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Chinese Business Interests in
Central Asia: A Quest for Dominance
Niklas Swanström
Wednesday / June 18, 2003
China is increasingly becoming a dominant actor in
trade and investments all across Central Asia. This is
the case not only in steel and energy, but also in
areas dominated by small and medium size enterprises.
As Central Asia is increasingly relying on China for
trade, interdependence grows – China’s western
provinces become increasingly reliant on Central Asia
as well. Moreover, increasing Chinese investments is
displacing Russia’s dominant role in the Central Asian
economies. China aims of a 50-fold increase in trade
in ten years may be utopian, but it nevertheless is
set to become the dominant economic actor in the
region.
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.
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