Wednesday, 04 June 2014

Shanghai Summit Marks Deepening China-Kazakhstan Economic Ties

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By Richard Weitz (06/04/2014 issue of the CACI Analyst)

The recent signing of the Eurasian Union Treaty between Russia and several other former Soviet republics, combined with Russian actions in Ukraine and the massive Sino-Russian gas deal finalized during Russian President Vladimir Putin’s recent visit to China, risks obscuring the continuing growth of Beijing’s influence in Central Asia, especially with Kazakhstan. When President Nursultan Nazarbayev conducted a state visit to China from May 19 to 22, he met with President Xi Jinping for the seventh time in less than a year. Although grassroots ties remain weak, energy and other economic ties between the two countries are booming.

BACKGROUND: Bilateral trade between Kazakhstan and China continues to grow. According to Kazakhstan’s Ministry of Economy and Budget Planning, in 2013, bilateral trade reached US$ 22.53 billion, with Kazakhstan exporting more than US$ 14.334 billion while importing US$ 8.193 billion. China’s General Administration of Customs estimates bilateral trade at US$ 28.5 billion, an 11.3 percent rise over 2012. The customs agency calculates Kazakhstan’s exports to China at US$ 16 billion, a 14 percent increase, and imports at US$ 12.5 billion, a 9.3 percent rise from the previous year. Despite the different figures provided by the two governments, both agree that Kazakhstan runs a multi-billion dollar surplus due to China’s purchasing large volumes of Kazakhstan’s energy and other natural resources. In 2013, China imported a record high level of 11.85 million tons of crude oil through the China-Kazakhstan Pipeline, over 14 percent more than the previous year. When in Shanghai, Nazarbayev said that if oil production at the massive Kashagan field reaches the planned 40 million tons each year, the two countries may need to build another oil pipeline to send the oil to China.

During Nazarbayev’s visit, he and Xi formally launched a US$ 100 million project to construct a 21.6-hectare joint full-service logistics terminal project in Lianyungang City. Xi signed an agreement establishing this terminal during his September 2013 visit to Kazakhstan. Located in eastern China’s Jiangsu Province, Lianyungang is one of the world’s largest and busiest ports. Kazakhstan sees this terminal as a gateway for cargo trade throughout the Asia-Pacific region. The port has rail links with other large Chinese ports such as Qingdao, Tianjin, Dalian and Shanghai as well as maritime connections with Japan’s port of Osaka and South Korea’s port of Busan. Kazakhstan Temir Zholy (KTZ) is partnering with the city government of Lianyungang to construct the logistics terminal. In February 2014, KTZ and Lianyungang Port Company established a joint venture, the “Kazakhstan-China International Logistics Company of port Lianyungang,” to manage the facility. During a March 2014 visit to China, KZT CEO Askar Mamin said that the company planned to increase its export and transit container transport through the port to 250,000 twenty-foot equivalent units by 2015 and double this capacity by 2020. During Nazarbayev’s visit, Xi said that China would welcome Kazakhstan’s participation in the Shanghai Free Trade Zone.

A number of major investment agreements worth some US$ 10 billion were announced during Nazarbayev’s visit. The KazMunayGas National Oil Company and the China National Petroleum Corporation signed an agreement to construct a US$ 150 million plant to manufacture oil and gas pipes in the Almaty region. Kazakhstan’s Samruk Kazyna Sovereign Welfare Fund and the China International Trust and Investment Corporation (CITIC) signed a memorandum of understanding to develop relations in the oil and gas sector and the mining industry. Nazarbayev told the press that Chinese investors would also participate in projects to produce glyphosate in the town of Taraz, build a power plant in the Kostanay region near the Turgay coal deposits, and manufacture nitrogen fertilizers in the Aktobe and Mangystau regions. Thanks to the surge in Chinese foreign direct investment (FDI) in Kazakhstan since 2008, the value of Chinese FDI in Kazakhstan now exceeds US$ 17 billion, making it one of the top 20 sources of FDI in Kazakhstan. The government would like to see more Chinese FDI in sectors critical for Kazakhstan’s future economic development, such as chemicals, electronics, mining, and mechanical engineering.

IMPLICATIONS: One reason for China’s growing presence in Kazakhstan is the country’s enormous financial resources. Chinese banks marked Nazarbayev’s visit by announcing two large loans to Kazakhstan. The Export-Import Bank of China will give the Development Bank of Kazakhstan (DBK) (a subsidiary of the Baiterek holding company) a US$ 1 billion loan to modernize the Shymkent oil refinery on preferential terms offered fellow members of the Shanghai Cooperation Organization. The refinery intends to use the fund to increase its annual fuel production to 6 million tons. The China Development Bank also presented DBK with a US$ 500 million credit line to finance joint projects outside the natural resource extraction sector. One candidate area might be developing Kazakhstan’s civil aviation industry. After meeting with Nazarbayev in Shanghai, the president of the Aviation Industry Corporation of China (AVIC) said that Nazarbayev wanted to sign a contract later this year with AVIC, which established a joint venture, Otan Avic, in April, to produce medium-sized aircraft in Kazakhstan using Chinese technologies. In February 2014, the China Development Bank gave KazTransGas a US$ 700-million 15-year loan to complete Kazakhstan’s Beyneu-Bozoi-Shymkent pipeline. With the construction of the 311-km Beyneu-Bozoi line and the Karaozek compressor station in the Kyzylorda region, the pipeline’s capacity will rise to 10 billion cubic meters annually.

In September 2013, Xi made a state visit to Kazakhstan and delivered a speech at Nazarbayev University in which he proposed building a “New Silk Road [that] will serve as an economic belt of Eurasia … connecting three billion people from the Pacific to the Baltic Sea with Kazakhstan as a key partner along the way.” Kazakh officials have embraced Xi’s proposals as harmonious with their “Kazakhstan – New Silk Road” program. In addition, Xi signed 23 documents whose value Foreign Minister Erlan Idrissov later estimated at more than US$ 30 billion. Idrissov has described deepening relations with China as an important element of Kazakhstan’s new foreign policy concept for 2020 and its long-term Kazakhstan-2050 Development Strategy. The Chinese and Kazakhstani officials and media have noted similarities between these strategies and President Xi’s “Chinese Dream” and other development and reform programs.

A persistent challenge has been that societal links between their societies have been lagging behind their growing commercial ties. In 2011, Nazarbayev told visiting Chinese President Hu Jintao that both sides should expand their humanitarian ties. The following year, the Kazinform News Agency signed a cooperation agreement in the field of electronic information with the Chinese People’s Daily newspaper, followed by similar agreements with the Xinhua and Tianshannet news agencies. In March 2014, Kazinform News Agency launched a Chinese language website to coincide with its existing offerings in the Kazakh, Russian, and English languages. CEO Dauren Diyarov said that the new website “would make a significant contribution to the development of political, economic, social and humanitarian ties between our two countries.” The PRC Ambassador to Kazakhstan, Le Yucheng, agreed that “cooperation between China and Kazakhstan in various areas is inseparable from understanding and support of our people. To do this, the media of the two countries should create conditions for the improvement of public opinion in favor of deepening the strategic partnership between China and Kazakhstan.” When Nazarbayev was in Shanghai, the Xinhua news agency conducted an online conversation between him and Chinese Internet users. Xinhua then published his responses to some of the more than 1,000 questions asked him.

Yet, popular contacts would increase if China would include Kazakhstan in the 45 countries whose tourists can visit Beijing, Shanghai Guangzhou, and other large Chinese cities for 72 hours without a visa. So far, only a few Chinese localities, notably the town of Tacheng in Xinjiang’s northern Ili Kazakh Autonomous Prefecture, have established such a special visa regime. In 2013, more than 10,000 Kazakh tourists visited Tacheng through the 3-day visa-free regime. Tacheng authorities would like Kazakhstan to introduce a similar 72-hour visa-free regime for Chinese nationals who stay at the popular tourist attraction of Lake Alakol in East Kazakhstan. Kazakhstan has entered into visa-free agreements with several more countries in recent years, but not China.

CONCLUSIONS: While in China, Nazarbayev expressed interest in pursuing Xi’s “Silk Road Economic Belt” initiative and reconfirmed the mutual goal of raising bilateral trade to US$ 40 billion by 2016. Yet, additional progress is needed in developing the transportation infrastructure connecting the two countries, overcoming unsupportive visa policies, and in combatting illegal commercial practices. Kazakhstan’s close economic ties with Russia have also disrupted China-Kazakhstan economic ties. For example, Moscow has tried to prevent the smuggling of cheap Chinese goods into Russia through the Russia-Kazakhstan-Belarus Customs Union by pressuring Astana to tighten controls at the border between Kazakhstan and China. The newly launched Eurasian Union could erect further economic and perhaps other barriers between China and Kazakhstan.

AUTHOR’S BIO: Dr. Richard Weitz is a Senior Fellow and Director of the Center for Political-Military Analysis at Hudson Institute.

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