/?p=69521&lang=ru

[iv] Kazakhstan and China have commissioned a new railway crossing. http://tengrinews.kz/kazakhstan_news/kazahstan-kitay-vveli-ekspluatatsiyu-novyiy-jeleznodorojnyiy-225591/

[vii] Document of day: Smile and wave.  12.05.2015 // https://lenta.ru/articles/2015/05/12/ximoscow/

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