China’s Silk Road in Central Asia: transformative or exploitative?

Silk Road
Jin Liqun, AIIB president © AFP

By Sarah Lain

First published in the Financial Times, 27 April 2016

The Silk Road Economic Belt (SREB) builds on China’s long-standing economic investment in Central Asia, and it has the potential to further develop Central Asian economies. However, China’s historical track record of investment engagement in the region raises concerns that the SREB could instead exacerbate economic inequalities and poor governance.

China has long been a key driver of infrastructure investment and construction in Central Asia, covering a wide range of sectors. It has invested heavily in the region’s natural resource extraction, with gas, oil, uranium, gold and copper making up key exports from the region.

However,China has done far more than just invest in extractives. Chinese companies have built roads, railways, tunnels, power lines and refurbished oil refineries as well as special economic zones. It is also actively involved in agri-business and telecommunications investments.

China’s economic strategy for Central Asia is linked to the domestic agenda for Xinjiang, the northwest frontier region that is home to a sizable Muslim ethnic minority population. This is based on the assumption that building up economic prosperity will result in political stability. For this theory to be truly tested, China needs to ensure the economic benefits cascade down to the general populations of Central Asia.

But so far the SREB initiative does not articulate how this trickle down effect is supposed to take place.

For example, Chinese investment should in theory open up employment opportunities for the local populations. But there are limitations to this. Most often, a condition of the huge soft loans that China provides through state banks is that the linked projects are implemented by a Chinese company and workforce.

Although not a Chinese-specific funding method, it has contributed to some resentment amongst Central Asian populations against Chinese investment. Certain countries, such as Turkmenistan and Uzbekistan, have guarded against this with local content quotas. Turkmenistan technically requires that a project’s workforce consists of 70 per cent local employees, and Uzbekistan mandates that Chinese companies can only send management personnel, not labourers. In reality, there are lapses in adherence to such stipulations.

In Kyrgyzstan and Tajikistan there is a more visible Chinese workforce. In Kyrgyzstan, for example, the construction of two roads (Osh-Sarytash-Irkeshtam and Bishkek-Naryn-Torugart) part-funded by China consisted of 30 per cent local workers versus 70 per cent Chinese workers, with 60 per cent of raw materials imported. This highlights the often China-centric relationship that is quite typical on such infrastructure projects.

A lack of clarity in the terms of official lending to Central Asia may also increase economic vulnerabilities in the region, especially given the weight of Beijing’s loans in the national balance sheet. For instance, the Export-Import Bank of China was Kyrgyzstan’s largest creditor at the end of 2015, with outstanding credit worth almost $1.3bn out of a total $3.6bn in external debt.

A representative at the International Monetary Fund (IMF) in Dushanbe noted that the organisation was encouraging Tajikistan to accept the loans, given the very low interest rate. Despite these good terms, in reality the loans are offered with quiet scepticism that they will ever be paid back. This is particularly true of Kyrgyzstan and Tajikistan, given their heavier dependence on Chinese aid. A Wikileaks report from 2009 highlighted this scepticism, saying ‘no one in either the Chinese or Tajik governments is speaking about paying back Chinese loans’.

But the Chinese may seek loan repayments in other ways. Sometimes deals are structured so that access to resources or mineral rights become part of the repayment plan. However, there are suspicions of other, less transparent agreements, such as Tajikistan’s 2011 agreement to settle a land demarcation issue with China, in which the latter gained 1,000 sq km. This has been described as an ‘unofficial debt writing-off agreement’, although there is no documentary evidence of such deals. Mounting debt exposure within already structurally vulnerable economies could exacerbate domestic inequalities and potentially encourage unfair practices.

In addition, there has been criticism of Chinese companies engaging in non-transparent operations in the region. Although far from the only foreign entity to be accused of opacity in Central Asia, a case involving Chinese state-owned oil and gas company CNPC is prominent.

In 2003 CNPC acquired a 25 per cent stake in Kazakhstan’s Aktobemunaigas, a Kazakh oil and gas company. There is documentary evidence to suggest that, through a complex set of business transactions involving a group of offshore entities, this sale involved a repurchase scheme of shares in Aktobemunaigas from a company controlled by a former business associate of the Kazakh president’s son-in-law. Questions surround opaque dealings through companies registered in the British Virgin Islands (BVI) in relation to the acquisition, but Kazakh authorities have banned reports on the topic. No action has been brought by Kazakhstan’s authorities against any party in the deal.

There have also been instances of opacity in infrastructure built by Chinese companies. The state-owned China Road and Bridge Corporation, funded through an Ex-Im Bank loan, upgraded the Dushanbe-Khujand-Chanak road in Tajikistan. In April 2010 the BVI-registered Innovative Road Solutions Ltd, a company with no apparent track record in such projects, implemented toll booths on this road as part of the government’s strategy to raise funds to repay the Chinese loan.

China’s SREB vision could be transformative for Central Asia. Investment is by no means altruistic, but China’s vision does in theory support an economic agenda that enhances prosperity for local populations. China has emphasised the importance of good governance through SREB initiatives such as the Asia Infrastructure Investment Bank (AIIB).

It also intends for the AIIB to partner more with development banks such as the Asian Development Bank, which will require adherence to an open tendering process that may address some of the issues of transparency. However, there are risks that if historical practices of bilateral engagement continue in Central Asia, the SREB initiative may be seen less than transformative for the local populations of Central Asia.

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