China became the only export destination for Kazakhstani producers that showed a positive dynamic in 2020. It helped the country to avoid lowering of the trade surplus, which is a vital part of Kazakhstan’s balance of payments.
Despite the pandemic, Chinese economic growth has persisted, though at a slower pace. According to the World Bank, its growth rate was 2.0% (according to Chinese sources, it was slightly higher - 2.3%), which is higher than other major economies on average. This trend in China will persist for years, experts say.
It means a lot for Kazakhstan, which considers neighboring China as a huge trading area for its commodities and other products. Moreover, the country hopes to attract Chinese investors to get a counter-balance for Western and Russian capitals.
The Faster China’s Economy Grows, the More It Consumes
Given that Kazakhstan’s economy is deeply integrated with the international economy, this may sometimes have a negative impact. For example, when commodity prices go down, the national currency of Kazakhstan tenge also plunges. However, this kind of reliance can be beneficial when it helps the national economy to grow. In the early 2000s until the financial crisis, the fast growth of the Chinese economy had a very positive effect on Kazakhstan’s economy. At that time China had been growing by 11% a year and its economy craved for oil and metals – the main products of Kazakhstani export.
For a long time, this correlation was indirect and had been determined by the international market. After the financial crisis of 2008, Kazakhstan’s export to China rose to 18%. In 2020 it was even higher – 20%. The explanation for such growth is simple: Kazakhstan has built a system of oil and gas pipelines headed to China, and since the Chinese economy hasn’t stopped its growth, the demand for natural resources persists.
Last year the situation was the same: Chinese demand rose by 15% or $9 billion while the import of Chinese goods lowered by 3% (to $6.3 billion). That is why the trade balance with China had risen twofold.
Unlike other leading economies, China (along with Egypt and Turkey) had shown GDP growth even in 2020. According to the Chinese government statistics, its economy grew by 2.3% last year. Such sectors as machinery manufacturing, pharmaceutics, and energy, which have been actively consuming Kazakhstani commodities, showed even bigger results.
The main products Kazakhstan has exported to China for years are oil and gas (about $2.7 billion in 2020). Currently, Kazakhstan relies on its Beyneu-Bozoy-Shymkent gas pipeline to export gas to China and supply customers in Kyzylorda and Turkestan regions.
Metal producers are also strongly dependent on export to China: zinc (75%), copper (66%), steel (31%) and organic chemistry products (68%). Minerals account for about 10% of the Kazakhstani export into China. However, copper (+18% over the year), iron and steel (+19%) and uranium (+54%) are main drivers of growth.
Another promising sector is agriculture: roughly 7% of all grains, 37% of oil-bearing products and 46% of vegetable oil are exported to China. This huge market allows Kazakhstani farmers, who are used to selling their products to other Central Asian states, to diversify trading areas.
At the same time, China supplies Kazakhstan with affordable consumer goods and clothes: shoes (63%), plastic items (22%), rubber (23%), nonorganic chemistry (36%), machinery (16%), electrical devices (34%) and cars (15%).
The transportation sector is another fast-growing part of Kazakhstan’s export to China. It accounts for 31% of all exported services with every $9 out of $10 earned in the cargo transportation area. In 2019 this sector generated $2.4 billion, with $1.8 billion over the last nine months of 2020. This tally includes Russian Rosneftegas oil shipments to Chinese CNPC. The company has transported 10 million tons of oil a year through the Kazakhstani system of oil pipelines and will do so until 2024 when the contract with China expires.
As a matter of fact, Kazakhstan achieved huge progress in developing its potential as a transit hub between China and Europe as well as between China and Iran and between China and Central Asian states. At the end of 2019 Kazakhstan Temir Zholy, a railways operator, said that the amount of transit between China and Europe rose by 12%; China-Central Asia by 56% and China-Iran by 443%.
Debts and Modernization
There is a lot of speculation about the activity of Chinese investors in Kazakhstan. Even though the government has been publishing official statistics about the topic, someone can find this information confusing.
First of all, the positive dynamic in terms of external debt is a sign of the trust of investors and creditors. At the same time, the vast majority of Kazakhstan’s debt is private (between Kazakhstani subsidiaries and their foreign parent companies) while public debt doesn’t exceed the proper limits. As of the fourth quarter of 2020, the external debt of Kazakhstan was about $161 billion. The share of public debt was 8%; another 1% of the debt was secured by the government.
Currently, China counts 6% of the external debt of Kazakhstan, including debt of private sector and mining companies (57%); inter-firm debt (between Chinese companies and their subsidiaries, at 31%); and bank loans (12%). The government of Kazakhstan secured just 13% of these debt obligations to China.
The lion's share of the Chinese loans secured by the government has gone to non-oil sectors through development institutes. Usually, these loans are tied loans and should be used for acquiring equipment or technical services from the Chinese. A clear illustration of this is the modernization of three refinery plants in Kazakhstan. Chinese state banks provided financial support for these projects through the Development Bank of Kazakhstan and obliged Kazakhstan to buy equipment and services from Chinese companies.
As a result, Kazakhstan was able to make an update of its refinery potential, to produce enough gasoline for the domestic market and even export it.
However, China also wants to act as a direct investor. As of 2019 the share of the gross flow of direct foreign investments from China achieved 7% ($1.7 billion for the year and $0.5 billion in the first nine months of 2020) and cumulative investments ($6.3 billion).
The vast majority of direct investments from China go to transportation (48%) and the mining industry (20%). For example, Chinese state companies are co-owners of Asian Gas Pipeline (the Kazakhstani part of a huge gas pipeline from Central Asia to China) and Kazakhstan-China Pipeline with a capacity of 20 million tons of oil per year.
Moreover, Chinese investors have shares in CNPC AktobeMunaiGas, MangistauMunaiGas, NCOC and other oil companies. According to KazService Association, Chinese companies produce about 17% of the entire oil output in the country. At some point, this activity of the Chinese companies diminishes the monopoly of Western businesses and makes it more balanced.
China is also an active consumer of Kazakhstan’s uranium; therefore, it tries to gain control over some Kazakhstani assets. Recently, China General Nuclear Power Corporation has bought 49% of Ortalyk Corporation shares, which used to be a full subsidiary of Kazatomprom, a national operator of the nuclear industry in Kazakhstan. This is a small piece of large-scale efforts by Beijing to launch fuel assembly production in Kazakhstan. This new plant should produce 200 tons of products to supply to the Chinese market. This is another significant example of how foreign investments – Chinese in this particular case – can increase the technical potential of Kazakhstan.
Chinese direct investors are also interested in the processing industry, construction, retail and bulk trading and finance sector.
The Chinese Tomorrow
According to the World Bank, the Chinese economy may show a 7.9% growth this year thanks to domestic demand rebounding. In 2022 the growth may be slower (5.2%) because of fewer incentives by the Chinese government but then it may return to a 5.5–6.0% rate, according to experts.
In the following five years, China is going to increase digitalization and change its focus from exports to domestic markets. In March 2021 National Assembly of China adopted a plan for 2021–2025, which envisages the increase of average income in China above $20,000 a year (in 2019 this rate was $10,200).
The Chinese government plans to grow domestic demand by increasing productive capacity, creating new types of manufacturing and substituting imports with domestically produced technologies (sustainable energy, biotechnologies, space technologies, shipbuilding and aircraft engineering). The same idea should be applied to agriculture where the Chinese are going to accumulate enough wheat and make imports lower. However, they have to get over another big problem – inequality in the development of different regions, industries and territories.
All these nuances of the new Chinese economy might be very beneficial for Kazakhstan’s businesses, especially those in the oil, mining, chemical, energy and agrarian sectors. If the world economy and the Chinese continue to rebound, this growth in China will have a positive impact on the Kazakhstani economy as well.
However, while dealing with Chinese companies, the government of Kazakhstan has to be very careful in its estimates of environmental and social risks because the state of China is the final owner of all these companies and Beijing may pursue a wide range of goals including political ones. Moreover, Kazakhstan has to observe every aspect of the confrontation between China and the United States. This process can’t be possible without active participation of independent experts from various sectors of Kazakhstan’s economy. As a result, such a discussion would help minimize risks for the national economy and keep cooperation with China sustainable and effective.