MARTHA O. BLAXALL

Economic Consultant

ECONOMIC AND POLITICAL IMPLICATIONS OF CHINA’S GROWING ECONOMIC POWER ON CENTRAL ASIA

Before the U.S.-China Economic and Security Review Commission

HEARING ON CHINA’S REGIONAL IMPACT

AND IMPLICATIONS FOR THE UNITED STATES

Thursday, December 4, 2003

Madam Chairwomen and other Commissioners:

I am Martha Blaxall, an independent consultant who has worked as an economic development specialist for more than 30 years.  I have been involved in economic and regional development issues in the Central Asia region of the former Soviet Union for the past decade.  Most recently, I was a Visiting Fellow at the Central Asia Caucasus Institute at the Nitze School of Advanced International Studies at Johns Hopkins University, and Director of the Central Asia project at Yale University’s Center for the Study of Globalization.  My research has focused on regional trade issues in Central Asia, including trade between the Central Asian Republics and China.  I am pleased to be able to contribute to this hearing on China’s economic and political impact on its Central Asian neighbors.

It is important to point out at the start that China has differing relationships and interests with the five former Soviet Republics that comprise what we refer to as :”Central Asia.”   These differences, to a large extent, are reflected in the economic and political realities that shape each Republic’s policy towards establishing closer economic ties with China.   China interacts more with Kazakhstan and the Kyrgyz Republic, both of which share common borders with the People’s Republic and have significant economic and political ties with China.  Uzbekistan is interested in China as a possible export market and as an ally in the war against Muslim extremism in the region.  Tajikistan, though an immediate neighbor, and a market for Chinese consumer goods, has little to sell to China and is too heavily dependent upon the Russian military to envision major security ties with China.  Tajikistan does see China as an ally in the war against heroin trafficking from Afghanistan, however.  Turkmenistan, while a major source of natural gas, a commodity in great demand in the development of China’s western provinces, is not a major economic or political player in China’ s diplomatic initiatives towards Central Asia at this point in time, despite China’s interest in Turkmen gas. 

In general, the Central Asia Republics (CARs) are still emerging from the Soviet legacy of Central Planning.  In all five states the Government retains at least some ownership – and in many instances control – of the major industrial sectors.  Kazakhstan has encouraged foreign investors to become major partners, particularly in the energy sector, and its fiscal and monetary policies are supportive of foreign investors’ interests.  But even here, both domestic and international political considerations, rather than economic or market-based factors, are more likely to affect investment decisions and policies.  Uzbekistan still retains a multi-tier foreign exchange rate regime with non-convertibility and government control over access to foreign exchange.  There is greater market freedom in the Kyrgyz Republic, but even here there are many barriers for foreign businesses.  Turkmenistan has become an autarkic dictatorship in which economic and political decisions are made by its President, Saparmurat Niyazov, who prefers to be known as Turkmenbashi, the father of all Turkmens.  As a result, the country’s modernization has more or less come to a standstill.

These countries are also burdened with a transport and economic infrastructure that was put in place to implement the Soviet centrally planned economic system.  Railroads, pipelines, roads, and, until recently, telecommunications networks, still operate around Moscow as the “hub” of economic activity.  The World Bank and the Asian Development Bank have begun to invest in new roads and railroad lines that will allow the CARs to become an economic region by themselves, and to trade more effectively with China.  However, traditional trading relationships and transport routes have allowed Russia to remain one of, if not the principal trading partner for all countries in Central Asia. 

In Soviet times, Central Asia was a source of raw materials and unprocessed agricultural commodities that were sent to Russia for further processing and distribution.  This legacy has meant that the Central Asian countries have been struggling to evolve from colonial-style economies that export low value products and import finished goods.  Their economic policies are focused on attracting the foreign investors and new technologies that will result in more value added production.  The region also needs technology-related investments and technical assistance that will facilitate the transformation away from the old Soviet models to more market-based models that will attract foreign investors and generate desperately needed economic growth. Except for Kazakhstan and the Kyrgyz Republic, however, they have been reluctant to decentralize economic decision-making and allow private firms, rather than government agencies determine prices and production quantities for much of their export sectors.

As a result, their economies have suffered enormously since independence.  After the disastrous economic implosions that followed the collapse of the Soviet Union – the Kyrgyz Republic’s economy shrank to about 30% of its Soviet-era level, for example – economic recovery began to occur in Kazakhstan with the growth of the energy sector in the mid to late 1990s. Uzbekistan suffered less during that decade due to its conservative approach towards privatization and public debt, but its economic base continues to struggle, and the US Military expenditures related to the Khanabad base have been an important contributor to Uzbekistan’s economy in the last two years. 

At this point in time, only Kazakhstan has a per capita Income greater than $1500.  The Kyrgyz Republic and Tajikistan have GNI/capita of less than $300, which makes them among the poorest countries in the world.  Table 1 displays the GNI/capita for Central Asia and China for 1998 and 2002, as well as their respective infant mortality rates.  None of these countries is wealthy now, although Kazakhstan is on the verge of sustained economic growth.  Turkmenistan’s numbers are highly suspect, since the average Turkmen is at a subsistence level.

Two other factors are important in setting the stage for Central Asia’s relationship with the PRC.  First, the enormous oil and gas reserves in Kazakhstan, Turkmenistan and Uzbekistan are potential sources of energy for China.  Kazakhstan has more than 15 billion tons of oil overland and in the Chtmian Basin, at least 2 billion cubic meters of gas, and the capacity to reach 1 million barrels of oil per day in the very near future.  Turkmenistan has the fifth largest natural gas reserves in the world, but its exports are hostage to a wholly Russian-controlled pipeline system.  Uzbekistan, though not now a large exporter, and the eighth largest natural gas producer in the world, is energy self-sufficient. Yet all of these countries are geopolitically landlocked, with no access routes to the West or the Far East except through Russia.  This makes them entirely dependent upon friendly relations with their neighbors, including each other, for transport corridors to markets, or for pipeline transmission of oil and gas.  Not only does this leave each country vulnerable to instabilities in neighboring states, but also to terrorist acts that can damage or destroy existing transport routes.

CHINA’S ECONOMIC RELATIONS WITH CENTRAL ASIA

It is becoming increasingly clear that China views closer relations with its Central Asian neighbors as an important strategic objective. China is cultivating institutional and cultural ties with the region and expanding its security relationships, principally through its leadership of the Shanghai Cooperation Organization (SCO).  On the economic front, China has increased both its exports and its imports with the CARs, and has explored and realized several major commercial and infrastructure investments.

While China’s trade with Central Asia is still relatively small, officially-recorded imports and exports have more than doubled since the late 1990s.  In 2001, for example, China officially exported $0.8 billion of goods and services to the CARs and imported $1.3 billion.  This was a tiny fraction of China’s total trade (less than one percent in both cases), but it equaled almost eight percent of Central Asia’s exports and more than five percent of the region’s imports. If unofficial and unrecorded trade is also included – mostly the $1 billion in consumer goods that is shuttle-traded across the Xinjiang borders with Kazakhstan and the Kyrgyz Republic  —  China’s growing importance as a supplier of consumer goods becomes evident.  China’s principal competitor is Russia.  

Kazakhstan is, by far, the most important trading partner for China within Central Asia.  While China exports manufactured products to Central Asia, its imports from the area are mostly raw materials, with petroleum products from Kazakhstan being the largest single item.  Kazakhstan’s exports to China in 2002 reached nearly $1 billion, three-quarters of the total CAR exports of $1.3 billion, and China has become one of Kazakhstan’s top five bilateral trading partners.  Recognizing the importance of its growing trade with Kazakhstan, then President Jiang Zemin was quoted in the Chinese press in 1999 as having said that “Kazakhstan had become China’s second largest trade partner after Russia within the CIS.”  President Hu Jintao reinforced Kazakhstan’s priority in China’s foreign policy by visiting Kazakhstan during his first trip abroad in June, 2003.  

Expanded trade in raw materials and commodities offers growth opportunities for the Kyrgyz Republic and Uzbekistan.  For the Kyrgyz, hydropower offers an opportunity to export electricity along the border with China.  Uzbekistan’s exports to China are growing, but reached only $50 million in 2001, with short cotton fiber being the primary export. 

Uzbekistan could also export chemicals, mineral fertilizers, horticultural products, non-ferrous metals and natural gas, as well as cotton lint and other cotton products.  For China, exports of consumer goods, particularly to Uzbekistan and the Kyrgyz Republic, could expand further, particularly in processed foodstuffs, food processing equipment and technology, and some electronic goods. Better roads and a railroad between China and Uzbekistan would contribute substantially to realizing these opportunities.  Asian Development Bank funding for these investments is now becoming available.

China’s status as a major trading nation and locus for foreign investment has probably had less of an effect in Central Asia than elsewhere in Asia.  Countries like Singapore, Korea, Thailand, the Philippines, Taiwan, and even Indonesia, have been losing market share in the United States and the EU to Chinese-made goods that these countries formerly manufactured themselves.  Since none of the CARs had ever gained market share in the major Western markets, they have not suffered from competition with Chinese goods.  Russian exporters, however, continue to compete with Chinese products in the former’s traditional markets in Central Asia.

One positive effect on the CARs that stems from increased trade with China has been an improvement in the quality standards applied to export-related goods.  China, in general, demands a higher quality product than these countries were required to meet for Soviet or post-Soviet markets. 

One negative impact, however, relates to China’s insatiable demand for copper.  Chinese copper imports have been growing at about 30 percent annually as China upgrades its power grids and installs telecommunications cables throughout its western regions.  This has led to smuggling and unrecorded trade of illegally obtained copper supplies.  In the Kyrgyz Republic, for example, copper equipment has been stolen from the Kyrgyz electricity grids and sold to markets in Xinjiang, negatively affecting electricity production and distribution in Kyrgyzstan.

ENERGY TRADE AND INVESTMENT

China’s rapid economic growth, and its emphasis on the “development of the west,” including Xinjiang Province, are having a significant impact on energy developments in Central Asia and Russia.  The Commission’s recent hearings dealt in great detail with China’s energy needs, and that information need not be repeated here.  Suffice it to say that China is about to surpass Japan as the world’s second largest oil importer, and is expected to import more than 200 million tons of oil annually by 2015.

Kazakhstan, along with Russia, is the closest available source of energy in the quantities needed by the Chinese economy.  This has spurred China to explore major investment opportunities in Kazakhstan’s energy sector, and to investigate the feasibility of constructing major pipelines from Western Kazakhstan to Xinjiang Province.  CNPC has made a large investment in the Kazakh oil firm, AKTOBERMANAIGAZ, and there is a joint CNPC/KazMunaiGaz effort being explored to construct a pipeline from Atyrau and Kenkiyak, with a 1300 kilometer second stage planned from Atasu to a rail junction at the Kazakh border. China also attempted to become a partner in one of the major US-European-Kazakh oil production ventures on the Chtmian Sea but was excluded by the existing partners.  Since the Chinese tend to take into account economic, as well as energy security issues in their investment decisions, they have deferred the potential pipelines from Western Kazakhstan to Xinjiang until there is enough production to meet the 400,000 barrels per day (bpd) volume that will make this pipeline commercially viable.

CHINA’S VISION FOR THE SHANGHAI COOPERATION ORGANIZATION (SCO)

The Chinese see the opportunity to satisfy several of their strategic economic and security goals through a strengthened Shanghai Cooperation Organization.  Originally conceived in 1996 by China, Russia, Kazakhstan, the Kyrgyz Republic and Tajikistan as a cooperative effort to ensure regional security, the original “Shanghai Five” evolved into the “Shanghai Forum” at a meeting in Dushanbe in July 2000.  The Forum agreed to cooperate in fighting terrorism and Muslim extremism from both domestic and foreign (Afghani) sources.  At this meeting, which Uzbekistan attended as an observer, a proposal was put on the table to consider economic, as well as technical cooperation. Uzbekistan has subsequently joined the group, which has evolved further into the Shanghai Cooperation Organization with headquarters in Beijing, and secretariat support provided by the PRC.  China’s Ambassador to Russia, Zhang Deguang, has been appointed the Executive Secretary.

Chinese leadership has contributed to the institutionalization of the SCO and an energized program in several areas of key importance to the Chinese leadership.  It offers China a framework within which it can pursue its key strategic goals of political stability and greater regional economic cooperation.  The new SCO military initiative against terrorism and Islamist extremism provides a regionally-acceptable justification to clamp down on Uyghur efforts to promote a separate state in Xinjiang.  It also helps to assure border security and to reduce drug trafficking, one of the most important reasons for skyrocketing increases in HIV disease throughout Central Asia and Western China.

Further, from the Chinese perspective, the SCO counter-balances the growing U.S. military presence in the region and allows China to avoid voicing its concerns about a long term U.S. military presence in its backyard; a stronger SCO in which China has a dominant role is a non-threatening way to assert Chinese influence in Central Asia that does not overtly confront U.S. military or political objectives.  A recent article in a well-known Chinese journal commented how the SCO helps China to maintain “restraint” towards the United States, despite America’s “ever growing unilateralism” and the “formation of a power structure like the Roman Empire.”

Finally, the SCO offers China a framework within which it can pursue its energy security goals.  A Chinese Commerce Ministry Trade Institute publication in August 2003 stated that “The greatest economic benefit that China can achieve in the Shanghai Cooperation Organization is the acquisition of the energy resources needed for our country’s sustainable economic development and the exploitation of the Organization’s role as an Eurasian continental bridge.”   The articles then goes on to say that increased Chinese investments in Central Asia not only help China to achieve its economic objectives but also to satisfy certain political goals as well.  Stronger economies in the CAR contribute to regional stability.  Further, China’s economic support can only enhance China’s image as a true  “partner” in contrast with the “double-sided nature of the U.S.” or the limited capacity of Russia to provide real economic assistance. 

RUSSIA AND CHINA:  IMPACT OF CHINA’S GROWING ECONOMIC STRENGTH

Russia has responded pragmatically to recent strategic changes in Central Asia, seeking to maintain both its significant economic and political position and its military presence in order to neutralize China’s growing economic and diplomatic initiatives and America’s military inroads. Along with China, Russia was a driving force in the establishment of the SCO, and has a great deal at stake in its success.  The SCO reflects, in part, improved Russian-Chinese relations that have led to border demilitarization, expanded trade, and the June 2001 “Good Neighborly Treaty on Friendship and Cooperation” that was the first such treaty between the two countries in several decades, partly in response to concern about U.S. policies.  

Beijing became concerned, however, in the post 9-11 period, that the U.S.- Russia Treaty of Moscow and the creation of the NATO-Russian Council would shift Russian priorities away from the SCO to European matters.  Such a move would weaken China’s relative position in the Beijing-Moscow-Washington strategic triangle.  

Despite Chinese concerns, it would appear that the Russian-China relationship vis-à-vis Central Asia will remain solid, particularly as long as the United States continues its proactive military position in the region.  There is substantial bilateral trade – about$12 billion this past year -- between the two countries that has benefited Russia substantially as the Chinese economy has grown.  There is the prospect for major Chinese investment in the Russian oil industry in the central and western part of the country.  And there is the joint policy of zero-tolerance towards Islamist and separatist movements that is a primary motivating force behind the Shanghai Cooperation Organization.  As long as Chinese inroads in Central Asia remain economic, rather than military, it is likely that the two countries will see a commonality of interests that will strengthen their cooperation. The SCO will serve as a mechanism through which that policy can be translated into visible steps of a military and economic nature.  The multilateral approach to Central Asian security and economic cooperation that the SCO facilitates serves the interests of both Russia and China in counterbalancing the growing economic, military and political presence of the United States in the region.  (Certainly the Russian base at Kant, in Kyrgyzstan, offers Russia the symbol it needs to reassert unilaterally its military influence in the region.)  At the same time, however, the SCO can also serve as a collective partner with the U.S. in attacking the joint enemy of militant Islamist movements.  And from the Russian perspective, the U.S. presence in the region also counterbalances Chinese efforts to strengthen its military or diplomatic cooperation with the Central Asian Republics;  Chinese military interests in Kyrgyzstan to bolster its campaign against Uyghur separatists in Xinjiang is a case in point.

HOW DOES CHINA’S GROWING ECONOMIC STRENGTH AFFECT U.S. INTERESTS IN CENTRAL ASIA?

American policy towards Central Asia seeks to combat Islamic extremism and terrorist activities that could threaten the political stability of the region and U.S. access to Central Asia’s vast supplies of oil and gas.  The U.S. also asserts its support for more rapid movement towards democracy and market-based economic systems, but it has subordinated these universal American foreign policy objectives to its anti-terrorist campaign and American firms’ access to energy.

The fact that China and the U.S. have a meeting of the minds on the anti-terrorist objective has minimized potential diplomatic conflict between the two countries in their respective Central Asia initiatives.  The U.S. military presence in the region, as well as the Chinese-led SCO military exercises have been directed to the same goal and are viewed as complementary rather than competitive.  Over time, however, this shared interest may come into conflict with other U.S. objectives. 

For example, it is likely that political instability will characterize the transition from the current post-Soviet authoritarian regimes in Central Asia to the next set of political structures.  Should there be “velvet” revolutions similar to those that occurred in the then Czechoslovakia or in Georgia last month, U.S. support for the new regimes would undoubtedly be forthcoming, as long as democratic principles underlie the ideology of successor government leaders. 

China’s concerns may be different, however.  The Chinese fear instability within the CARs  because of its potential to generate greater pressures for Uyghur separatism in Xinjiang.  The existing autocratic regimes can be counted on to suppress any domestic opposition from Muslim extremists or other nationalist groups; more democratic regimes may be more tolerant of minorities’ claims for recognition, and by the same token, more wiling to support Uyghur nationalist ambitions in Xinjiang.  The Chinese are probably more aware of these potential policy divergences than the U.S., and are using the Shanghai Cooperation Organization as a vehicle to suppress Islamic terrorism and any associated separatist movements. 

Chinese concerns in this area go way beyond Afghanistan, the Islamic Movement of Uzbekistan, or any of the other existing Islamic organizations, whereas American interests fall short of the condemning the legitimate nationalist htmirations of the Uyghur people.  The U.S. decision to categorize a key Uyghur nationalist movement as a terrorist organization was undertaken to gain Chinese support for U.S. foreign policy elsewhere in the world, and did not necessarily represent an unwillingness to recognize some kind of legitimate minority status for Uyghurs within the PRC.  What happens in Central Asia as the current regimes evolve into the next stage of political rule may affect U.S.-Chinese diplomacy in this regard.

The area with the greatest potential for problematic competition, however, is access to the region’s oil and gas supplies.  It is clear that the Central Asian countries benefit from multiple markets for their oil and gas.  The one country that has only one outlet for its exports, Turkmenistan, has little leverage on the prices it negotiates with its Russian buyers.  Kazakhstan and Uzbekistan are aware of this situation, and the former, in particular, intends to maximize the number of players investing in and buying its vast oil supplies and to retain the freedom to pursue the best deal offered by any of the players..  Kazakhstan’s foreign minister told The Asia Society in September that “as far as pipelines are concerned, our policy is clear and simple:  have as many export routes as possible.”    This means that the Kazakhs are likely to pursue actively additional Chinese investments in oil field development and pipeline construction. 

Should the U.S. be concerned?  To the extent it is advantageous for these countries’ economic growth to have diversified markets for their oil and gas, U.S. interests are well served.  The U.S. gains, as well, if supplies of non-OPEC sources of oil are expanded through Chinese investments.  Also, if China is able to obtain greater quantities of petroleum products from its neighbors in Central Asia, sources closer to the U.S. in the Middle East, Africa and Latin America will become more available to the United States.  

U.S. influence in the region will remain strong in any case. American and European business practices, cutting edge technologies and capital base are attractive to, if not essential, for Central Asia to realize its full potential in the energy sector.  Neither Russia nor China can provide the expertise and funding needed to exploit these vast resources.  Furthermore, the Central Asian nations view the U.S. presence as a positive counterweight to Russia and China, and American involvement will continue to be a priority for these countries’ foreign investment strategies.

The U.S. should remain vigilant towards Russian and Chinese goals and actions, but countering these actions should not be the principal motivating factor in U.S. policy towards Central Asia.  It is equally important that we continue to press for political reform, democratic approaches, and market-based economic systems in order to promote the kind of economic and political governance that will best contribute to the long term stability of these countries.  We should also provide assistance in the use of oil and gas sector royalties for poverty alleviation and economic development in order to create the broad-base of economic and political support that can withstand the threats from Islamic extremism and endemic corruption.

These latter goals demand that the U.S. remain committed to the growth and development of the Central Asian Republics for the long term, perhaps well beyond the time period needed to stamp out Islamic terrorism coming from Afghanistan or other parts of the region.  We must continue to support realistic, sustainable, economic assistance programs that bring about real gains for all segments of the population.  In this regard, we should welcome Russian and Chinese initiatives that our consistent with our long run objectives and not respond in a knee-jerk fashion that labels any such initiative a threat to U.S. interests.

TABLE 1

POVERTY INDICATORS IN CENTRAL ASIA AND CHINA:

PER CAPITA INCOMES AND INFANT MORTALITY RATES

Source:  World Bank