Wednesday, 18 June 2003

CHINESE BUSINESS INTERESTS IN CENTRAL ASIA: A QUEST FOR DOMINANCE

Published in Analytical Articles

By Niklas Swanström (6/18/2003 issue of the CACI Analyst)

BACKGROUND: The Chinese government has made it a policy to aggressively improve trade relations with the Central Asian states, and not only in the prioritized areas of oil, gas and grain, but also for small and medium sized companies. Both Chinese Premier Zhu Rongji and Chinese President Hu Jintao have emphasized the strategic importance of the ancient Silk Road for China’s economic development and stability. Trade has earlier focused on commodities such as steel, cotton, food, etc, but in recent years border trade has begun to focus to a higher degree on machinery, electronic products, and high tech development as well as large investment projects in the agricultural sector and the oil/gas industry.
BACKGROUND: The Chinese government has made it a policy to aggressively improve trade relations with the Central Asian states, and not only in the prioritized areas of oil, gas and grain, but also for small and medium sized companies. Both Chinese Premier Zhu Rongji and Chinese President Hu Jintao have emphasized the strategic importance of the ancient Silk Road for China’s economic development and stability. Trade has earlier focused on commodities such as steel, cotton, food, etc, but in recent years border trade has begun to focus to a higher degree on machinery, electronic products, and high tech development as well as large investment projects in the agricultural sector and the oil/gas industry. Investments to date total more than US$500 million. Small and medium sized companies were modestly involved in the trade with Central Asia until around 2000, but in 2002 the trade level increased rapidly from both Central Asia and China due to strong engagement from the governments. The Sichuan province in China, for example, increased its trade with Central Asia 13 times between 2001 and 2002, and other regions followed suit in the pursuit of the “virgin markets”. The western provinces and the central Chinese government plan to increase bilateral trade with Central Asia to the staggering target of between 30 to 50 times over the coming 10 years. This would make Chinese business the dominating investor and trader in Central Asia by far – even if the more modest goal of a tenfold increase would be realized, China would be the single largest business actor. Those calculations do not include the oil and gas industry which has an even steeper investment ratio. One single actor, the China National Petroleum Corp., has pledged a stunning HK$ 31 billion (ca. US$ 4 billion) to investments in Kazakhstan only. Kazakhstan is also the most important trading partner for China, and Chinese attempts to increase trade with Kazakhstan have been remarkably successful. The Presidents of China and Kazakhstan have pledged to increase trade with 150% between 2002 and 2004. China’s weakest link in the region is Uzbekistan, but even there the Chinese trade is the fastest increasing bilateral trade with a 15 percent increase in trade and, an even larger increase in investments from the Chinese government and medium-sized private companies. Despite the impressive trade increase between China and the Central Asian states, it has in fact increased slower than expected due to 9/11. The increased U.S. interest in Central Asia and, through this, U.S. investments, aid and business have flown into Central Asia. Earlier perceived U.S. neglect of the region strengthened China’s position, but presently one of the most threatening competitors for Chinese companies is the U.S., especially on a psychological level. One of China’s advantages is its proximity with the Central Asian states, and this will decrease transaction costs. It has also made Chinese merchandise the most sold at black markets in bordering countries. Chinese merchandise offers a relatively cheap commodity, compared to the more expensive western merchandise or inferior quality local products.

IMPLICATIONS: The rapid increase in Chinese investments and trade relations has opened up the borders between China and Central Asia and re-established the importance of the ancient Silk Road area for China. The implications of this are several, and of major concern for both China and the Central Asian states. The most obvious is the increased reliance the Central Asian states will have on Chinese investments and trade: a cut in Chinese investments or trade would be disastrous for the Central Asian states. As trade and investments from Russia decrease in importance and China’s increases, the political and economic focal point for Central Asia will gradually shifts. This is not to say that China will be the only trading partner for Central Asia. On the contrary, the Central Asian states have improved business relations with most western countries and the European states do have a significant position in Central Asia; in 2001 Germany was still Kyrgyzstan’s most important export market. This has dramatically changed in the last two years and when considering the black markets, Chinese trade is today the most important for the Central Asian states. This will increase the Chinese influence over the region’s future, in economic as well as political terms. It is undeniable that Beijing has increased its leverage over Central Asia, but the Chinese economy is also increasingly dependent on the Central Asian markets. This is particularly true for China’s Western provinces, which have an increasing share of their trade going westwards to Central Asia. The Chinese state is less dependent on the Central Asian markets as they make up only a fraction of total trade, but energy questions and increased private and state investments in the oil and gas industry makes relations with Central Asia increasingly important. The small and medium enterprises in the Western provinces of China are also increasingly dependent on trade with Central Asia, and a disruption of cross-border trade could create unease in some provinces. The western provinces are also some of the poorest in China, and the much anticipated trade with Central Asia has had a positive effect on the economy of these provinces. It is therefore highly unlikely that China would do anything that could jeopardize the current economic development in Western China. The dual need of increased bilateral relations creates new incentives for the Central Asian states and China to cooperate in the economic sphere, but also in the political, legal and social spheres to increase economic compatibility and political stability on a regional and bilateral level.

CONCLUSION: Increased Chinese investments in Central Asia and the booming trade between China and Central Asia will continue to be high and stable, even if the goal of a 50-fold increase of the current trade level in 10 years seems utopian. There are both political and economic reasons for the Central Asian states and China to continue to work for increased trade; this will be at the expense of the relative strength of other trading partners, and especially a shift on dependence from Russia to China for Central Asian states. It is however clear that the dependence on China will not be as high as reliance on Russia was in the past, due to the diversification strategy of the Central Asian states. It is however clear that the relatively modern products with high quality to a low price from China is what Central Asia currently needs at their current development stage.

AUTHOR BIO: Dr. Niklas L.P. Swanström is Associate Professor and Director of the Silk Road Studies Program at Uppsala University. He also heads Asian Analyses, inc. (http://www.asiananalyses.com)

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