Xi’s Central Asia-China Summit: The Consequences of China’s Growing Interest in Central Asia
Author: Haley Nelson
Apr 19, 2023
For the first time, Chinese President Xi Jinping will convene the leaders of Kyrgyzstan, Uzbekistan, Kazakhstan, and Tajikistan for the Central Asia-China Summit on May 18-19 in Xi’an. During this summit, China will unveil its “grandiose plan” to strengthen its bilateral ties with the region, entailing a hurried transformation to China’s “long-game” investment strategy. However, the quick maneuver in China’s approach may worsen long-term economic stability in Central Asia, demanding liberalizing reforms that China’s statist regime will unlikely install. Without reform to Chinese investment policies, progress at this summit could potentially push Central Asia further into economic uncertainty. And until Beijing commits to liberalizing reforms, Central Asia should perhaps delay the upgrade to their relations.
Ever since Russia’s position began deteriorating in Central Asia, China’s President Xi Jinping has dauntlessly laid the groundwork for economic dependency in Central Asia, leading their relations into a transformative era. This transformation has relied on the opening of new channels to China that bypass Russia, Chinese-led economic modernization in Central Asia, and China’s non-interference policy, starkly differing from Russia’s policy in former Soviet states. Against the backdrop of Russia’s invasion of Ukraine, China is stepping into the power vacuum left by Russia’s decline in Central Asia. However, global decarbonization commitments, Chinese bank defaults, and delays in liberalizing reforms in Central Asia have recently imperiled Xi’s exorbitant investment policies. Now, Beijing is left with two choices; undergo tough structural investment reform to ensure future economic prosperity, but risk losing short and medium-term growth; or continue with its statist investment policies, maintaining short-term economic stability, but risk losing long term economic growth in investment states.
With its historical “Long-Game Strategy,” some would assume Xi would choose to maintain long-term economic growth and choose to reform its investment scheme. But it is more likely that the fear of market instability and the potential abrupt economic decline will push China to hold onto its statist economic policies abroad. This is because statism has encouraged economic stability in China, and with the looming global economic crisis in sight, China may understandably choose to stay on the same trajectory. Without liberal reforms, China has extracted most of its value abroad from cheap labor and cheap capital. But, in building a broad set of export-driven economies, China has effectively developed what were formerly underdeveloped countries, and now those countries are charging higher prices for their services. The once cheap labor has now become too expensive to exploit. And now, rather than implementing liberalizing reforms which could help these economies mitigate economic, environmental, and social issues that China helped cause in its conquest for cheap labor, China is doing the opposite and continuing its harmful statist policies.
With China fixated on maximizing returns from export-driven economies, it is now further lifting restrictions and opening its economy to extract as much value as possible from its foreign supply chains. In fact, for Central Asia, as part of the May summit, China will discuss Central Asia’s access to one of China’s Free Trade Zone ports, the Lianyungang Port. If successful, Central Asia would have free access to a port with generous tax exemptions, poor business and trade laws, and inadequate labor regulations. Although this could help expand trade ties between Central Asia and Asian markets, improve supply chains and social networks, and promote higher FDIs in Central Asia, China’s free trade zones also promote sustainability problems through export-driven growth, lack environmental and resource constraints, and hamper social development.
With Xi distracted by Central Asia’s increasing global profitability, China is overlooking the social and environmental uncertainties its investment policies have left behind in the last decade. Right now, it seems that China isn’t focused on solving the issues its condition-free investments have inspired, but instead it is looking to exploit Russia’s deteriorating position in Central Asia through hasty economic expansion. And with an upcoming Central Asia-China summit, it raises the question: Why is Central Asia engaging with Xi’s diplomatic efforts if China is unwilling to mitigate the long-term implications it has caused? Large investments, free of conditions, are surely desired by Central Asian states, but it’s apathetic nature will inevitably deplete the investment attractiveness of the region.
For the past decade, China’s statist economic approach has propelled growth in its own state-controlled assets and wealth. But, abroad, it has left an overabundance of cash in emerging economies, unraveling unstable economic commitments in Central Asia, woven with corruption and unpaid loans. For example, in recent years, Kazakhstan has amounted a large sum of hidden debts, near 16% of its total GDP. Tajikistan owes an estimated $3.3 billion to foreign investors, half of this owed to China, amounting to 27% of its total GDP. By 2020, Uzbekistan’s debt to China reached $3 billion, or 20% of the country’s total foreign debt. And, Kyrgyzstan has an estimated $4 billion in unpaid loans to China, an estimated 40% of its total GDP. These debts have lowered China’s loan-giving abilities. Kazakhstan- the largest receiver of Foreign Direct Investments in Central Asia- received US$960 million from China in 2020, US$1.85 billion in 2021, and this decreased to US$996 million in 2022. With high unpaid debts, Central Asian states are hindering their ability to develop industries outside of their primary commodities, prolonging a vulnerability to global price standards. Not only does this jeopardize economic stability, but this high debt sustainability problem has impeded the region’s efforts to mollify environmental and social risks caused by Chinese-funded infrastructure projects.
And, unfortunately, China lacks the economic incentives to fix these issues. As Beijing’s market competitiveness has stagnated, and its openness to portfolio and direct investments has deteriorated in Central Asia, China cannot afford to solve the issues it has riddled Central Asia with. This has left analysts to believe China will forego investment reform, and instead return to the statist economic policy, which defined the initial framework of the Belt and Road Initiative.
For Central Asia, potential progress towards liberalization has been thwarted by China’s non-tariff barriers on goods, services, and digital trade. In fact, China’s Twentieth Party Congress has made no major changes to China’s economic policy, and its remained committed to the same policies which promote massive investments in foreign export industries. This export-driven growth model cannot be sustained in Central Asia if the world moves closer to recession. China has failed to recognize the numerous environmental and economic issues the initial framework transferred to the region, and meetings to establish more investments and more infrastructure projects will unlikely mitigate these issues. Central Asia does not need talking points from Beijing, it needs China to commit to real structural change in its investment policies.
China promises high profits for Central Asian states, yet this is often undermined by insufficient planning and ineffective implementation which can cause excess capacity along transport corridors and bottlenecks. Although China funnels massive investments in hard infrastructure (roads, bridges, railways), it often fails to provide complementary investments in soft infrastructure; that is, border controls, transport logistics, and technology advancements. This heavily limits the profitability of the hard investments as it often adds layers of bottlenecks. Benefits for Central Asian states are also limited by the import of Chinese laborers into project sites and technology transfers, which produce long-term dependencies on China’s services. These economic issues are in addition to the environmental and social issues Chinese investments have brought with it.
Some of China’s Belt and Road Initiative (BRI) projects in Central Asia pose serious environmental risks, and with China’s unreformed statist approach, and its overreliance on energy-intensive economic activity, Central Asia may become locked into a less energy-efficient trajectory which does little to lower emissions. During the Caspian Policy Center’s “The Future of China’s BRI in Central Asia” Event on April 4, Johannes Linn, an expert on Chinese investments in Central Asia, stated that, in terms of environmental issues, China has made great headway in the renewables market, but it “hasn't yet found itself into either Central Asian or Chinese activity in Central Asian priorities.” China has invested heavily into its own renewable energy industries, and it’s been, at least rhetorically, committed to reducing carbon emissions. Yet, in 2022, China saw an 8% increase in its crude oil imports, and its Russian coal imports surged by 20%, and analysts are expecting this trend to continue.
For the countries China invests in, despite its investments in renewables in BRI countries, Chinese investors are still developing coal-based power plants and new fossil fuel production capacities. This of course has created environmental issues in Central Asia, such as resource management issues in Kazakhstan. But it also puts limits on Central Asia’s export portfolio. As consumer economies approach the energy transition, China’s statist approach will only weaken the region’s economic durability, preventing it from fostering greener economic growth. As long as China continues to rely on traditional energy resources and emission-intensive growth, China's BRI states will fall behind the energy transition, and Central Asia will risk losing its investment attractiveness.
As indicated, much of China’s investments into Central Asia have raised the risk of being overconnected to China. During the Caspian Policy Center’s “The Future of China’s BRI in Central Asia” Event, Johannes Linn stated “These road and railroad investments have biased the transport infrastructure too much towards China, rather than to the remaining neighbors and world markets.” Chinese investments in Central Asia are being used to expand trade relations with China, leaving the region vulnerable to Chinese economic changes, such as another pandemic slowdown. Central Asia must maintain a diversified set of trade partners, and it seems that China is unwilling to contribute to transport corridors towards alternative partners.
The challenge with China’s lack of reform to its investment policy is simple; without reform, there will be no change, and the established issues will remain. An overreliance on industry infrastructure investments in Central Asia will mean China, and Central Asian states, will find it more difficult to reach their 2030 emission targets. And, for Central Asia’s export economy, the inability to uphold environmental commitments will have lasting consequences. To solve this, Chinese policymakers must sacrifice costly investments into green initiatives, despite Central Asia’s growing debt issues, and Central Asia must diversify its investor portfolio to establish greener infrastructure projects- including solar power projects, wind energy infrastructure, and electric vehicle facilities.
As long as Central Asia accepts investments to build an industrial capacity reliant on coal, it will hinder itself from becoming a key player in the global energy transition. Further, Central Asia should be more cautious of China’s condition-free investments, and instead accept investments which promote long-term environmental suitability and social reform. These necessary investments cannot happen if Xi refuses to recognize the FDI slowdown as an inevitable consequence of its unaccountable initial framework. The Central Asia-China Summit in May has great economic potential, but without meaningful reforms to China’s investment policies, the negative byproducts of the BRI will remain in Central Asia.