China continues to expand its economic presence in Central Asia, including in Uzbekistan. How do the countries of the region benefit from this? What is the peculiarity of Chinese investment policy? Will security cooperation between Beijing and Tashkent deepen? These and other questions have been discussed in an interview with Professor of the Russian Academy of Sciences and St. Petersburg State University Yana Leksyutina, specifically for CABAR.asia.
Since about 2009, China has become a major trading partner, and at the same time, a leading creditor of the Central Asian countries. How activities developed in Uzbekistan in this respect? To what extent is the country interested in Chinese goods and investments?
In the last decade, China has seriously increased its economic presence in the region. In 2009, Central Asia’s turnover of commodities with China for the first time exceeded turnover with Russia, and this trend continues to this day.
I want to note that expanding its economic presence in Central Asia, China focuses on a number of priority goals.
First, China is interested in ensuring the stability of the regional situation in Central Asia. Beijing fears both socio-political instability in the region and the spread of extremism and terrorist threats from Afghanistan or the Middle East there. In this regard, China is concentrating its efforts on stabilizing the region by promoting regional economic development. Beijing proceeds from the notion that the economic development of Central Asia strengthens stability both in the region and indirectly in China itself, namely, in the Xinjiang Uygur Autonomous Region (XUAR), bordering Central Asia. Believing that prosperity on one side of the border helps bring stability and prosperity to the other side, China is interested in creating a belt of stability near Xinjiang.
Secondly, since the late 1990s and early 2000s, China, which was undergoing a stage of accelerated industrial development and aimed at diversifying the sources of imports of resources (primarily hydrocarbons/energy commodities), began to show interest in gaining access to the natural resources of Central Asia. China’s interest coincided with the desire in the Central Asian countries to diversify their foreign economic relations and energy export routes. At the time of the formation of the Central Asian states, almost the entire pipeline infrastructure, through which oil and gas resources were transported from Central Asia to foreign markets, passed through Russia. Diversification of oil and gas transportation channels, export markets for hydrocarbons and incoming foreign investment in the oil and gas industry have become of great importance for the Central Asian states. The complementarity of the interests of China and the countries of Central Asia allowed the parties to establish effective energy cooperation. Turkmenistan has become a major gas exporter for China, while Kazakhstan has become an exporter of uranium and a transit country for oil.
Uzbekistan is also actively using its potential to establish close trade and economic ties with China. For several years, China has consistently remained the country’s largest trading partner. In 2021, China’s share in Uzbekistan’s foreign trade turnover amounted to 17.7%. This is slightly more than the share of Russia.
Modern Uzbekistan, which changed its economic policy quite a lot with the change of power in 2016 and demonstrates the desire to expand its economic openness to the world and China in particular, can now be called one of China’s priority trade and economic partners in Central Asia. Uzbekistan is both the locomotive of the economies of Central Asia, and a country with a huge consumer market, the largest in Central Asia, a very young economically active population, and a cheap labor force. It is a country that has embarked on infrastructure development, which promises very large contracts for Chinese contractors. Of course, Uzbekistan’s rich natural resources also attract China.
It is important to note that Beijing considers current Uzbekistan as a fairly safe country with a stable political situation and strong state power, a favorable business environment, and great potential for economic and infrastructural development. Therefore, I think that while maintaining the current trends in the development of Uzbekistan, mutually beneficial economic cooperation between the two countries will only develop.
In 2018, a sharp increase in Chinese investment in the economy of Uzbekistan was recorded. Since then, their total volume has been continuously increasing and reached 9 billion USD by the end of 2021 (from the press service of the President of the Republic of Uzbekistan). Does Uzbekistan have any advantages over its neighbors in attracting Chinese investment?
Most likely, the figure you cited for Chinese investment in the amount of 9 billion USD is the calculation of the Uzbek side, and it differs greatly from Chinese statistics. Probably, giving such a high figure, the departments of Uzbekistan consider not only investments, but also Chinese lending and credit. Investments and lending are completely different financial mechanisms that should be distinguished.
Thus, Chinese loans are mainly directed to the implementation of projects for the development of transport and other infrastructure of the recipient countries, including the construction of roads, tunnels, thermal power plants, power lines, etc., and are conditioned by the fulfillment of a number of requirements of the Chinese side: involvement of Chinese contractors, materials, equipment, and work force. And Chinese investment involves the taking of commercial risks by Chinese investor companies and is directed to the extraction of natural resources, the creation of new production capacities. For example, in the case of Central Asia, the trend has been the construction of cement plants with the participation of Chinese investors. China’s investments in developing countries often go to various special economic zones and industrial parks, construction, and property management (hotels, shopping centers, residential buildings).
It is clear that in the current pandemic situation, the tourism sector is in a difficult situation, but if we look at the longer term, then this is the sector that can attract Chinese investors.
I would like to emphasize that Chinese estimates of Chinese investments in Uzbekistan are much more modest. According to the Ministry of Commerce of the People’s Republic of China, at the end of 2019, China’s accumulated direct investment in Uzbekistan amounted to 3.2 billion USD, and the investment flow in the same year was 446 million USD. There are no more recent data in the public domain, but the estimated accumulated investments at the moment may vary between 3-4 billion USD. At the same time, both Chinese and Uzbek statistics record the fact that in the last five years Uzbekistan has begun to attract an order of magnitude more Chinese investment than before, which is primarily due to a change in the economic policy of Uzbekistan.
In which sectors is China mainly investing in Uzbekistan?
Chinese investments in Uzbekistan are directed to such sectors and areas as oil and gas, chemical, textile, electricity, coal, cement, as well as to agriculture, water management, logistics, industrial parks/estate.
In the past three years, the largest Chinese investments in Uzbekistan have been announced in the cement sector: these are the investments of the Chinese company Anhui Conch in the construction of a cement plant in the Akhangaran district of the Tashkent region in the amount of 150 million USD, the Chinese company Huaxin Cement in the construction of a cement plant in the Jizzakh region in the amount of 150 million USD, the Chinese company Hengyuan Cement in the construction of a cement plant in the amount of 200 million USD.
After the change of power in Uzbekistan, the republic’s debt to China began to grow. By 2020, this amount has reached 3 billion USD. According to the latest data, more than 20 percent of Uzbekistan’s foreign national debt falls on China. Is there some kind of dependence on Chinese donor organizations here? What serious consequences can this lead to? In your opinion, is there any competition between the countries of Central Asia for Chinese investments?
The build-up of debt to China must have its limits and framework. A move towards over-reliance on one creditor country is hardly a wise strategy. There is always a possibility that afterwards the creditor country may begin to use economic levers to pursue its own interests and promote the agenda it needs in the recipient country, especially if there are difficulties with debt repayment. The development of foreign economic relations always requires the diversification of trading partners, investors, creditors. And in the case of choosing creditors, of course, it is better to give preference to multilateral development banks or partner countries that have a good reputation and, when issuing loans, consider the ability of the recipient country to repay this debt.
As a rule, the main criticism of the Chinese model of foreign lending is related to the opacity of lending provisions in terms of “hidden” lending conditions or the imposition of special commercial requirements for projects under which loans are taken. These are the conditions for the use of Chinese contractors, labor, equipment, materials, and other points for the implementation of relevant projects. In the case, for example, when loans are taken from multilateral development banks, such commercial requirements are not imposed on the recipient, public tenders are held, for example, for contract work and so on.
The problem of borrowing from China also lies in the fact that the Chinese side does not assess the ability of the recipient country to pay off the debt, because in the event of non-payment of the debt, as practice shows, the Chinese side is ready to receive debt in a different, non-monetary form, for example, in the form of obtaining rights to manage critical infrastructure – ports, railways, etc., or licenses for the development of minerals, as happened in Tajikistan, when in 2019 the Chinese company TBEA received the right to develop the Upper Kumarg and Duoba gold deposits in volumes, necessary to reimburse the funds previously spent by it on the construction of the Dushanbe-2 thermal power plant.
I don’t think there is intense competition among the Central Asian states for Chinese loans. Beijing is ready to offer its own conditions and the necessary amount of credit to each of the countries of the region. To do this, the country has enough resources. Moreover, by Chinese standards, the financial injections required by the Central Asian countries are insignificant.
China, Uzbekistan, and Kyrgyzstan express interest in starting the construction of the China-Kyrgyzstan-Uzbekistan railway. However, the matter has not moved forward to this day, even after the recent visits of the leaders of Uzbekistan and Kyrgyzstan to Beijing. What is it connected with? There is an opinion that, among other reasons, the position of Russia also plays a certain role in slowing down this project.
Initially, when the China-Kyrgyzstan-Uzbekistan railway project was put forward, for many years its implementation was mainly held back by Uzbekistan and the difficulties in relations between the two Central Asian countries. At that time, China’s interest in the project was indeed very strong, but perhaps after many years of artificial inhibition of the project by the countries of Central Asia and due to the emergence of new transport routes connecting China and the countries of Eurasia, this interest has weakened.
Another reason for the current slowdown of this infrastructure project may be the mismatch of the commercial interests of the parties. It is possible that the countries cannot agree on the specific parameters of the project implementation, such as the terms of financing, the model for attracting contractors, and so on.
I doubt very much that there is any Russian interference here.
In your opinion, is it possible to say that Beijing is actively involved in the security sphere of the Central Asian countries? For example, China is implementing safe city projects. Will security cooperation between Uzbekistan and China deepen, and what do you think about this?
It is necessary to clearly distinguish between the issues of ensuring military, national security, and issues of ensuring the security of citizens as residents of the city, for example. When we talk about systems similar to the “safe city” system, we are talking, first of all, about creating a safe living environment for citizens, protecting citizens from illegal actions of criminals, and so on. Here, of course, we can expect further expansion of the presence of Chinese information and communication companies, which are rightfully one of the world leaders in providing various IT services, monitoring services, implementing face recognition systems, etc.
As for the issues of ensuring military security, it seems to me that the January events in Kazakhstan clearly showed the limited role of China in Central Asia in this area and, on the contrary, emphasized the enormous role of Russia and the CSTO in promoting security in the region. The January events became a “litmus test”, dispelling numerous speculations on this topic, which previously constantly circulated in expert and near-expert discourse.