“Working with China would help Central Asia to weather the crisis and identify a new economic growth point, but it would take a more rigorous policy on the eastern neighbor”, Anton Bugaenko, a sinologist and chief expert of the Chinese and Asian studies program at the Institute of World Economics and Politics, notes in his article just for CABAR.asia
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The coronavirus outbreak has put the world to the brink of a pervasive economic recession. This has implications for China and its tremendous efforts in promoting the Belt and Road Initiative (BRI) in Central Asia (CA) in recent years. Although many countries are facing a period of turbulence, it is already possible to outline some of the main development areas for BRI. To do this, we first need to evaluate the subtotals of the initiative and define its place in policies of both China and Central Asia
The Chinese BRI has evolved into an umbrella project incorporating all the China-related projects and nearly all China’s activities in the region. BRI is now perceived rather as opening China’s doors to the West.
As time showed this China-centric project, in fact, aims to develop the Chinese economy, which entails at a new stage an optimal use of the external resources, forces, and incentives of economic development. As of Central Asia, this has to do with the development of Western China’s regions; among the priorities of Xi Jinping’s regional policy. Economic relations were nurtured accordingly but on a bilateral basis as China’s convenient BRI delivery mechanism.
The BRI’s second objective, i.e. creating a friendly environment around the PRC, is evidenced by China’s inducements in the region. China had two major incentives to promote the Initiative in Central Asia: the need to appease the country’s most troubled region Xinjiang, and at a later stage – the reluctance for Central Asia to enter the anti-Chinese sphere of influence. Eventually the former has manifested in Central Asian influence on the situation with national minorities in Xinjiang, while the latter became the driving force behind a greater activity in the region.
Investments have become the main vectors of the BRI growth in Central Asia. China invests primarily in the region’s resources sector to the needs of the Chinese economy, as well as in policy-relevant projects.
If we proceed from China’s two main objectives and extrapolate them to the results of the Chinese presence in the region, the volume of foreign direct investment (FDI) flows from China is best suited to evaluate interim results of the BRI and the entire Chinese policy. According to Chinese data, the FDI flows from China in 2018 amounted to $ 3.8 billion in Kazakhstan, $ 1.98 billion in Turkmenistan, $ 412 million in Uzbekistan, $ 316 million in Tajikistan, and $ 47 million in Kyrgyzstan. At the same time, the total Chinese investment in Kazakhstan even fell from $ 19.7 billion in 2013 to $ 14.5 billion in 2019. An investment structure has changed considerably. For instance, investment in the manufacturing industry has soared: as of March 2013 (the start of the BRI), there was no Chinese investment in the industry at all. Some Chinese companies invested through Hong Kong, whose FDI in this sector amounted to $ 694 million, and by July 2019, China had already invested $2.16 billion in Kazakhstan’s manufacturing industry, while maintaining Hong Kong investment of $ 698 million.
Uzbekistan, like Kazakhstan, had attempted to concentrate Chinese investment on the development of the non-energy sector. Most of the 46 projects worth $ 6.8 billion signed by the leaders of Uzbekistan and China in 2018 are focused on the manufacturing industry. Even if most of them, like the declared 56 Kazakhstan projects, will not be implemented, the countries might still consolidate China’s interest to invest in non-energy sectors of the economy.
Meanwhile, Kyrgyzstan, with no centralized approach to Chinese investment, could not seize the opportunity. As a result, various elitist groups used the investment flows for their purposes, whereas uncontrolled Chinese investments led to galvanizing public outrage. In Tajikistan, for its part, most investments were directed to the mining sector development.
Kazakhstan also prompted inefficiencies, especially in the allocation of the priority 56 joint projects. It was the bureaucratic processes for determining the projects and the opacity of their selection that gave the green light to several projects ineffective in the context of the market.
In the end, most of the projects were buried by a more rational approach of Chinese investors worried primarily about their profits. They were replaced by more viable joint projects. Generally speaking, it was thanks to Chinese investment policy reorientation that set the investment flow in the right direction to benefit Kazakhstan’s national economy.
Trade with China in the region
Apart from investments, the volume of bilateral trade between Central Asian states and China can indicate the eastern neighbor’s growing influence. The trade ratio of Central Asia with China and other major political players (Russia and the EU) might also echo China’s relative influence in the region.
Figure 1. Trade of Central Asian countries with China (2013 and 2019)
Source: Data on CA, PRC and Russia based on UN statistics // https://www.trademap.org/Bilateral_TS.aspx?nvpm=1%7c%7c23%7c643%7c%7cTOTAL%7c%7c%7c2%7c1%7c1%7c2%7c2%7c1%7c1%7c1%7c1 Data on CA and EU using European Commission statistics restated to reflect average annual EUR and USD rates/ https://webgate.ec.europa.eu/isdb_results/factsheets/region/details_central-asia-5_en.pdf// https://www.statista.com/statistics/412794/euro-to-u-s-dollar-annual-average-exchange-rate/
Central Asia’s foreign trade data suggests several considerations for the BRI subtotals in strengthening ties with China. The export volumes of Central Asian goods to China increased from $ 14.64 billion in 2013 to $ 18.83 billion in 2019. Compared to other major trading partners, China’s share in exports grew from 17% to 23%. Throughout the BRI’s implementation, Central Asia’s export possibilities to China had improved, with a simultaneous increase in China’s share in total CA exports. That is, the Chinese market is becoming increasingly important for the economies of Central Asia.
At the same time, imports from China were severely curtailed from $ 15.42 billion in 2013 to $ 14.35 billion in 2019. China’s share in the region’s imports fell from 28% to 21%. This might be attributed to the introduced duties and restrictive tariffs in the EEU framework, as well as to the gradual economic reindustrialization in the region.
Given an increased presence of Chinese business in the manufacturing sector, the overall picture seems to confirm China’s shift from exporting goods to set up industries in the region itself. This is also evidenced by Chinese investments in the non-energy sector of Kazakhstan and Uzbekistan during the BRI’s implementation.
To understand the possible future implications of the COVID-19 pandemic, we must address the following questions:
- first, what impact did the coronavirus crisis have on the Chinese economy as a whole and the BRI-related part of it?
- second, what impact the COVID-19 pandemic will have on Central Asia, its economic, social, and political situation?
- third, how has the Chinese policy in the region changed over the past 4 months?
The Chinese economy is entering a long recovery period that requires the country’s spare resources. A reduction in spare capacity to invest abroad will be therefore first obvious impact. Financial resources of both the state and business will be diverted to address the consequences of the economic halt, i.e. combating inflation and unemployment, production restart, and restructuring of the economy to a new domestic market-oriented development model.
The Chinese government might declare that it would sustain the investment at its current rates for the BRI participating states. Funds already allocated by the Asian Infrastructure Investment Bank (with declared capital of $ 100 billion) and the Silk Road Fund ($ 40 billion and 100 billion yuan) will not be withdrawn as China has other financial reserves, and besides, the PRC’s leadership ambitions will play a huge role in that regard.
Aside from the post-pandemic implications for China’s opportunities and objectives, the BRI’s future will also depend on the impact of the crisis on Central Asia.
The non-energy sector investments, like manufacturing, attract the most attention of Central Asia, and Kazakhstan in particular. These are the enterprises that fit the definition of medium-sized businesses in mainly screwdriver industries. The stagnation of local small and medium-sized businesses (SMEs) is becoming a significant BRI factor.
SMEs are already experiencing stringent constraints in quarantined countries. For example, among 1.3 million SMEs in Kazakhstan, about 300 thousand have already suspended their activities. After the lockdown and throughout the crisis, many of them might get forced to close. Chinese companies might have a playground for heavy investment in here. Besides, while strengthening its domestic economy, after the first recovery period, China won’t mind relocating relatively simple low-skilled industries abroad. This process has already commenced in those same 56 projects (engineering sector projects) described to media as transferring production capacities.
A constraining factor here is the probable advent of Russian companies or Western companies through Russia. Large companies enjoying state support in Russia might cede the entire space previously occupied by local medium-sized businesses (or symbiotically). Russian business and Western businesses operating through Russia are consistently ranked higher than Chinese companies in trade, services, and small-scale production.
Nevertheless, Chinese business has all chances to share the market, especially in view of the general reorientation of the EEU space towards cooperation with its eastern neighbor. As a result, Chinese presence in the manufacturing sector might end up being systemically important. This enables an environment for doing business with a Chinese focus. Theoretically, it could mean that Western companies remaining in the Chinese market (as the Chinese market will still be attractive to them) can enter Central Asia not only through Russia but also through China.
Another significant factor in BRI’s future is declining oil export revenues. Low energy prices are becoming a new reality of the world economy (for example, the projected average annual price of Brent oil is $ 35 per barrel in 2020 and $ 45 in 2021 against $ 64 in 2019). Fall in export will vary depending on energy’s share in exports to China: from Turkmenistan (almost entirely dependent on gas exports) to Kazakhstan with a 35% share of energy exports in the total ($ 2.8 billion out of $ 7.8 billion total export). Central Asian republics will need an alternative consumer, and a dynamically developing state-subsidized Chinese economy would be a better option.
Falling energy prices could have a more global impact on interaction with China. Trying to cope with an income loss, the Central Asian countries to establish the need for income generation alternatives. The only competitive alternative to oil and gas exports is metallurgy and mining products. The fall in their prices was not quite as consequential as for other goods, whereas the Chinese industry will continue to consume metals for its needs. This is one of the priority areas in the framework of Chinese BRI. To illustrate, out of 56 priority projects, 8 are metallurgy and mining-related.
The corona crisis implications might as well generate China’s growing attention to the Central Asian region. A direct consequence of regional governments’ falling incomes, i.e. deterioration of the population’s standard of living, increases the chance for various social upheavals. There can be two adverse consequences for China. Amid the growing Chinese presence and the global information war that is likely to intensify, the opposition might use the anti-Chinese agenda to pressure the governments of the region.
The second adverse consequence is an imperative Chinese policy bundle in the region, and mainly in the implementation of BRI projects with collaboration at the government level. Chinese investment in the region within the BRI mightily depends on the governments and elites of the Central Asian republics. Both the Chinese decision-making sheltered from public view and weak regional state institutions have come into play. The agreements at the top level thus become faster and easier to make. Therefore, any instability in local governments will affect Chinese investors.
Given that one of two major items on the Chinese agenda is stability on the Xinjiang border, the discussed impact of the pandemic will encourage Beijing to support regional governments in stability preservation. This can be either direct support, including the sale of security technology solutions, or indirect support, i.e. investments in job creation, loans for infrastructure projects, as long as there are economic returns for China.
As of becoming too dependent on Chinese loans, we need to distinguish the neighbor’s real plans. For the very fact that it aroused strong and conflicting emotions in Central Asian society. For example, most of the anti-Chinese demonstrations in Kyrgyzstan primarily question the spending and repaying Chinese loans. The Chinese government is not interested in escalating the degree of the debt issue.
On the other hand, organizations involved in investing and lending projects through the BRI are purely commercial and profit-oriented. And this leads to a more stringent project selection for investment (at least from 2016-2017) and repay requirement.
This clash, political stability vs economic efficiency, will only intensify in the post-coronavirus period. Therefore, China is compelled to make advances in Central Asia. It won’t provide debt relief due to financial records of the lenders but at the same time won’t stop lending.
Future of the Initiative
Peering into the BRI’s future involves many assumptions. But given the recent course of the events, we can assert that the Chinese project resists the change brought by the coronavirus pandemic. Except crisis reinforced emerging trends, i.e. result-oriented investment and prioritizing energy sector.
BRI in COVID-19 will undergo two stages.
The project will be suspended at the first stage due to quarantine-imposed interruptions in transportation, as well as the diversion of China’s resources to remediate and adapt to the new reality of its economy. China will incline to abandon inefficient projects. In the event of social and political instability in the region, China will be obliged to provide financial support to maintain its presence in the region and preserve the peace on the border with Xinjiang.
In the second stage, China will return to the active BRI pursuit. At the same time, the strategy might change a little. The development of an inward-oriented economy will now fuel the interest in resources, geopolitical reasons will impel enhanced cooperation with bordering countries. If the Central Asian countries will create the necessary conditions, local production organized by Chinese companies will develop, too. China’s technological capacities, strengthened during the pandemic, will consolidate the Chinese products offered to the region.
The need to address the crisis implications will bring the Central Asian countries towards increased economic cooperation with China. Central Asia’s export will steadily become China-oriented, both in the energy and metallurgy & mining sectors. Chinese presence n in the manufacturing sector might end up being systemically important.
Working with China would help Central Asia to weather the crisis and identify a new economic growth point, but it would take a more rigorous policy on the eastern neighbor.
Central Asia needs to get ready to shift from a spontaneous process to a managed one. The region should realize the ways “to ride the looming waves of the crisis”, learn to find growth opportunities in the new realities, and evaluate the possible impact of Chinese economy-oriented policies and an increased presence of Chinese business in the region. Though not at the regional level, the governments should develop a strategy within each of the states to profit from the Chinese Belt and Road initiative.
This material has been prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project. The opinions expressed in the article do not reflect the position of the editorial board or donor.
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