No.1 2017 (Vol. 15)

No.1 2017 (Vol. 15)

目录

编辑部

| CONTENTS

The Belt and Road (B&R): Review and Outlook 01 Three Years of the Silk Road: Successes and Challenges / The Polish Institute of International Affairs 05 Can China Participate in Middle East Stabilization E ff o r t s by Supporting R egiona l Conne c tivity? / Yoram Evron 08 Prospects for China-CEE Relations in the 16+1 Format / The Polish Institute of International Affairs 12 The China Syndrome / Dalia Ghanem-Yazbeck, Lina Benabdallah 16 Arctic as a part of Silk Road Economic Belt? China-Pakistan Economic Corridor (CPEC): Beyond the Business 21 Pakistan-China: Strategic Partnership Means Business / International Institute for Strategic Studies 24 The Balochistan Tinderbox / Sunaina Kumar, Angela Stanzel 27 Time to Rethink India's Approach on OBOR / Jabin T. Jacob China and Central Asia: A Common Vision to Achieve Regional Security and Prosperity 29 Prospects of Political and Economic Cooperation of Kazakhstan and China / Elmira Kagazbaeva, Bekzat Baktybekova 42 T h e o r e tical and Ideological Funda me nta ls of Modernization of China: Experience for Kazakhstan / Dauyen Dinara 50 China's Economic and Military Expansion in Tajikistan / Fuad Shahbazov Xi's Visit to Latin America: How to Understand “New Era” of China-Latin America Relations? 53 What's New About Xi's "New Era" of China-Latin America Relations? / Matt Ferchen 56 How Important Is Latin America on China's Foreign Policy Agenda? / Shaheli Das Heading for Uncertainty: Possibility of Sino-US FinancialTrading Warfare 58 China Trade Realities for the Trump Administration / Yukon Huang 60 Financial Warfare: China and the US T-Bills / Marcel Baartman 63 Heading for Trade War with China / Steve H. Hanke

Editorial Department

责任编辑　Responsible Editor 　张　怡　Zhang Yi 　沈国麟　Shen Guolin 　黄　昊　Huang Hao 执行编辑　Executive Editor 　王柯力　Wang Keli 栏目编辑　Column Editor 　付　宇　Fu Yu 　周光俊　Zhou Guangjun 刊物设计　Art Editor 　范佳秋　Fan Jiaqiu

中国观

C H I N A WAT C H

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http://fddi.fudan.edu.cn

Three Years of the Silk Road: Successes and Challenges The Polish Institute of International Affairs

China has evaluated as positive the first three years of its Silk Road initiative (also known as Belt and Road), announced in autumn 2013. Apart from conceptualisation and institutionalisation, various economic, infrastructure and finance projects have been or will be launched. The PRC focuses on the initiative’s broad scope and the positive response from other countries that collectively and with great enthusiasm are joining the Silk Road. However, more countries view it with increasing concern. Enthusiastic Chinese Assessment A meeting of the Leading Group for the Silk Road’s Implementation was held in late August and attended by PRC Chairman Xi Jinping. An assessment of the first three years of the initiative was among the topics discussed. China argues that more than 100 countries have already joined or support the initiative and more than 30 have signed Silk Road memorandums. What is more, international financial institutions have been established. For example, in June the Asian Infrastructure Investment Bank (AIIB) announced its first four infrastructure project s worth a total of $509 million in Bangladesh, Indonesia, Pakistan and Tajikistan. The Silk Road Fund also unveiled its first three investments, one, to develop a hydropower plant in Pakistan, the second, acquisition of the Italy-based firm Pirelli, and the third, a 9.9% equity stake in the Yamal LNG project. China claims that there has been a 20% rise in trade with countries the PRC considers Silk Road states and that investments have also increased. The evaluation highlights that already there are almost 40 rail cargo connections between Europe and China, and that Chinese state-owned companies have concluded agreements on 38 infrastructure projects in 26 countries and are taking part in 40 foreign energy projects in 19 countries. Moreover, it says 52 economic zones have been established in 18 Silk Road countries. Currency swap agreements, signed with 35 countries, and offshore RMB settlement, are also considered Silk Road projects. China argues that the Silk Road is a “public good.” The reason for its success is that it is promoted as the Chinese contribution to the global 01 China Watch · Watch China

Three years ago, PRC Chairman Xi Jinping announced the Silk Road initiative. China perceives its implementation to date as a success. Nevertheless, in other countries, there are doubts about the lack of a defined scope and concerns about planned or already launched p ro j e c t s . F o r P o land, Silk Road is a chance to strengthen trade and attract investment, including in infrastructure. WithC h i n a y e t t o p ro pose beneficial projects and considering the potential risks involved with access to critical infrastructure, the Chinese declarations should be treated carefully and expectations lowered.

The Belt and Road (B&R): Review and Outlook

governance system and forms a new model for integration but one different from Western notions. Silk Road aims to create a cooperation network rather than spheres of influence, such as the notion preferred by Russia, for example. What is more, the Silk Road initiative is a means to establish Chinese-style leadership based on taking responsibility, setting an example, and not exerting pressure on others. In that sense, the Silk Road is a kind of Chinese “third way”. Chinese leaders stress that this is an open idea and a response to international needs. They see vindication of the initiative in its inclusion in the development strategies of other countries. A good example of that is the agreement between China and the EU, namely the synergy between the Silk Road initiative and the Juncker Plan. Some Countries Express Doubt However, beyond China, the Silk Road initiative is raising doubts. They are articulated at two levels with the first the macro level, such as in the political discourse, assumptions about the initiative, and trust in Chinese statistics, and the second is at the micro level, relating to specific projects and cooperation proposals. Despite Chinese efforts to give more “substance” and detail to Silk Road, the initiative remains vague. China’s argument that access to the initiative is voluntary combined with the lack of a list of objectives and tools reinforce its partners’ conviction that it is nebulous. Good evidence of this is the list of activities undertaken in the last three years. Apart from priority areas such as infrastructure, trade, investment and financial cooperation, Silk Road embraces any other forms of state activity, including those in domestic and foreign policy. There are also doubts about the Chinese statistics. Usually, only ac cess to general, quantitative data is available. It remains unknown when some projects were launched and their stage of implementation. It is highly probable there are only a few real Silk Road projects, that is, those that began after autumn 2013. In that sense, projects finalised or launched before the initiative’s announcement, such as the rail cargo connection between Łódź and Chengdu, have been claimed as examples of Silk Road initiatives. The names of the countries taking part in the projects or signatories to agreements are rarely made public. As a result, China’s enthusiastic assessment of the Silk Road initiative is perceived as arbitrary and unable to be verified. Currently, “Silk Road” is more a label under which China pursues its assertive export, investment and foreign policies while diversifying their directions. At the micro level, the doubts are connected to the first, 02 China Watch · Watch China


unsuccessful projects. For example, energy projects in Mongolia have been suspended for environmental reasons, such as threats to Lake Baikal. Some countries also have expressed doubts about their security because of the mode of the Chinese investments. A good example is Thailand, which declined a railway infrastructure project because the Chinese side requested the right to land at the stations and along the tracks. There are also problems with the launch of a similar project in Laos and with the Belgrade-to-Budapest railway. Other concerns include Chinese demand for access to critical infrastructure and the potential for acquiring technologies through investment in the energy and high-tech sectors. This was why the Australian government rejected two Chinese companies’ offer to lease transmission lines. There also have been concerns in Germany about access to digital data following China-based firm Midea’s acquisition of Germany-based robotics company Kuka. Another German company, Aixtron, saw its shares fall sharply after the unexpected cancellation of a large order by a Chinese company followed by an offer from another Chinese enterprise to take over the company. There is also apprehension about whether China, due to its economic slowdown and potential for crises (such as stock market slumps that could result in capital outflow), can finance the projects and how profitable they will be. Concerns about economic sustainability have being raised in connection with, for example, transport projects in Central Asia. Silk Road’s Prospects Despite these problems, the initiative will remain Xi’s most important political concept. Silk Road will remain general and vague because it gives the Chinese authorities room for manoeuvre depending on its needs and avoids criteria that may indicate failure. Silk Road will remain the state’s “umbrella” over its domestic and foreign policies. Apart from export promotion, it will become an increasingly more important instrument for acquiring technology, much needed for China’s economy to diversify. Silk Road may also result in an influx of Chinese workers to countries where the projects are located. For example, China’s military base in Djibouti is already seen as its foothold in Africa (about a million Chinese live on the continent) and is capable in an emergency to be a hub for protecting or quickly evacuating Chinese citizens. Silk Road will remain a tool for strengthening China’s global position under Xi’s rule. It is an essential and important instrument to project Chinese power given recent setbacks to its neighbourhood policy, including the unfavourable ruling by an arbitration court at The Hague in connection with the South China Sea, and in its economic policy, namely the stock market plunges in 2015 and 2016. Chairman Xi 03 China Watch · Watch China


needs confirmation of his image as a strong leader before the personnel reshuffle of party leadership that will take place after the 19th CPC congress in the autumn of 2017. Implications for Poland Poland has declared participation in Silk Road. The initiative is seen as a chance to increase Polish exports to China, attract investment and improve infrastructure. However, no significant project for Poland has yet been launched under the Silk Road banner. On the other hand, China’s assertive rhetoric, including open criticism of the United States, aggressive export promotion of overproduced goods and extra manufacturing capacities, and access to technology through mergers and acquisitions, may pose various risks for Poland. Among the challenges are the effects on transatlantic relations, EU cohesion, global economic governance, and even state security. Under these circumstances, Poland should assess the Chinese declarations carefu lly and lower its own expectations. When engaging deeply in cooperation with China, Poland should strengthen the support system for entrepreneurs and cooperate closely with the EU’s institutions and other EU Member States. It is also worth strengthening relations with other Asian states, such as Japan and the Republic of Korea, which have developed similar or even competitive projects to Silk Road. www.pism.pl/publications/bulletin/no-71-921

04 China Watch · Watch China


Can China Participate in Middle East Stabilization Efforts by Supporting Regional Connectivity? Yoram Evron

Despite repeated efforts, so far Washington has failed to convince China to share the burden of stabilizing the Middle East. To date China’s approach to the region remains unchanged: engaging in activities of high economic self-benefit while refusing to invest substantial political resources or take considerable risks in shaping regional developments. In view of China’s pragmatic approach to the region, one way to convince it to share the burden of stabilizing the Middle East is by encouraging it to undertake roles closely related to its interest and within its capacity and intentions. China's extensive engagement in the construction and operation of transportation infrastructure across the region, recently framed by Beijing's One Belt, One Road (OBOR) concept, provides such an opportunity. More specifically, if China takes a prominent role in the establishment and operation of international transportation lines, this would make Beijing a de facto stakeholder in and facilitator of regional stability and development because such a project would bolster regional interdependence and require multiple states to cooperate. The visionary Israel-Gulf Economic Corridor (IGEC) could be such a project. Suggested by Yigal Maor, Director-General of the Israel Shipping and Ports Authority, this corridor would connect Jordan to the Mediterranean by a railway line from the Israeli-Jordanian border to the Port of Haifa. At the border it would connect to the Jordanian railroad system, thus creating direct and continuous ground transportation from the Mediterranean through Israel, Jordan, and Saudi Arabia, all the way to the Persian Gulf. Currently, this route consists mostly of roads, but there are already plans and agreements — including with Chinese companies — to expand the railway system in the relevant countries. As revolutionary as it may sound, such a vision is neither new nor abstract, and its basic physical components already exist. In November 2016 a new railway line between Haifa port and Beit-She'an — a city on the IsraeliJordanian border — began to operate, with the declared intention of eventually connecting to the Jordanian railroad system. Furthermore, with the civil war in Syria severely disrupting cargo transportation between the Mediterranean and Jordan (and through Jordan to the Persian Gulf), the attractiveness of Haifa port as Jordan's gateway to the Mediterranean has increased dramatically. Indeed, the port already serves Jordan and certain Gulf states through the same route, but so far only by trucks. By an Israeli 05 China Watch · Watch China

“China has both the interest and the means to realize the IGEC vision. The realization of the IGEC vision by China can have far-reaching outcomes and implications. Such cooperation can serve both Beijing and Washington as a case study as to how China can be constructively involved in regional development and cooperation endeavors.”


estimate, some 30,000 trucks traverse the cargo terminal on the IsraelJordan border annually. Replacing the trucks with trains would increase both the capacity and the efficiency of this transportation line, making it much more attractive to businesses; a train line would also facilitate continued economic development along the Haifa port-Persian Gulf line. Such development could involve all concerned parties, including the Palestinian Authority, while enhancing regional interdependence, and providing strong incentives to resolve conflicts and discord. Arguably, China has both the interest and the means to realize the IGEC vision. The PRC already has a stake in this project. A state-owned company, Shanghai International Port Group (SIPG), has won a 25-year concession to operate a new port in Haifa, whose construction (by another Chinese company) has already started, and in 2015 China and Jordan signed a $2.8 billion agreement to construct the Jordanian national railway network. The IGEC is expected to increase significantly the volume of cargo that goes between Haifa port and Jordan, thus providing larger income for various Chinese companies along its route. Those companies will presumably include SIPG and others involved in transportation, logistics and related economic ventures. The IGEC may also reduce costs to Chinese companies that are based in the Gulf and working with European markets and suppliers. Above all, construction and operation of the IGEC harmonizes well with China's declared intention to play a role in the resolution of the Israeli-Arab conflict and with its OBOR vision. Considering Iraq's instability and the security problems in Central Asian countries, which the ground route of OBOR is planned to cross, the IGCE crosses much more stable countries — partly due to US dominance in this area. The IGEC can therefore be included in an OBOR ground network as an alternative to the main route, to be used when political-security conditions demand it. Moreover, China is probably better equipped than any other world power to facilitate the IGEC. The establishment and subsequent operation of this transport line is expected to face major opposition, on both economic grounds (e.g. by competing transportation channels like the port of Aqaba) and political-ideological grounds (objection to any cooperation with Israel). The latter pressure will most probably surge time and again whenever Israel is involved in a local or regional conflict. In addition, the completion of the IGEC will require extensive financial investment. Maintaining good relations with all the involved parties, and being engaged in large-scale construction and logistics projects in the region, China is optimally placed to address these challenges. Beijing’s ability in 2009 to force the Turkish President Erdogan to tone down his attacks against China's crackdown on the Uighur population demonstrates the 06 China Watch · Watch China


ability to impose its will on regional players when specific interests are jeopardized, though it does not do this often. And if needed, China can seek assistance from other world powers that share similar interests of regional stability and cooperation. The realization of the IGEC vision by China can have far-reaching outcomes and implications. First, it will provide China with a much more concrete interest and role than hitherto in the preservation of regional stability and cooperation, and it will allow China to utilize its unique advantages without intimidating other world players operating in the region. In addition, China will gain the reputation it has so far unsuccessfully sought as a responsible big power in the Middle East, without stepping on other world powers' toes. And last but not least, this focused and framed experience will promote concrete China-US cooperation and interdependence in the Middle East; while the US provides stability, it faces hardships in promoting regional cooperation because it is suspected of being pro-Israeli. China, on the other hand, can be more successful in promoting economic-based regional cooperation but depends on the US as a regional security provider. Such cooperation can serve both Beijing and Washington as a case study as to how China can be constructively involved in regional development and cooperation endeavors.



Prospects for China-CEE Relations in the 16+1 Format The Polish Institute of International Affairs

Apart from the prime ministers of China and Central and Eastern European (CEE) countries that are members of the “16+1” dialogue format, the fifth China-CEE summit was attended by an EU representative as a permanent observer, representatives of Austria, Switzerland, Greece, the European Bank for Reconstruction and Development and, at Latvia’s initiative, the prime minister of Belarus. The summit was preceded by bilateral meetings between the prime ministers. Simultaneously, the 16+1 business forum and the inauguration of a pilot cargo railway connection from the Chinese city of Yiwu to Riga were held in the Latvian capital. Summit Decisions Due to the very loose institutionalisation of the 16+1, its main decisionmaking instrument is a summit of heads of governments. The sixteen countries compete with each other in their relations with China, so the CEE as a group has no single, cohesive China policy. The fact that EU and non-EU members are included also presents a significant barrier. The main summit decisions are written in the Riga Guidelines. This document records 16+1 activities in the previous year and presents goals for the next. For the first time a summit declaration, called the Riga Declaration, has been adopted. The Riga Guidelines are a clear attempt to find synergy between the 16+1 grouping and EU-China relations. This is why it was stressed that all transport infrastructure and logistics activities, the main topic of the summit, are in line with the EU-China Connectivity Platform, launched by the European Commission in September 2015. The Platform’s goal is to find commonalities between the Belt and Road initiative and EU proposals. The latter include the Investment Plan for Europe and new work plans within the Trans-European Transport Network (TEN-T) policy, adopted in mid-2015. In Riga, the topic of connectivity prevailed over that of trade. The main focus was on maritime issues. The Riga Declaration broadly presents the “Three Seas” (Adriatic, Baltic and Black) initiative announced at the Suzhou summit in 2015. It assumes the development of ports, including those in the hinterland, as well as logistic hubs, economic zones and transport corridors. The stress on maritime issues arises from the host country’s interests, as maritime trade is crucial for Latvia. But it could also be that the thus far modest results of land transport under the 16+1 08 China Watch · Watch China

On 5 November 2016, the fifth summit of China and Central and Eastern Europe was held in Riga. The main topic of the meeting was the buzzword “connectivity,” which indicates building various connections or links, especially infrastructural ones. The main results of the summit were an attempt to define maritime dimension of cooperation, with special focus on the three seas initiative (the Adriatic, Baltic and Black) announced in 2015, and a decision to set up in Poland a secretariat for maritime issues. For China, the 16+1 will remain a tool f o r s t re n g t h e n i n g i t s international status and promoting the Silk Road initiative, while the others will use it to enhance their bilateral relations with China.


and the Silk Road initiative led to a search for new areas of cooperation. Cargo trains to Europe, subsidised by China and often transporting only Chinese goods, will not be profitable in the long term. The significance of maritime cooperation has been confirmed by the decision to set up a secretariat for maritime issues in Poland, in 2017. This will be the third 16+1 mechanism in Poland, after the Business Council and an association of investment agencies. It will be run by the Ministry of Maritime Economy and Inland Navigation. China also wishes to propose new financial instruments. Existing Chinese support such as loans, often similar to those offered for investments in African countries, is not attractive for the EU members, which have access to EU funds. An investment fund worth €10 billion (that aims to raise €50 billion in total) was set up during the summit. The fund will be run by the financial holding established by the Chinese bank ICBC. There are also plans to set up a 16+1 inter-bank association. Among other decisions was the establishment of new mechanisms of cooperation. These could be seen as an attempt for the “specialisation” of individual states in selected areas, as well as a means of showing appreciation to those countries that have so far not hosted such institutions. New mechanisms will be set up in Romania (energy projects), Slovakia (technology cooperation), Slovenia (forestry cooperation) and Macedonia (cultural cooperation). More significance has been attached to people to people relations and the promotion of mutual understanding. Lack of knowledge is perceived as an important barrier to closer cooperation between CEE and China. This is why 2017 will be a year of media cooperation (2016 was a year of people to people relations and cultural cooperation). The next host of the 16+1 summit will be Hungary. 16+1 Achievements to Date The format has made CEE important in terms of Chinese foreign policy. Since the summits in Belgrade and Riga, the role of Balkans and Baltic states in Chinese policy towards Europe has increased. Miscellaneous meetings under the 16+1 format contributed to the intensification of political dialogue on the lower level (for example, that of ministers and local authorities) and people to people exchanges. Moreover, the status of Central Europe within the region and in the EU has been raised. CEE countries showed that they are able to establish their own formula for cooperation with China, and to pursue an active policy towards nonEuropean great powers. Another result is the rise of interest of potential investors in countries which hosted 16+1 summits. For example, Serbia and Romania recorded increased interest from potential investors, not 09 China Watch · Watch China


only from China but also from Korea and Japan. As far as economic cooperation is concerned, discrepancies between EU and non-EU members are noticeable, especially in terms of investments and infrastructural projects. They are located mainly in the non-EU countries, which indicates the weakness of Chinese financial instruments that are not adapted to the needs of all countries. The Chinese credit line is being used, for example, in Bosnia and Herzegovina for the construction of a thermal power plant in Stanari, in Macedonia for building highways, and in Serbia for a Belgrade bypass. Credit from China-based Exim Bank is being used to build a new thermal power plant unit in Kostolac. Similar credit was also utilised to build a bridge over the Danube in Belgrade, which was officially opened in 2014. In terms of failures to date, there has been little progress with the highspeed Belgrade-to-Budapest railway, a 16+1 flagship project. Many agreements have been signed but not implemented, and there are concerns that the $1.7 billion line of credit extended by China may seriously increase Hungary’s national debt. What is more, the European Commission has initiated preliminary infringement proceedings against Hungary. This is because the project assumes implementation by a consortium from Hungary and China (15% and 85%, respectively) based on an intergovernmental agreement, but not through issuing tender procedures. In Riga the decision was made that the consortium will announce a tender and sign agreements with contractors. This means that the consortium itself will not be a project contractor, although the financial aspects have not changed and 85% of the project is expected to be financed with Chinese credit. Still, the level of Chinese investments is modest, while the trade deficit on the CEE side is increasing. What is more, China has not yet located manufacturing bases in Central Europe, an idea that it announced at previous summits. Prospects China and European countries will not abandon the 16+1 format. For both sides, it is a useful political instrument. One may expect an extension of the format, for example with other countries acting as observers. This assumption may be vindicated by the fact that China has recently been promoting the 16+1 as “open.” With more countries on board in the framework of 16+1, China may highlight its rising international status and attract more allies for its own interests. At one 16+1 meeting, in Ningbo, in June, Hungary openly declared support for granting China market economy status. It also supported China’s position on the South China Sea issue, just before a ruling by the Court of Arbitration, and afterwards, with 10 China Watch · Watch China


Croatia, was reluctant to adopt the EU statement about this issue. The decision to hold the next 16+1 summit in Hungary might be perceived as appreciation for Viktor Orbán’s pro-Chinese policy. It is worth mentioning that the Czech Republic was also interested in hosting the next summit, but its relations with China soured after the visit of the Dalai Lama, who met with the minister of culture in Prague in October. For China, the 16+1 remains a mechanism for gaining knowledge about the region, such as investment conditions and plans, important for the implementation of the Silk Road initiative. The 16 countries will also use the format to indicate their own interests and strengthen bilateral relations with China. A good example is Latvia, which is greatly interested in transport in the north-eastern part of Europe. Latvia sees opportunities for cooperation with China, following the deterioration of its relations with Russia after the imposition of sanctions that limited Russian trade in ports of the Baltic States. The 16+1 format should serve for Poland as a complementary element for strengthening bilateral relations and the pursuit of Polish interests. Poland, as a hosting country of three 16+1 mechanisms, should initiate seminars and publications about the investment climate and create a platform for the exchange of information. The focus should be primarily on Polish interests, such as lobbying for Chinese greenfield investments and increasing Polish exports to China. The secretariat for maritime issues should be used to enhance cooperation within the maritime Silk Road, and to increase the role of Polish ports in trade and investments with China. www.pism.pl/publications/bulletin/no-76-926



The China Syndrome Dalia Ghanem-Yazbeck, Lina Benabdallah

On October 8, 2016, the China Petroleum and Chemical Corporation (Sinopec) announced the completion of the TOUAL 3D seismic acquisition project, in Ouargla and Illizi, Algeria. The news reflected a trend of rising exchanges between Algeria and China. In 2014, China surpassed France to become the largest importer into Algeria, supplying over 14 percent of imports. Bilateral trade rose from $608 million in 2003 to $9 billion in 2013, making Algeria China’s top trading partner in the Maghreb. To that effect, in 2014 both countries signed a five-year plan for a comprehensive strategic partnership, the first of its kind in the Arab world. However, given Algeria’s resource wealth, relative financial leverage, and political stability in the last decade, one would have expected to see higher levels of Chinese investment and trade in the country. However, that is not the case. Investment has been mostly limited to commercial loans, while Chinese Foreign Direct Investment (FDI) in Algeria, estimated at $1.5 billion, did not surpass 0.3 percent of total overseas Chinese FDI. China is aiming for a deeper and stronger presence in Africa. It is seeking political support from the continent at the international level, greater access to African markets, new export destinations, and it is attempting to secure supplies of oil and minerals. In pursuit of such objectives, Chinese firms have been particularly involved in the Algerian construction sector. As of 2014 Algeria became the second largest market for Chinese infrastructure investments and contracts in Africa (after Nigeria), and is among the top fifteen worldwide. Indeed, since 2000 the Algerian state has been focusing on the development of infrastructure and Chinese firms have profited from these plans, bringing in some $22 billion in contracts between 2005 and 2016. The Chinese, first, benefited from the Economic Support and Recovery Plan (PSRE) between 2001 and 2004, which aimed at renovating basic infrastructure. Likewise, between 2005 and 2010, Chinese companies took advantage of the Complementary Growth Support Program (PCSCE), designed to modernize roads and build housing. Between 2010 and 2014 Chinese contractors were brought into a government development plan to complete all ongoing infrastructure 12 China Watch · Watch China

Algiers and Beijing have improved their economic ties, but Algeria can certainly benefit more. China is aiming for a d e e p e r a n d s t ro n g e r presence in Africa. It is seeking political support from the continent at the international level, greater access to African markets, new export destinations, and it is attempting to secure supplies of oil and minerals. In pursuit of such objectives, Chinese firms have been particularly involved in the Algerian construction sector.


programs. Among the major contracts there was the East-West highway project, launched in 2007 and completed in 2015, built by both Chinese and Japanese consortiums. There was also the construction of the Sheraton hotels in Oran and Algiers, a new terminal at Houari Boumediene Airport in Algiers, and low-cost housing projects (since 2000, some 250,000 units have been built). Finally, there is the new mosque of Algiers, the third largest in the world, which will be completed in 2020. In addition, fifteen new memorandums of understanding were signed with China in April 2015 by Prime Minister Abdel-Malek Sellal, in order to increase investment partnerships and economic relations between the two countries. As a consequence of these growing ties, Chinese migrants are more present than ever in Algeria. Indeed it is the country in Africa with the most Chinese workers. Official numbers indicate an increase in the numbers of Chinese workers from 22,000 in 2013, to 24,000 in 2014, to 55,000 in 2015. There is even a Chinese quarter in Algiers, and as many as 2,000 Chinese are believed to have been given the Algerian nationality, which is notoriously difficult to obtain. However, cultural cooperation between the two countries is limited. There is not a single Confucius Institute or a Confucius Classroom in Algeria, both geared toward Chinese cultural outreach. In comparison, there are no less than 46 Confucius Institutes present across the African continent and 23 Confucius Classrooms. Moreover, tourism as well as business opportunities remain limited because of Algeria’s complicated entry requirements. Sino-Algerian cooperation seems to be more beneficial for China. First, the trade balance is in China’s favor and the Algerian state funds most projects undertaken by Chinese companies. Chinese FDI in Algeria accounts for only 6 percent of China’s FDI in Africa. Algeria is in need of foreign investment, however its strict regulations are partially responsible for discouraging investment. A stringent law on visa requirements from 2007 and a complementary finance law from 2009 requiring joint ventures with outside investors to be 51 percent owned by Algerian companies are but two examples of unfavorable legislation. Second, there is very little transfer of technology or expertise from the Chinese, as Algerians have little access to managerial positions. That’s because assigned employment quotas do not stipulate the kind of positions Algerians are supposed to occupy in joint projects. Hence, Algerians tend to hold blue-collar positions as janitors, security guards, drivers, and so on. Similarly, the Algerian private sector’s ability to grow is hindered by the presence of giant Chinese state-owned companies. Small and medium 13 China Watch · Watch China


private enterprises have a hard time competing with the more established Chinese companies, which end up winning bids and taking most contracts. Third, construction deals with Chinese companies for the most part have a limited impact on the economy in terms of employment. Despite regulations requiring the employment of Algerian workers, a majority remains Chinese. There is no oversight when it comes to implementing employment policies, as the Algerian state has sought quick solutions in order to resolve the housing crisis, which was one of the causes of social unrest during the 1990s. So, for instance, when the $1.1 billion project of the mosque in Algiers was signed, both Algeria and China agreed that out of the 17,000 jobs the project would generate, 10,000 would be reserved for Algerians. However, reports indicate that at least 10,000 Chinese workers were on-site when the project began. The high competence and efficiency of Chinese workers was the explanation used by both sides to justify such a violation. In addition to this, scandals have sullied the reputation of Chinese companies in Algeria. In one case, the China Railway Construction Corporation (CRCC) paid checks to subsidiary enterprises that bounced, while there have been allegations that Chinese companies are withholding over $4.2 million in wages. Most important, the lack of oversight from the Algerian authorities has diminished the incentives among the Chinese for transparency and accountability. A salient example of this is the East-West project, in which portions of the highway had to be closed weeks after it was inaugurated because they were already in need of repairs. Although Sino-Algerian relations are not necessarily mutually beneficial, there is still a great deal of potential for more prosperous cooperation. On the Algerian side, the government has the means and the resources to build more effective partnerships and negotiate better deals with Chinese companies. The Algerian government should also think about ways of becoming more competitive in attracting FDI flows from China. An example of how to go about this can be found in Morocco, where the authorities recently removed visa requirements for investors from China, which will boost the number of Chinese tourists and investors in the kingdom. Second, the Algerian government should push for more deals with China that play to Algeria’s competitive advantage in renewable energy sources rather than natural resource extraction deals. Particularly in the solar power and wind power industries, China’s expertise in these alternative energy sources and Algeria’s vast empty spaces in the Sahara could create opportunities for win-win cooperation. 14 China Watch · Watch China


Third, where diaspora communities feel at home they tend to invest and consider long-term profitable projects. On the other hand, when they do not feel integrated into their host environments, they’re more disposed to think about short-term gains and temporary projects which may not be sustainable. In the case of China-Algeria relations, cultivating cultural and people-to-people connections is vital to having a Chinese diaspora in Algeria that is invested in the local environment and cares about contributing to the greater good. carnegie-mec.org/diwan/66145



Arctic as a part of Silk Road Economic Belt?

In the beginning of October (7-9) 2016, Reykjavik (Iceland) will host the fourth annual grand forum “Arctic Circle” aiming on the research of Arctic development. It will bring attention of many politicians, international relations scholars, business executives of Western countries, Russia and China. Amid of the China’s remoteness from the Arctic, Beijing shows great interest towards the region as an emerging strategic part of geopolitics and geoeconomy. China considers participation in the forum as an opportunity of further polishing its regional policy and evaluating benefits to include Arctic into Silk Road Economic Belt. Chinese Arctic expectations Initially Chinese delegation pool on Arctic conferences consisted only of scientists, who specialized on ecology issues and risk assessment of ice melting for coastal provinces of China, and low-ranked officials from relevant ministries and foreign affairs office. However, after China was included into the Artic Council (intergovernmental high-level forum to discuss Northern territories development) as an observer state in 2013, we started to witness a growing presence of Chinese diplomats, analysts, business persons on all field-specific conferences, especially in Scandinavian countries. Reasons for this activity are mostly practical and involve Arctic vision as potentially economically and technologically valuable region for the future PRC development. China’s participation in the Arctic will let Beijing an access to vast offshore resources both as a consumer and as stakeholder in joint extractive projects. As an example, a joint venture of CNOOC (where Chinese side has 60% share), Eykon Energy and Petoro Iceland provides development of Dreki oil and gas shelf site near Iceland, whereas CNPC purchased 20% share in “Yamal-LNG” in Russian Arctic. Apart from already contracted LNG deliveries to the country, Chinese companies’ participation in Arctic development triggers modernization in related areas, where competence enhancement is in strategic importance for China. It is referred to modernization of shipbuilding cluster in order to construct sophisticated vessels of ice class ARC 7/9 and compete with South Korea and Japan for future ship contracts from Russia, quality and speed upgrade of conducting seismic works and experience obtainment to drill in harsh Arctic conditions that will influence a 16 China Watch · Watch China


number of national patents in this field. Success in mentioned areas are important in the context of 中国制造 2025, National High-Tech Research and Development Program and National Key Technology Research and Development Program that define priorities in marine, modern transportation, energy conservation and environmental sectors as well as in exploration technology for large oil, gas and coal bed methane fields. Taking into consideration that Arctic ecology is very fragile and sensitive to any anthropogenic interference, the constant contact with major European Arctic states on this issue, in particular, Finland, Denmark and Iceland, let China pay crucial attention to cutting-edge solutions of “green” energy. Therefore, consultations with Danish Energy Agency have led to problem identification that Chinese wind industry faces – necessity for grid modernization, integration of high penetration of renewable energy resources into the industrial power system with micro-grid solution, establishment of wind turbine testing platform in order to minimize power loses. In its turn, contact with Finland have let China to invest into development of €1bn biofuel refinery in Kemi and have an opportunity to launch joint projects with local partner companies and get know-how from Finland’s progressive biofuels policy. The refinery is scheduled to be operational by 2019 and generate 200 000 tons of biofuels per year. All experience that China gets from international cooperation in “green” economy sectors is implied in the country and provide solutions to achieve governmental goals in substitution of coal by less harmful energy sources. China committed at COP21 in Paris to top carbon emissions before 2030 and to reduce its energy intensity per capita with 60-65 pct. by 2030. The most impressing example of ecological solution program is ChinaIceland geothermal energy utilization. The pilot project of using Icelandic know-how in China was launched in Xianyang city of Shaanxi province in 2006. It was planned to heat and provide electricity to 1 million square meters of living space. However, this year the overall square of residential area under geothermal maintenance will exceed 30 million and hit 100 – in 2020. This will make Xianyang the most ecological city in the PRC. The project’s success was decided to repeat in Hebei (Baoding city), Shandong, Sichuan, Yunnan provinces, in Tibet and Xinjiang. By the end of 2014 85% of all residential spaces in Baoding (1.6 million square meters) was heated by geothermal energy that saved 120 000 tons of coal. Moreover, heating expenses of local households decrease to 15-18 yuan per square meter from 24 yuan when coal was the main source of heat. Finally, ice melting in the Arctic is of high concern for Beijing officials since foreign and domestic ecological situation modeling show dramatic 17 China Watch · Watch China


results for China. Under the current speed of ice melting, Chinese coastal provinces will experience significant flooding of its territories. The latest data shows that a considerable sea level rise will happen between 2030 and 2050 when the vast territories of the Arctic are expected to be icefree. Arctic as a part of One Belt One Road The most speculative and intriguing part of China’s policy in the Arctic are concerns whether the Arctic pathway through the Northern Sea Route (NSR) in Russia to Scandinavian ports can become a transport and logistics corridor for Chinese goods to Europe as a part of One Belt One Road Initiative (OBOR). Currently Beijing is examining this opportunity by setting up meetings with officials, analyzing expert reports and hosting productive conferences. There has been no official statement or hint so far concerning future integration of Arctic into the OBOR. However, we witness several key trends in Russia, Scandinavia and China that indicate the possibility of logistics connection through the waters of Northern neighbor strategic partner. Moscow shows deep interest in developing national Northern territories and demonstrates readiness to attract Chinese capital and relevant technologies to Arctic resources extraction, maintaining of maritime corridors and local infrastructure construction. Russian State Commission on Arctic development together with relevant ministries issued the updated plan at the beginning of this year, which includes 17 perspective projects worth of ~ 257 billion dollars, to strengthen Russian presence in the region and present Beijing and other actors lucrative conditions for mutual work in the Arctic. First, it is referred to successive modernization of icebreaker fleet with better capability to convoy large bulk carriers. This guarantees decrease in delivery costs, enhance security and increase NSR competition with traditional routes. Second, elaboration of logistic connections between Northern Russian ports and main internal transport corridors will let to transfer not only transit cargo but also provide shipment in mid points. Mounting intention to deliver goods via the NSR is proved by the dispatch (17 July) of two petrochemical reactors from South Korean port Ulsan that will be first delivered to Sabetta (15 August) and then by river route (Irtysh, Ob) to final destination point in Pavlodar (25 August, Kazakhstan). This is the first in history of the NSR international delivery of high-tech equipment form Asia that can be a milestone for regular transit of foreign shipping. Additionally Moscow is eager to offer the PRC a share increase in economically rational extracting projects of natural gas. CNPC and Silk Road Fund has already purchased 20% and 9% in “Yamal LNG” of 18 China Watch · Watch China


“Novatek” company. The head of “Novatek” also expressed intention to work with Chinese counterparts on joint development of the second Arctic gas project “Arctic LNG”. Russian gas from “Arctic LNG” looks rather attractive for buyers from East and South-East Asia that remain world gas consumption leaders. Prime cost of “Arctic LNG” liquid gas will be less than 3 dollars per 1 million BTU, the current LNG price in Europe fluctuates from 3,9 to 4,02 dollars, in Asia (China, Japan, South Korea, India) – 4,2 – 4,38 dollars. Moreover, the final prime cost of Russian LNG can decrease because Novatek works closely with German company Linde AG, which specializes in industrial technologies for natural gas fractionation, on cost reduction and equipment localization. In its turn, Scandinavian countries also monitor vigorously Chinese decisions in Arctic transit hoping to trigger development of national Northern provinces. Finland, Sweden and Norway plan to finish to 2030 the construction of combined transport system that secures economic prosperity of Arctic territories by using its transit potential, establishment of additional plants for oil and gas, wood and fish industries as well as development of tourism sector. Moreover, a new united logistics system will interlink Scandinavia with continental Europe that is one of priorities of China’s transit through the Arctic. Governments of Finland, Sweden and Norway are ready to spend jointly around 2 billion euros on modernization of national roads and implementation of “smart” transport security and notification system. This will result in transit potential increase on 60% to 2030 from current 10 million tons per year. The European Union will share the expenses by using the following financial instruments: funds of TEN-T (TransEuropean Network), “The European Investment Plan”, “Northern Dimension Partnership on Transport and Logistics” and “Cross-Border Cooperation” Iceland is also lobbying actively its project of grand-scale logistics hub development that is capable to become a key point in Arctic cargo transit from Asia to America. Currently Reykjavik carries consultations with the leading company in port management “Bremenports” regarding construction details. What’s next? The coming “Arctic Circle” will make new adjustments to policy of Western countries, Russia and China on Arctic track. Many politicians, business representatives and academia experts are waiting for China’s signals concerning Beijing’s understanding how to use Arctic opportunities in light of joint efforts to integrate the region into world economy. As for China, Beijing will try to understand how it should 19 China Watch · Watch China

China-Pakistan Economic Corridor (CPEC): Beyond the Business

response to the growing activity of Washington that tries to implement own investment rules in the Arctic. In addition, China should also hold the right position concerning emerging military increase of NATO in the Arctic as a response to Russian build-up there. Finally, the conference in Iceland is a key platform for Beijing to point out the future agenda of the Arctic Council under Finland’s chairmanship in 2017-2019 in order to find new investment opportunities in Scandinavia.



Pakistan-China: Strategic Partnership Means Business International Institute for Strategic Studies (IISS)

In a notable diversion from its usual policy of non-interference in the affairs of other sovereign states, China recently appealed to India and Pakistan to adopt greater restraint and diplomacy amid growing tensions over Kashmir. No doubt Beijing was eager to avoid allowing regional security concerns to overshadow Pakistan’s economic prosperity, in which it has a significant stake. This is the first major diplomatic tangle between China’s two neighbours since President Xi Jinping and Pakistan Prime Minister Nawaz Sharif announced tens of billions of dollars’ worth of Chinese investment in Pakistan’s infrastructure and energy sectors. In April 2015, during his first presidential visit to Pakistan, Xi pledged that his country would, over the following 15 years, spend roughly US$11bn on infrastructure and another US$33bn on energy projects. Sharif’s government published and updated a list of 51 joint initiatives, including bilateral agreements, memorandums of understanding and development projects, estimated to be worth at least US$46bn, marking Pakistan’s largest influx of foreign capital since its creation. The China–Pakistan Economic Corridor (CPEC) was first formally unveiled in 2013, but only topped the political agenda in 2015. It amounts to over two-thirds of what Xi pledged, also in 2015, as outbound investment into the UK. It is also twice all the aid Pakistan has received from the US since 2001, as a frontline state in the fight against terrorism. No wonder Sharif called CPEC a ‘fate-changer’. His interior minister has also termed it a ‘sea-change’. Some details of CPEC are confidential. Projects that had already been in the pipeline have been re-branded as being part of CPEC. Others, such as the construction of China’s ‘demonstrator’ export nuclear reactor in Karachi or a dam, appear to remain outside of CPEC. But the scope of the project is clear: it will consist of roughly three interconnected, north– south corridors to boost transport, energy and industrial capacity. They are concentrated across the highly populated Punjab province and extend from the ports of Gwadar (Baluchistan) and Karachi (Sindh), and over the Hindu Kush mountains into China’s Xinjiang. For China, this is a way of capitalising on its existing security-focused 21 China Watch · Watch China

Despite the challenges, China is determined to give Pakistan a once-ina-generation opportunity to transform its economy and their relationship. Here, Antoine Levesques examines their efforts to broaden an ambitious strategic partnership.


and military-led friendship with Pakistan. It is an opportunity to broaden and deepen long-term access to its neighbour’s US$270bn economy of 200 million people. For Chinese state banks, loans to Pakistan also look less risky. Belt and Road Initiative CPEC is one of six regional investment and trade corridors that span outward from China and make up its trillion-dollarplus global Belt and Road Initiative (BRI). Afghanistan and Iran are already beneficiaries of this highly ambitious project, with both enjoying new rail links to China (they are also committed to a port development project with India). For both parties, CPEC represents an opportunity to convince other countries to cooperate with them in support of Pakistan’s economy. They argue that this corridor could link up to other nations’ existing or future plans to build infrastructure across South and Central Asia or the Gulf. For Pakistan, this new deal promises sorely needed capital investment. Its annual GDP growth currently stands at 5.5%, but there are reasonable expectations that CPEC will bring about a sustainable increase. The UK, US and EU have lent support to Pakistani optimists and officials, who foresee CPEC’s positive effect on Pakistan’s domestic political and macro-economic stability, as well as regional connectivity. So far China is thought to have invested approximately US$14–18bn in Pakistan since 2013. Some funds are being channelled through BRIrelated institutions, including the Asian Infrastructure Development Bank and its Silk Road Fund. The initiative is already bearing fruit, with new roads already open to traffic and earth-breaking ceremonies marking the start of many other projects. Managing inflated expectations on both sides will be of crucial importance at this stage in the partnership. Pakistani critics have warned that China has, in the past, failed to realise its investment pledges, and that its interest in CPEC far outweighs that of Pakistan. However, it is too early to determine where the truth lies. In the meantime, China has embarked on a tandem capacity-building drive across a broad range of fields, to help ensure this group of projects is well-managed and potential risks are mitigated. Obstacles ahead But this partnership with Pakistan is not without its complications for Beijing. India’s sentiment has hardened since 2014 to its two neighbours, and it views CPEC with suspicion, especially in Pakistan-administered Kashmir or Gwadar. In a future crisis between India and Pakistan, China may find it harder to argue restraint as a UN Security Council permanent member, because India would see it as a 22 China Watch · Watch China


party to the situation. Pakistan is attempting to address the concerns of Chinese officials and other prominent figures about its internal security. In 2014, Army Chief Raheel Sharif made it his priority to permanently stamp out militants targeting state interests and civilians. There is roughly one soldier for every 15,000 Chinese citizens estimated to work in Pakistan, and 44 Pakistani military workers have been killed since 2014. Despite this formidable challenge, both the military and government are attempting to pool and streamline their resources to ensure the smooth implementation of CPEC. Islamabad argues that the prosperity that this initiative will eventually bring will serve to undercut militancy. Early benefits for Pakistan The early promise of CPEC should serve as encouragement to both parties to redouble their efforts to make this ambitious project a success. It has the potential to become a transformative virtuous circle for Pakistan. Its development needs are so sizeable that adding marginal megawatts to the grid and miles to networks will really feel like early wins. Trade through the deep seaport of Gwadar could begin as early as December. In 2018, Pakistan’s civilian leadership, including Nawaz Sharif’s party, will seek an unprecedented third consecutive term in power since the return of pluralist electoral and parliamentary politics in 2008. It hopes to cash in such successes at the ballot box. www.iiss.org



The Balochistan Tinderbox Sunaina Kumar, Angela Stanzel

Could the Great Game in Asia shift from Afghanistan to Balochistan? According to watchers of the complex geostrategic region, including a former general of Pakistan’s army, it already has. With rising political tension in the region, brought to the fore by the ambitious China-Pakistan Economic Corridor (CPEC), the central players, Pakistan and China, are contending with many unexpected factors, including India. Balochistan is one of the least developed and most troubled areas of Pakistan, having witnessed regular insurgencies and military campaigns. Several militant separatist groups are responsible for various attacks against Pakistani security forces and construction workers. In addition, Balochistan has seen numerous attacks by Islamist militant groups, including the August bombing of the government hospital in the province’s capital Quetta, which was carried out by Pakistani Taliban groups. The government and military have also been implicated in human rights violations in Balochistan, with Human Rights Watch accusing Pakistani security forces of “continue[ing] to unlawfully kill and forcibly disappear suspected Baloch militants and opposition activists in 2015”. In reaction to the suicide bombing in Quetta, European Parliament member Alberto Cirio urged the international community “to take notice of a situation created due to years of concerted government use of extremist groups as proxies against political activists, journalists and intellectuals.” Balochistan’s troubles stem from its fraught history and many paradoxes. After the Partition of India, the province, which comprised of four princely states and was guaranteed independence, was forcefully occupied by Pakistan in 1948. It constitutes half of the country’s landmass, but only 3.6 per cent of its total population. It is rich in natural resources, like oil, gas, copper and gold, and yet it is one of the poorest regions of the country. The Baloch insurgency, a result of ethnic nationalism, peaked in the 1970s, at the time of the creation of Bangladesh. It was repressed by the Pakistani state until recently, when the conflict shifted to a battle for control of the region’s rich resources, at the centre of which lies the CPEC. Islamabad hopes that the region will become a major trading hub, linking the deepwater port of Gwadar with the Western Chinese province, Xinjiang, via the CPEC. The CPEC could be a major driver 24 China Watch · Watch China


of employment for those underdeveloped regions. However, several observers in Pakistan interviewed by ECFR experts recently warn that the CPEC might exploit Balochistan rather than develop it, while the government in Islamabad and other provinces benefit the most. Increasingly, the CPEC has been a target for domestic political opposition in Pakistan, amid fears that the $46 billion package of Chinese investment will be distributed inequitably and fail to benefit those communities, which need it most -in particular Balochistan, but also Gilgit-Baltistan and Khyber Pakhtunkhwa. “The problem so far is that Chinese investment is focused on monumental infrastructure and not on rural development”, ECFR was told by an academic in Pakistan, and that “the locals have no role” in CPEC. The latter refers not only to including local voices in the decision-making process of CPEC but also failing to include local people in newly created jobs. One of the dilemmas might be the lack of skilled and educated people in such underdeveloped regions. Estimates of CPEC creating up to two million jobs may be exaggerated but, nevertheless, there will be newly created job opportunities in fields ranging from construction and engineering to architecture and IT. The question, however, is how many Baloch (or other minorities) are educated and skilled enough to qualify for these new jobs. So far China’s only response to the complex issues and disputes in Balochistan has been to call on Pakistan’s army to ensure security. “China ignores human rights issues in Balochistan, but unless we do something for the local people CPEC will not succeed,” a professor in Islamabad told ECFR. Another stated, “70 people killed in Quetta and the army chief only talks about CPEC”. Indeed the military has significantly increased its efforts to protect the project. A security division of the Pakistani army of up to 15,000 soldiers have been allocated to provide security for construction as part of CPEC. On several occasions Pakistan’s army chief general Raheel Sharif reaffirmed the army’s commitment to ensure the development of the CPEC and Gwadar port at all costs. There seems to be a security dilemma for China: As long as the security issue remains, CPEC cannot reach its logical purpose, but on the other hand CPEC is also fuelling tensions within Pakistan and beyond, notably between Pakistan and India. India is concerned at the growing closeness between China and Pakistan, and particularly of Chinese control of the port at Gwadar, which it fears could turn into a naval presence. In response, India has been developing Chabahar Port in Iran to access a trade route to West Asia that bypasses Pakistan via Afghanistan. India appears to care about human rights violations in Balochistan, but 25 China Watch · Watch China


within Pakistan the neighbour is seen trying to set back construction on CPEC and supporting militant groups in Balochistan in retaliation for Pakistan’s support for anti-Indian militias in Kashmir. What is clear is that Modi’s recent comments on Balochistan - and his government raising the issue before the United Nations - has further escalated the issue. The recent attack by the Pakistan-based terrorist outfit Lashkar-e-Taiba on an Indian army camp at Uri in Kashmir was seen by many as retaliation by Pakistan for India highlighting the Balochistan issue. This has not been unnoticed in China. Hu Shisheng of the China Institute of Contemporary International Relations recently commented on India’s actions, saying , "If this kind of plot causes damage to the CPEC, China will have to get involved". In the meantime, the political cauldron is likely to stay on boil. Baloch separatist leaders, living in exile, have welcomed India’s stance. The effects were felt as far away as Europe, where Baloch people came out on the streets in Leipzig, waving the Indian flag and raising slogans against Pakistan. Brahumdagh Bugti, leader of the Baloch Republican Party (BRP), and the biggest bugbear for the Pakistani establishment, who has been living in exile in Switzerland, has been making pro-India statements, and has announced he will be seeking asylum in India. Sher Mohammad Bugti, spokesperson for the BRP, told ECFR from Geneva that, “We are hoping that India will help us, like it helped Bangladesh.” Policy experts in India are unsure if the changed stance will pay off. “You get on the wrong side of China if you support any form of separatism and bring in Baloch asylum seekers to India. China will naturally question India’s stand on Tibet and the Uyghurs,” says Alka Acharya, of the Institute of Chinese Studies, in Delhi. The conflict in Balochistan is an illustration of the challenges China meets in its attempt to build a transportation network throughout Asia. For now, it is settling for the time-tested wait-and-watch policy. Europe, for it's part, needs to take notice of developments in Balochistan not only in view of the massive human rights violations, but also due to the impact the conflict has had and could have on the region as a whole. Balochistan illustrates that Pakistan has an increasingly central role in the emerging competition between China and India. Although the EU can only play the role of an observer, it should urge Pakistan and India not to begin a proxy conflict in Balochistan – the danger for regional stability is too great.



Time to Rethink India's Approach on OBOR Jabin T. Jacob, PhD, Fellow, Institute of Chinese Studies

When Indian Prime Minister Narendra Modi and Chinese President Xi Jinping met for their bilateral on the sidelines of the 8th BRICS Summit in Goa two issues dominated. One was the Chinese resistance to India’s membership of the Nuclear Suppliers Group (NSG). The other was China’s refusal to support UN action against terrorists living under state protection in its ally Pakistan, who were involved in the attack on the Indian Parliament in New Delhi in 2001 and the 26/11 attacks in Mumbai. It is unlikely that New Delhi will get anywhere with the Chinese on either issue. The reasons are rather simple. One, NSG entry for India would be an acknowledgement of Indian exceptionalism in international relations, something the Chinese are loathe to concede given their own self-perception as an Asian and global power. Two, any public Chinese criticism of Pakistan on terrorism seemingly at Indian behest would seriously set back the China-Pakistan alliance, a risk that India has given little cause for the Chinese to think it worthwhile. What is probably central to resolving such Indian problems with China, however might be New Delhi’s response to China’s ‘one belt, one road’ (OBOR) initiative. Sold by the Chinese as an infrastructure and economic development project, OBOR is read by the Indians – and correctly so – as a deeper strategic initiative. The rather unimaginative Indian response however, has been to simply oppose or cold-shoulder the Chinese initiative. A case in point is the very legalistic Indian opposition, valid as it may be, to the China-Pakistan Economic Corridor (CPEC) – the unofficial ‘flagship’ project of the OBOR – based on the fact that it runs through Indian territory in Gilgit-Baltistan under Pakistani occupation. However, since the Karakoram Highway was first built through this area in the 1970s, it also needs to be noted that New Delhi seems to have done precious little by way of influencing or trying to bring this region back into the Indian fold. The Chinese, meanwhile, have taken the huge risk – as ambitious players and aspiring great powers are wont to do – to complicate their hitherto simple relationship with Pakistan and shift it from an interaction only with Pakistan’s military and political elite to one that brings them in greater 27 China Watch · Watch China

China and Central Asia: A Common Vision to Achieve Regional Security and Prosperity

contact with ordinary Pakistanis. This is a move that risks damaging their positive image among Pakistanis and indeed, some of this already in evidence in the newspaper editorials and statements by Pakistani intellectuals, as well as questions about where the promised jobs are, what the terms of contracts are, what the actual price of power will be. The Chinese embassy in Islamabad is desperately trying to tweet its way out of the problem and have given the short shrift to China’s vaunted principle of non-interference in the internal affairs of other countries by meeting all and sundry from across Pakistan’s political spectrum and signalling to the Pakistani Army to take over management of the CPEC from the civilians. Why is all of this of interest to India? While it correctly perceives the intention of the OBOR as regional and global domination, New Delhi also ought to see from China’s experiences with CPEC so far that the OBOR is not a well-thought out plan and that it is prone to multiple vagaries. That said, the Chinese have the will and wherewithal to both stay the course and make the adjustments necessary as they have in pulling out or downgrading several CPEC projects or asking the Pakistanis to show them the money first. Thus, from the Indian perspective, OBOR/CPEC has four implications. One, it is open to change in course and content and Indian engagement therefore, is also an opportunity to shape the OBOR to Indian needs and interests. Two, given that the CPEC appears to be floundering, Indian willingness to participate and obviously create greater economic viability would also generate great goodwill within important sections of the Chinese state. This goodwill could well influence politics elsewhere including on the NSG and a willingness to increase pressure on Pakistani state actors on terrorism both in private and in public. Three, participation in the CPEC specifically, and OBOR more generally in Central Asia and Southeast Asia also allows India to play the role of a ‘swing factor’. An Indian buy-in into the Pakistani economy through the CPEC, for example, is also an opportunity to influence Pakistani politics and state actors. Will the Pakistanis or the Chinese agree? There will be groups in both countries that will see business sense in involving India and might well push both their as well as the other side to agree. India will have to take the initiative. And so four, to make all of this work, will require the Indian government to restructure, reorient and expand its foreign policy establishment as well as expand and improve its military diplomacy and the country’s intellectual capacities on its near neighbourhood. 28 China Watch · Watch China


Prospects of Political and Economic Cooperation of Kazakhstan and China Elmira Kagazbaeva, Bekzat Baktybekova

1 Introduction An important role in the structure of gross domestic product plays oil and gas sector, as well as mining and processing of metals, coal and other raw materials. Kazakhstan plays an increasingly prominent role on the world stage both economically and politically.According to the World Trade Organization, Kazakhstan occupies the 40thplace among world exporters. According to some export items the republic occupies a leading place in the ranking of world exporters.For example, Kazakhstan is a country with the richest hydrocarbon resources in Central Asia. Kazakhstan is a world leader in exports of chromium oxides and hydroxides, quartz, bituminous mixtures based on natural asphalt and petroleum bitumen. The republic occupies the third place in the ranking of world exporters asexporter of radioactive chemical elements, as well as chrome ores and concentrates. At the beginning of 2014 in Kazakhstan there were 10 special economic areas and 10 industrial areas, which operate in various sectors of economy such as chemicals and oil-gas industry, metallurgy industry, information and communication technology, textiles, logistics and tourism. In the territory of special economic areas operate 83 productions with investments of 203 billion KZT, 68 projects are in the implementation phase with investments of 1.8 trillion KZT, 348 projects are at the stage of investment decision making with investments of 571 billion KZT. President of the Republic of Kazakhstan, Nursultan Nazarbayev, does his best to createsound and strong ties with other economies in the context of common interests of countries. Overcoming of raw material economy is currently the main objective of economic policy of Kazakhstan. Strategy "Kazakhstan-2050" is aimed at decision of this problem, Strategic Plan of Development of Kazakhstan until 2020 and State program of industrial and innovative development of Kazakhstan for 2015-2019. Main benchmark of public policy is to turn the country into a regional hightechnological, export-import, investment, financial and trade center. General ides of Kazakhstan is presented in Table 1. PRC is the largest country in the world in terms of population and the second economy after USA. Besides, China is a near-border of Kazakhstan. Two countries haveclose economic relations in recent years, 29 China Watch · Watch China

Kazakhstan and China are two countries developing dynamically in Asia. Two countries share a common border and increase their economic and trade cooperation actively in recent years. Joint projects between two countries and scope of their implementation, bilateral trade and economic relations, as w e l l a s p ro s p e c t s o f joint bilateral political and economic activity in the context of the situation that now exists in the world economy and politics are analyzed in the article.


Table 1. Main data on the Republic of Kazakhstanhttp://www.stat.gov.kz/

trade turnover is constantly increasing. According to potential and power China's economy in future may become a leader of the world's economic system. Kazakhstan is aiming to strengthen its position in Central Asia and diversify its economy by developing different sectors. In this respect it is interesting to see what projects has been already implemented in the framework of the Kazakh-Chinese relations. The date of bilateral relations appearance can be considered January 3, 1993. Then diplomatic relations were established between the Republic of Kazakhstan and PRC. Main document describing relations of the Republic of Kazakhstan and China was a treaty of friendship, neighborliness and co-operation, which was signed on December 23, 2002. Principles of the Kazakh-Chinese relations and main directions and spheres of bilateral cooperation were described in this treaty. It is worth to note that in almost all areas of these two countries there are inter-agency and intergovernmental agreements on cooperation. The highest meaning for foreign policy of PRC had covenants with the Republic of Kazakhstan, with which the level of "strategic partnership" was reached in 2005 that for Chinese diplomacy may be comparable with the level of allied relations. Initially it was the Joint Declaration on establishment and development of strategic partnership dated July 4,2005, and in 2011 the People's Republic of China and the Republic of Kazakhstan established "relations of comprehensive strategic partnership". Treatiesbecame foundations for work of the intergovernmental committee 30 China Watch · Watch China


on cooperation. By mid-2000s, four main areas of cooperation in following sectors were identified: security, political, trade and economic and humanitarian. Directions were reflected in the work of subcommittees on specific areas of cooperation.New problematics including water-energy component, environment, etc. has appeared. China offered to make better use of new mechanisms for cooperation, which, together with political components formed "environment" for cooperation. There were included mechanisms in financial and economic sector (interbank and investment cooperation, credit agreements and contracts, grants). In 2015 President of the Republic of Kazakhstan Nursultan Nazarbayev visited officially China. The visit resulted insigning a package of documents totaling more than 23 billion USD. This visit was another turning point of the Kazakh-Chinese relations. Kazakhstan and China are working closely and support each other in the framework of the Conference on Interaction and Confidence-building in Asia (CICA), Shanghai Cooperation Organization (SCO) and in the framework of the Congress of Leaders of World and Traditional Religions, coordinate their positions on matters related to UN activities. What is very important, Kazakhstan has always supported China regarding Taiwan issue and is against so-called Taiwan independence. In general, ongoing development of political dialogueshould be noted. Process of bilateral and multilateral relations between China and Kazakhstan is an example of evolution of Chinese policy and its growing experience. Among the largest and most significant Kazakh-Chinese projects the following should be highlighted: - Plantwhich is currently under construction of «Asia Steel Pipes Corp» LLC in Almaty city for production of welded steel pipes of large diameter of capacity of 150 ths. tonswill meet needs not only of Kazakhstan's oil and gas sector, but also of markets of the Customs Union, Central Asia, Iran and the Caucasus. - Construction of copper-smelting plant of«KazMinerals» JSC in the East Kazakhstan region with capacity of 300 000 tons of copper per year will start in 2017. This project will help Kazakhstan become a major coppersmelting hub. - Currently it is exported as a raw materials. Construction of the second stage of electrolysis plant for production of primary aluminum. This project will allow to process up to 85% of all alumina produced in Kazakhstan. It is currently exported in the form of raw materials. - Establishment of an integrated gas chemical complex, which will 31 China Watch · Watch China


produce up to 500 thousand tons of polypropylene per year can also be included. Among implemented and ongoing projects one should pay attention to: - successful implementation of the first phase of passenger cars production project of brand «JAC» in the amount of 40 million USD (700 pcs. of passenger cars were produced in 2015). The second phase will increase local content to 50% and pass competence to Kazakhstanis. In general, the main task for Kazakhstan - creation of new and better jobs for Kazakhstanis.Successful implementation of joint KazakhChinese industrial and innovative projects will allow by 2022 to create 15 thousand work places for Kazakhstanis. Currently, 600 work places are created as part of already implemented projects. New productions will be created in almost all regions of Kazakhstan. The main part will be built in 2016-2017 with completion until 2018-2022.Kazakhstan will get new high-tech industries, new work places, tax revenues, advanced training of Kazakh specialists, markets for final products. China, in turn, receives goods, which requires production and Chinese population. According to data of KAZNEX INVEST 375 investment projects with participation of foreign investors in the total amount of 76.1 billion USD are in process. Among them, Chinese companies are implementing 79 (21%) projects amounting to 27.9 (37%) billion USD. According to the National Bank of the Republic of Kazakhstan, during the period from 2006 until the 1stquarter of 2016 Kazakhstan attracted 218.8 billion USDfrom foreign direct investors, including from China - 13.2 (6%) billion USD. Currently, the largest investors from PRC are oil and gas companies, for example, China National Petroleum Corporation. The cooperation program of Kazakh-Chinese industrial and innovative cooperation will attract Chinese investors namely to the non-resource sector of the economy. Among the list of 51 joint Kazakh-Chinese projects in the framework of industrial and investment cooperation in 42 projects Kazakhstan is a majority shareholder, in 23 projects China is a contractor or supplier of equipment, while a buyer will receive services or equipment at reduced rates. At the end of January 2016 Minister of Investment and Development of Kazakhstan Aset Issekeshev arrived in Pekin on a working visit. During the visit, there were hold more than 20 meetings with leaders of major Chinese companies. The most important purpose of meetings was to discuss projects implemented in the framework of the KazakhChinese program of industrial and investment cooperation, as well as meetings with leaders of prospective companies that intend to implement 32 China Watch · Watch China


investment projects in Kazakhstan. Among 52 projects, 11 projects will begin construction this year and implementation of these projects will lead to creation of about 5 thousand new permanent work places. Regarding the rest, construction is expected to start in 2017-2018. In general, all projects will create approximately 19 thousand permanent work places. In the framework of theProgram work is performed with multinational companies such as China Gezhouba Group, CNPC, Sinofert, NFC, COFCO, Rifa Holding Group, CMC, Sinosteel Jilin ElectroMechanical Equipment Co., Inspur Group, etc., with which during his visit the Minister met. Meetings were also held with such major potential companies as AVIC International Holding, SINOMA, Shenyang Lianli Copper, Huatong Electric Wire & Cable Group, China National Seed Group, Oriental Patron and others. Major projects of the Program: construction project of Karaganda complex alloys plant for production of innovative metallurgical alloy of Aluminum Ferrosilicon (cost of the project is 260 million USD); construction of the third stage of "Aluminium of Kazakhstan" in Pavlodar and related facilities of energy infrastructure (total project cost isnearly 700 million USD); construction of new copper-smelting plant inEast Kazakhstan Region, a joint project of companies KazMinerals and Baiyin Nonferrous Group (project cost is 1.6 billion USD); construction of light rail systems in Astana (project cost is 1.9 billion USD). Among already achieved results, there can be distinguished development of mutually beneficial cooperation of Aktobe oil field, commissioned AtasuAlashankou pipeline, implementation of joint construction project of the road "Western Europe-Western China". It should be noted that according to the Ministry of Economy of the Republic of Kazakhstan, at the beginning of 2016 in the territory of Kazakhstan there were registered 2500 companies with Chinese participation, more than 500 of them are joint Kazakh-Chinese enterprises. For a long time our countriescooperated in energetic and resourceexploration industries. Now, in the framework of the so-called project "relocation of Chinese enterprises to the territory of the Republic of Kazakhstan" it is planned to implement 51 projects, mainly in the processing branch of economy. For the purposes of Kazakhstan-China oil pipelineproject, it was necessary to ensure flow of oil from regions of West Kazakhstan and Aktobe to the Chinese market. In order to resolve this issue on December 20, 2006 between China National Petroleum Corporation (CNPC) and Joint-Stock Company National Company "KazMunaiGas" there was signed an Agreement on basic principles of construction of the second 33 China Watch · Watch China


Table 2. Data on trade of China with countries of central Asia in2012 phase of the Kazakhstan-China pipeline. Implementation of the first phase of Atasu-Alashankou and the second phase of Kenkiyak-Kumkolwas conducted on a parity basis by Chinese and Kazakh parties. Construction of Kenkiyak-Kumkolpipeline was completed in September 2009. The studies carried out show a growing level of China's influence on

Table 3. The volume of China's direct investment to the countries of Central Asia, (mln. USD) 34 China Watch · Watch China


Kazakhstan, but a significant increase in export-import operations between two countries to a large extent is achieved through investment policy of PRC. So, if in 2002 contribution of China’sGDP in GDP dynamics of Kazakhstan was 9,3%, then in 2013 - already 28.9%. One of the main trade partners of Kazakhstan is China. Thus, Kazakhstan's trade weight with China increased from 8.1% to 17.2%. Each statestudies own interests in foreign policy. China and Kazakhstan have the same interests when it comes to the need for social and economic development, security and stability in Central Asia. In addition to bilateral relations, Kazakhstan and China cooperate in the framework of SCO. Founded in 2001, SCO promoted protection of economy and China's strategic interests in Central Asia. As shown in Table 1, China is the largest trading partner of four among five countries of the region (with exception of Uzbekistan). During the trip, President Xi Jinping, Chinese state media reported that the volume of trade with Central Asia exceeded 46 billion USD in 2012. As shown in Table 3 at the end of 2011 the main volume of direct Chinese investments are concentrated in Kazakhstan, which is 70.87%, investment in Kyrgyzstan over the past three years extremely increased and amount about 13.02% of total direct investment of China; share of the other three countries in terms of investments is relatively lower, especially in Uzbekistan they amount to 3.88% of total volume, that shows us uneven distribution of Chinese direct investments in Central Asian region. «Nurlyzhol» –"Economic way of Silk Road" as a measure of cooperation deepening between Kazakhstan and China Transport is a necessary condition for development of national economy, basis and prerequisite for development of foreign trade relations and cross-border cultural exchange. 2. "Initiative "One belt - one road"and cooperation of the Eurasian Economic Union. "Great Silk Road" is a project of creating transport, energy, trade corridor between the countries of Central and South Asia and Europe, named in honor of acting from the II century BC caravan routes from China to Europe. The project aims at intensifying of scientific and technical cooperation and deepening of economic cooperation between the states. The concept of creation of Economic Belt of Silk Road, as one of new strategic directions of development of China's foreign trade, was first announced by Chinese President Xi Jinping in September 2013, during his speech at Nazarbayev University in Kazakhstan. New concept provides for creation of more favorable conditions for promotion of Chinese goods, 35 China Watch · Watch China


services and capitals in Central Asia, Russia, the Near and Middle East, as well as in Europe. Later, during his visit to Indonesia of 21stinformal meeting of APEC leaders, it was supplemented by the concept of "Maritime Silk Road of XXI century". At the end of 2014 President of Kazakhstan announced a new economic policy "Nurlyzhol", aimed at continuation of structural reforms in Kazakhstan's economy over the next five years. New economic policy of Kazakhstan "Nurlyzhol" and Chinese program "Economic Way of Silk Road" pay great attention to development of transport infrastructure, complement each other and allow to deepen cooperation between countries and regions. In the framework of Chinese program"Economic Way of Silk Road" Kazakhstan is becoming a transit bridge between Europe and Southeast Asia. Transport communications, expanding trade and economic relations between Kazakhstan and China, will contribute to development of cities, along which international traffic artery passes, in particular, development of service sector - hotel and restaurant business, maintenance sector, logistics, tourism, and will be a catalyst for regional international integration. All of this suggests that in case of proper building of cooperation between the Republic of Kazakhstan and the People's Republic of China, one can achieve effective development of small and medium-sized enterprises in the regions of Kazakhstan. Economic belt of Silk Road (EBSR) in China is considered as part of civilizational task of the state - "discovery of itself." It focuses on three objectives: promoting development of western regionsof China, strengthening of trade relations and economic cooperation between central and western regions of China and countries of Central, South and West Asia, as well as European countries. It is assumed that in the framework of Economic Belt of Silk Road of China it will be possible to realize potential of Ningxia and Xinjiang provinces and Shaanxi, Gansu and Qinghaimore fully.Initially Economic Belt of Silk Road was conceived as an infrastructure project of transport corridor between Asia-Pacific countries in the east and Europein the west, stretching over 10 thousand kilometers. It originates in the Chinese port of Lianyungang, passes through cities of Great Silk Road Xi'an, Lanzhou, Urumqi, - cities of Kazakhstan, Russia, Europe and ends in Dutch Rotterdam. New interpretation of initiative has already covered almost entire Eurasian continent. Volume and potential of markets of 18 countries which can enter it in case of implementation, are among the largest in the world. In addition, China will have access to wealth power, mineral, touristic,



Fig.1 – Mapoftheroute «Economic Beltof Silk Road» cultural and agricultural resources of Eurasian region. Conceptual base of the project is very interesting. At this stage Economic Belt of Silk Road is promoted bygovernment of China as a geopolitical economical project for development of a multipolar and open cooperation process. Leaders of PRC specifically emphasize that it is not a questionof union or hegemony, but first of alla question ofinteraction on the basis of cooperation and consultation, which should correspond to desire of Eurasian countries to economic development, implementation of needs of economic interaction, balanced and coordinated development between West and East, allow Eurasian countries to maintain closer ties, deepen cooperation, expand space for development.In reality it is an integrated project, which develops cooperation idea of China with Eurasian countries. It should be noted that the initiative is based on a sufficiently strong economic base created during previous years. China is the largest trading partner of Russia, Kazakhstan and Turkmenistan, the second partner of Uzbekistan and Kyrgyzstan, the third partner of Tajikistan. Today, one of the most urgent and acute problems in Kazakhstan, as well as in cooperation with China and other countries - transport and communication infrastructure. China in its development follows the principle: « 要想富 , 先修路 », which is translated as: "If you want to be rich, build a road." Figure 1 reflects the trend of regional economic development of the New Eurasian Continental Bridge from Asia to Europe. Horizontally, East - China, West - Europe and between them inside U - is Western China and Central Asia.Verticalaxisreflectsle velofeconomicdevelopment. In the figure it is clear that in spite of established communication, level of economy of the East and West is 37 China Watch · Watch China


much higher than in the countries of Central Asia and Xinjiang. With rich natural and mineral resources,economy of Central Asia has not reached proper level of development. In this regard, there is a big gap between economies of the West, East and Central Asian countries. Low level of the economy leads to a backward transport communications, which in turn hinder development of the country and economy of the region. Thus, The main thing for the Republic of Kazakhstan is the issue of improving transport communication, to study China's experience in road construction, production of high-quality cement. As you know, China is the world leader in the production of cement and cement products. At the same time, we should not forget about annually raised issues regarding improvementof the situation in the field of international transport, improvement of cooperation mechanisms and infrastructure, improvement of system and operation mechanisms at customs offices of the country. Regarding access to fields of raw materials and other minerals, it should be noted that main reserves of Central Asian oil are concentrated in the Republic of Kazakhstan. Since the end of 2000s China is expanding its presence in the oil and gas industry of the country, buying assets of Western companies. At the same time, China's actions have received support of authorities of the Republic. In this regard, example of American company Conoco Phillips is demonstrative, which in 2013 decided to sell its stake in Kazakhstan's project Kashagan, but did not consider China as a buyer. The Government of the Republic of Kazakhstan took advantage of the priority right to purchase the company, the share of which was then sold to Chinese CNPC. For delivery of Kazakh oil to Chinese consumers pipeline with capacity of 20 mln. tons per year was built. Currently, due to falling production volumes and suspension of some of projects, Russian oil is transported through the pipeline. Turkmenistan is a gas supplier of the Chinese market. By the end of 2000s entire volume of Turkmen gas was sent to Russia. In 2009, China allocated funds for arrangement of group of gas fields Galkanysh, becoming the only foreign company which gained access to the development of Turkmenistan's onshore fields. Today, China has built a pipeline network for delivery of Turkmen gas to its territory, and after Russian refusal to purchase Turkmen gas is the main market for Turkmenistan. Let us consider the task of developmentof western regions of China in the framework of Economic Belt ofSilk Road in details. Development policy of western areas was officially proclaimed in 1999. In accordance with it, development of industry of western regions was conducted, which implies, in particular, search and expansion of markets for products of 38 China Watch · Watch China


Chinese manufacturers. In this context, Central Asian states are deemed attractive sales markets. In the framework of the concept implementation of economic belt of Silk Road infrastructure projects allowing not only to ensure unhampered delivery of Chinese export goods to other regions of Eurasia and to load production capacities of the country, but also to increase economic interdependence of the countries participating in the project prevail for China. Today, almost 94% of containerized cargo from China to Europe are delivered by sea and only about 6% are performed by land transportation. Despite this, in order to diversify supply, China intends to develop land routes, and Central Asian region playsa special role in this process. Agreement Establishing Eurasian Economic Union was signed on May 29,2014 by participating countries of the Customs Union and Common Economic Space. The Union consists of Armenia, Belarus, Kazakhstan, the Kyrgyz Republic and the Russian Federation. Within the framework of the Eurasian Economic Union freedom of movement of goods, services, capital and labor, conducting of coordinated, agreed and unified policy in various branches of economy are ensured. Purpose of the Eurasian Economic Union - ensuring conditions for stable development of economies of the Member States in order to improve living standards of their populations, comprehensive modernization, co-operation and competitiveness of national economies in the global economy. Today, progress has been made in the development of transport and logistics and communications infrastructure - Kazakhstan-China logistics terminal in the city of Lianyungang (PRC) as part of transcontinental highway "Western China - Western Europe". Lianyungang port is one of 25 largest ports of the world with a developed transport infrastructure. Cargo area allotted for Kazakh-Chinese terminal in the port is 21.6 hectares. This complex is managed by Kazakh-Chinese joint venture company "Kazakhstan-China International Logistics Company," which will provide processing and handling of Kazakh transit cargoes in the countries of Southeast Asia, Australia and Canada, as well as goods in return direction. This will provide a full package of services for carriers of all kinds of transport in export-import and transit traffic. Thus, Kazakhstan and China create all conditions for deepening trade relations and regional international integration. This terminal will also allow the service sector in Kazakhstan reach a new level, to expand geography of exports and accelerate development of trade relations, in particular, to reduce terms of transportation of both exports and imports. 39 China Watch · Watch China


Thus, in matters of trade, economic and investment cooperation Kazakhstan and China benefit from joint policies and projects in these areas by developing its economy and strengthening cooperative relations. Conclusion. Consequently, China has decided to open for its northern and western provinces a new corridor of opportunities as the project of economic belt of Silk Road. But the Eurasian Economic Union opens similar opportunities. Project "One Belt – One Road" is advantageous for countries of the Eurasian Union. Firstly, it will attract flow of new investments. Secondly, it will animate development of new territories. Thirdly, the country will be able to generate income from transit. Cooperation with China will allow to hope that a variety of branches of economy of the Eurasian Economic Unionwill have new impulse. Financial institutions and transport infrastructure created by China can be used by the Eurasian Economic Union countries for the benefit of national economies. In geopolitical sense, "Silk Road" will be a key factor in economic confrontation between East and West. Perhaps it will lead to demise of Grand Atlantic and rise ofEurasian. Consequently, participating in the development of transport corridors through the territory of Central Asia within the framework of concept implementationof Economic Belt ofSilk Road, China solves several problems. Higher priority is given to development of western regions of the country through expansion of exports of their products in the countries of Central Asia and the Eurasian Economic Union, which will lead to leveling of economic development of East and West of China and meet need for new markets for growing Chinese economy. To a lesser extent diversification of supply routes to Europe products. In addition, as shown by recent initiatives, China is interested in expanding its participation in economy of Uzbekistan and Iran through infrastructure development. In summarizing the foregoing, it is necessary to note that China's initiatives are created to ensure development of new type of strategic partnership and implementation of Chinese concept of “westward motion". Moreover, under the term "West" is meant Central, South and West Asia, the Middle East and Europe. Ideology of these projects is not limited to establishment of transport infrastructure, it is associated with creation of information, financial and other networks. Their implementation will require billions of dollars of investments, which will be carried out by Chinese companies in yuan, not in dollars. As a result, 40 China Watch · Watch China


the Chinese yuan (RMB) will make one, but very important step on the way to becoming a reserve currency. Regarding cooperation of projects ofthe Eurasian Economic Union and Economic Belt of Silk Road should be said that it brings great opportunity for China and all countries of the Eurasian Economic Union. Despite concrete results of bilateral relations between Kazakhstan and China, in particular, new economic programs for improvementof conditions of trade and economic, investment, cultural and educational cooperation, the countries still should solve many problems: in social sphere, in international traffic, investment activity, etc. In trade and economic relations, it is important to move from limited cooperation with the western region as Xinjiang, to closer partnership relations with dynamically developing domestic, eastern provinces and free economic zones of China. As it was noted above, in the framework of construction of transcontinental highway "Western China - Western Europe" KazakhChinese terminal at the port of Lianyungangwas set up, which aims at providing export and transit cargo flows. In this connection it is necessary to expand the work on informing local and foreign population and business-structures about activity of the terminal, ensure its operation at full cargo-handling capacity, ensure provision of services in accordance with international standards. Anti-corruptioncampaigniscarriedoutactivelyinChina. Corruption is one of the urgent problems in Kazakhstan and an obstacle to political and economic development of the country. Taking into accountseparatecommon mentality, traditions and cultures of the countries, Kazakhstan and China would carry out activities at intergovernmental level for exchange of knowledge and experience in the matters of fight against corruption. Thus, we can conclude that Kazakh-Chinese relations are characterized by persistently high level and dynamics of development, regulated legal framework, built organizational structure and strong ties at the level of bilateral cooperation.



Theoretical and Ideological Fundamentals of Modernization of China: Experience for Kazakhstan Dauyen Dinara, Faculty of Oriental Studies, Kazakh Ablai khan University of International Relations anf World Languages, Almaty, Kazakhstan INTRODUCTION Modernization of China is one of the most important and debated topics in modern Sinology. Modernization of China is a topic which is now being studied with great interest by many scientists around the world. Modernization is the process that gave China a second wind, a process that was being perfected over the years, this is the practical implementation, which was based on the best theoretical base. Modernization of the country, which covers a wide range of industries, has placed China on the top positions in the world community. We witness today unprecedented achievements of China that it was able to achieve due to modernization and it would be superfluous to repeat it. However, the path and methods of modernization are interesting and important, as they can serve us as a model. Today modernization is one of the most important issues in the life of Kazakhstan too. Kazakhstan, as a young country, carries out modernization for development of the country. After the collapse of the USSR, Kazakhstan had to build statehood anew. Thus, the theoretical origins pledged to the basis of modernization play an important role in the modernization, determine the success or failure of modernization. MATERIALS AND METHODS OF RESEARCH This article was based on the analysis of the available theoretical and ideological data, political views of the leaders of the country, national development programs and on the basis of previous studies. As a basis selected works of leaders and political figures in the country, such as Mao Zedong, Deng Xiaoping, Lin Biao, Liu Shaoqi and others were also taken. MAIN PART At the beginning of China's modernization basic frequently asked question was "Will China success?". Today we can say with confidence: "Yes, China succeeded." They predicted that "China will collapse in the near future", but China is still developing. We know that this is not the finish line. China has not yet achieved its main goals, and of course, there are many problems, but despite this China is modernizing and developing. Everyone knows that China did not just copies. In China, any action in 42 China Watch · Watch China

This article considers the theoretical basis for the modernization of China and Kazakhstan. As a rule, the practical realization of modernization is not possible without a good theoretical basis. Under the theoretical basis the ideas and strategic plans of country modernization are understood. As we k n o w, C h i n a h a s n o t realized modernization of the country for a short time. China was coming to this for years. The ideological foundation was built, not suitable ideological ways were declined. Properly chosen path became the key to successful modernization of China.


the development of the country, and not only in developing of the country, is studied carefully before use, and enforced in accordance with the compatibility with the mentality of the people. This lets us understand that the new model of modernization of China arose not accidentally and not in the short term. As noted in the annual report of the study group of Chinese modernization, led by Professor He Chuantsi: «China’s modernization has gone through 140 years since 1860. The exploration and construction of China’s modernization experienced roughly three phases. The first phase was the modernization efforts made in the 1860~1911 period of the Qing Dynasty, the second phase was the modernization exploration in the 1912~1949 period of the Republic of China, and the third phase was the modernization exploration and construction since 1949" ). To understand how much it is true, we tried to compare the ideas and views of several historical persons that played an important role in the development of China in different periods. Question of modernization of Chinese society is not a spontaneous decision. It rose in the early times in the writings of Chinese thinkers. Ideas and thoughts of Chinese philosophers, ideologues of different eras on governing the country gave rise to the Chinese leaders. Leaders of the new China having rethought and transformed these traditional views on the management of their countries, implemented them in the new interpretation. If you refer to the works of Chinese authors, the specific problem modernization of the country came after the start of the Opium War in 1840, which resulted in the Western capitalists invaded China and turned the country into a backward semi-colonial country. But in that time it was not possible to adequately implement the modernization of the country because of the prevailing regulations and that fact that ideas were not deep. Actually China is peculiar to precautionary approach in borrowing of foreign socio-political doctrines and experience of socio-economic development. The first attempts to modernize China with advanced European science, technology and weapons were made in the second half of the XIX century. Interest in this problem in the future increased due to formation of new social layers associated with modern forms of social life, the expansion and development of the national-revolutionary forces, and as Chinese intelligentsia become familiar with the achievements of the of Western civilization. At the turn of the XIX-XX centuries teaching Chinese reformers are not limited to simple borrowing of scientific and technical achievements of the West, and included projects of wide changes in the economics, 43 China Watch · Watch China


the political system, in the field of public education, in creating a new culture, that is, in all main areas of life in Chinese society. At the end of the XIX century the leaders of the reformist movement Kang Youwei and Liang Qichao made a detailed program of renovation of China. In the early XX century, a comprehensive program of building a modern highly-developed state based on achieving national independence and the implementation of radical political and economic reforms developed by Sun Yat-sen. The fundamental task of reforms he saw in achieving full national independence of the Chinese nation from the domination of the Manchu dynasty, and from the leading imperialist powers (the principle of "nationalism") as the main condition for the stable development of the country. Sun Yat-sen tried to lead China through a special path of development at which it was possible to "prevent" the development of Western-style capitalism, seeing it as the only source of wealth inequality and social conflict. Sun Yat-sen called for a gradual transition to democratization through intermediate stages, when there would mature the necessary conditions for the country's accession to the period of "constitutional government", which marks the implementation of the democratization of the political system. State expressing the interests of the "common people", was to ensure the harmony of opposing social interests and to help all the needy classes and segments of society, including workers and entrepreneurs to. As the Chinese researchers point out, Sun Yat-sen’s program in that time was at the deepest understanding of the essence of modernization since its implementation for the first time was made conditional on the overthrow of the feudal political system and was linked with the creation of a democratic republic as a guarantee of the policy of modernization, the formation of a democratic political system and the solution of the agrarian question, the key stage of China's modernization. In his political testament Chiang urged his compatriots to continue to implement the Three People's Principles of Dr. Sun Yat-sen: to seek rehabilitation and return to life of China mainland, to revive the national culture, and to vigorously defend democracy. In the 30s Chiang Kai-shek tried to introduce in China "totalitarian model of modernization," modeled on Germany, which attracted him by the relation to the state as the highest substance, standing above all citizens and having absolute power over them, embodying nation interests. In the 20-30s in China various approaches to solving the problem of modernization were discussed: from total "westernization" of the country 44 China Watch · Watch China


by borrowing Western scientific and technological achievements and political system, as well as spiritual culture to the integration of the West and the East on the basis of "complementarity" of Chinese and western civilizations, which should lead to a change from "European" to " Confucianism". Reform movements of Kang Youwei were also built from the idea to raise backward China. The main problem Kang Youwei was trying to solve for all his life and which became a stumbling block for all Chinese thinkers of the late 19th - early 20th centuries, was the country's modernization while preserving its cultural identity. Trying to solve this problem, Kang Youwei sought analogue to Western Theory of social progress in the classical Confucian literature. Not less important person in the history of China, philosopher, one of the leaders of the reform movement in China Liang Qichao interpreted Kang Youwei’s doctrine expressed in traditional Chinese science, and above all "canonical school of new texts", meaningful wording as a sample of native theory of socialism according to which "the state and the family are completely dissolved in the society." After a trip to Europe in 1918 at the Paris Peace Conference Liang Qichao took a sharp anti-Western position. Liang Qichao urged to consider socialism an ideal of the distant future of China and focus on the fight against the oppression of foreign capital and the development of domestic industrial enterprises. Although all the activities of Mao Zedong were very controversial, and not always appropriate, of course, focused on the rise of China. Mao Zedong moved the idea of national liberation of China, and its subsequent "self-empowerment" through the realization of the traditional idea of a "strong state and the rich people." Actively participating in revolutionary activities, he was looking for that social force that was able to lead the struggle for national liberation and for the elimination of elements of feudalism that hampers the country’s development, and then for the revival of the former might of China. Influenced by the vicissitudes of the revolution and the accumulation of political experience, Mao Zedong initially pinned these tasks to the entire Chinese nation as a whole, then, alternately, the different classes of Chinese society, while in 1927 did not put forward the thesis of the hegemony of the peasantry. In 1930, Mao Zedong openly opposed against dogmatic attitude to Marxist theory and Soviet experience of revolution and civil war, and called to follow the principle of "realistic approach to reality." According to it, he began to develop a theoretical platform of the Chinese 45 China Watch · Watch China


revolution, based on many years of practical experience of the existence of revolutionary bases. This process culminated in the late 30s by "Sinicization" of Marxism and the nomination as "Sinicizated Marxism" his own theoryf national liberation and social reconstruction of China, the theory of "new democracy" . Considering the peasantry as the driving force of the "democratic bloc", Mao Zedong defined "the new political system of democracy" as "the provision of power to the peasantry." In practice, this meant providing CCP authorities because, as Mao Zedong emphasized, it is the only party in the country that expressed the interests of the peasants. This program actually was not addressed to any particular class, but the entire Chinese nation. She contrasted the "enemies" of the nation like landlords, the bureaucratic bourgeoisie. The main role in the implementation of regulatory functions inevitably fell on the Communist Party as the leading party of the block. Preparing CCP to fulfill such a role, Mao Zedong during the development of the theory of "new democracy" pursued a policy of turning Communist Party into a national organization designed to unite the Chinese nation. In the early 40s, a campaign was pursued to the grow of the number of members, resulting in that it has become a predominantly peasant party by social composition. Transition to socialism, guaranteed by the leaders of CCP was proclaimed as the ultimate goal of building new democratic state. The theory of "new democracy" until this day is regarded as a transitional period to socialism in Chinese social science. In essence, the theory of "new democracy" was the first comprehensive program of modernization of China, developed by the CCP. At the VII Congress of the CCP in 1945, it was adopted as the ideological and political platform of the party. Chinese social scientists in the 80-90's saw a path of "Chinese style" modernization in this theory based on "connecting basic principles of Marxism with the practice of the Chinese revolution." However, the leadership of CCP led by Mao Zedong in the early 50s renounced the policy of "new democracy" and established a general line of building socialism based on the Soviet experience. In September 1954, at the first session of the National People's Congress 1st convocation Premier Wen Zhou Enlai first proposed to carry out the installation of the four modernizations that indicated the desire of the Chinese leadership to go their own way in the construction of socialism in China, and in 1956, Mao Zedong criticized the Soviet model of socialism building and urged to regulate the relationships between the various 46 China Watch · Watch China


branches of the national economy on the basis of taking into account Chinese characteristics, primarily dictate the recognition of agriculture basis of the economy of the country at that stage of its development. It’s impossible to imagine the Chinese modernization without Deng Xiaoping, architect of China's reforms. The main theory of Deng Xiaoping is the construction of socialism with Chinese characteristics, upbringing Chinese people in the spirit of the "state patriotism" closely associated with "collectivism and socialism", as well as the fight against "foreign hostile forces" trying to "westernize" China. Deng Xiaoping made a number of key theoretical and policy provisions of the reform strategy, particularly the need for reform of industrial relations and the superstructure, preventing the accelerated development of the productive forces. Under these provisions, the reform of the economic system would begin in the countryside and be accompanied by reform of the political system that meets the challenges of modernization. Reform by Deng Xiaoping, does not mean the rejection of established Chinese socialist system, but improving the economic and political systems of socialism. Rejecting the dogmatic approach, Deng Xiaoping emphasized that the plan and the market - are just economic policy instruments that can be used under socialism and capitalism. At the XII Congress of the CCP in 1982, Deng Xiaoping put forward a detailed exposition of the course of building socialism with Chinese characteristics, in which the task was to create the material basis of modernization. Deng Xiaoping also puts emphasis on the need to reform the political system aimed at eliminating bureaucracy and corruption generated by it. It was emphasized that the reform of the political system has nothing to do with political liberalization on the Western model. Based on the fact that the main condition for the normal course of internal modernization is stability, he assigned a special role to the Chinese Communist Party in the political life of the country, seeing it as the only force capable to resolve the contradictions posed by the reform and thereby provide the necessary stability. At the XIII Congress of the CCP in 1987 fundamental principle was put forward according to which China is in the initial stage of socialism due to objective historical circumstances of socio-economic backwardness of the country, which will require a long time to solve. Building on reform, China's leadership headed by Deng Xiaoping on the third plenum of the Central Committee of CCP 14th convocation made theoretical "breakthrough" in 1993 by announcing connection market economy with socialism.



Final completion Deng Xiaoping's course for the implementation of socialist modernization in a shape of developed theoretical system received at the XV Congress of the CCP in 1997, in which Deng Xiaoping Theory was officially declared ideological and theoretical platform of the party. At each change of leadership of the country some changes come. However, for China, including the leaders of the ruling Communist Party "modernization of the country", "Chinese reform" is a common goal, which continues from generation to generation. Jiang Zemin, Hu Jintao had the same goal, and the current chairman Xi has the same goal, to successfully complete the modernization of China, to reach the level of spoken Mao Zedong, Den Xiaoping. The level previous leaders, nationalists, philosophers, dreamed about. The level which the reformers and revolutionaries fought for. Only ways to achieve it change and improve. Currently, in China there is a group that studies the process of modernization. The group, led by Professor Hу Chuanqi is carefully studying various theories of modernization, studying existing ideological and conceptual framework of China's modernization, generate a new theory of modernization of China. CONCLUSION In summary of the theoretical and ideological basis of China's modernization it can be said that China has no "foreign" idea and does not accept the theory and adopts in its original form. China changes it according to their traditional and national interests and characteristics. Thus, the reform and modernization of the country is the result of experience in China and the Chinese leaders over the years. Kazakhstan can extract the following from China's experience: - to modernize the country successfully in practice, Kazakhstan should carefully examine the conceptual framework of modernization; - Kazakhstan should have scientific validity; - should create a special body or group which will examine, review all issues related to the modernization of the country, will make recommendations for reform and identify preferred directions. - in the course of modernization should base on the specifics of the country, modernization is not copying the development of others, but conducting modernization drawing lessons and experience of others. - modernization must be carried out exclusively in the interests of the nation and all the people of the country and not for the personal benefit of 48 China Watch · Watch China


individuals. Theoretical and ideological basis for the modernization of modern China, which originates from the ideas and goals of Chinese Nationalists, leaders, philosophers today can be regarded as a strong foundation for a successful modernization China.



China's Economic and Military Expansion in Tajikistan Fuad Shahbazov

Following its economic expansion in Central Asia, China unexpectedly took a step to expand its military dominance in the region. In September 2016, Beijing offered to build 11 new border checkpoints and a new military facility along the Tajikistan-Afghanistan border, which raised some concerns in Russia. Although these moves could position China as a security player in Central Asia, Russian experts seemingly are doubtful about the future of any China-Central Asia military alliance. Notably, Russia has an entrenched presence in the region and its largest foreign military base is located outside the Tajik capital. China’s economic expansion in Tajikistan is a very young phenomenon. In the early 2000s, Chinese influence in Tajikistan was quite weak and limited, due to the lack of transport networks connecting both countries. Only after the opening of a new major highway between two countries did bilateral trade significantly increase. Another factor that contributed to the boost in Chinese economic activity was the availability of financial resources and readiness to invest even in less important sectors in Tajikistan. While few others seemed to be interested in investing financially in Tajikistan’s vitally important infrastructure, Beijing not only sponsored various projects but also got giant Chinese companies involved. Bilateral economic relations entered into a new stage in the shadow of the global economic crisis, in particular during a period of worsened Tajikistan-Russia relations. Russia’s pro-Uzbekistan position in 2009 over the Rogun dam dispute became the main catalyst that pushed Dushanbe toward China. Tajikistan, one of the poorest former Soviet republics, is heavily dependent on energy imports, particularly in the winter, and regularly experiences electricity outages. Therefore, construction of the Rogun dam is a matter of life and death for Tajikistan, which is in urgent need of energy. Authorities say the Rogun dam would be able to provide electricity, for the whole country. They say the dam could also provide parts of Afghanistan and Pakistan with cheap electricity. With Russia’s involvement in the Rogun dam stallin, Tajik authorities began seeking an alternative partner and economic counterweight, which it found in China. Obviously, China did not pretend to intrude into Russia’s “influence zone” but actively participated in fields that did not overlap with Russian interests. China’s main interest in Tajikistan is 50 China Watch · Watch China

“In September 2016, Beijing offered to build 11 new border checkpoints and a new military facility a l o n g t h e Ta j i k i s t a n Afghanistan border，these moves could position China as a security player in Central Asia. China has already set up an antiterrorism alliance with Pakistan, Afghanistan, and Tajikistan in order to boost coordination with regional countries to tackle the growing domestic militant threat. Seemingly, China is pushing all these countries for closer military and security cooperation.”


power-engineering. However, it did not aim to replace Russia as the main constructor of the Rogun Hydropower Plant. Through its growing economic influence, China has also expanded its presence in other fields, such as the military arena. Many claim that China’s actions in the Central Asian region, in particular in Tajikistan, are rational due to Beijing’s security concerns. By increasing expenditures in the security field in Central Asia, China seeks to create secured buffer zones along its borders with Afghanistan, Pakistan, and Tajikistan. China’s main concern is a growing threat from radical Islam in the region would sharply destabilize the situation in its own Xinjiang Uyghur Autonomous Province. China has already set up an anti-terrorism alliance with Pakistan, Afghanistan, and Tajikistan in order to boost coordination with regional countries to tackle the growing domestic militant threat. Seemingly, China is pushing all these countries for closer military and security cooperation. In October, 10,000 military personnel from both China and Tajikistan engaged in five-day counterterrorism exercises held in Tajikistan, near the Afghanistan border. Though there has been little public comment on the rise of military cooperation, it seems Dushanbe’s willingness to promote security relations with Beijing is linked to Dushanbe’s growing emphasis on the threat from radical Islamists. Even though Russian officials have not publicly condemned China’s rising military activities in Tajikistan, no doubt that such a fast-growing influence in the Central Asian region sparks a certain discomfort in Moscow. Despite the fact that Russia’s presence in the region has weakened in last ten years, it still sees Central Asia as its geopolitical sphere of influence. Russian officials are keen not to dramatize the current Chinese activities in Tajikistan. Some claim that the new military alliance between China, Afghanistan, Pakistan, and Tajikistan is too limited to turn into a quasiNATO, as its main priority is border security. Even though Russia has not been invited to join the new quadrilateral alliance, it has had a continuous military presence in Tajikistan for more than 50 years, and reportedly, the latest military agreement between Moscow and Dushanbe prolongs its military presence in Tajikistan until 2042. Still, it seems that China has successfully established a major presence in the Central Asian region both economically and militarily, including in Tajikistan. In 2015, China invested $273 million in Tajikistan — 58 percent of country’s total foreign direct investment for the year. According to EurasiaNet, that’s not all: “The potential consequences of Tajikistan’s growing economic reliance on China came into sharper focus in 2011, 51 China Watch · Watch China

Xi's Visit to Latin America: How to Understand “New Era” of China-Latin America Relations?

when Dushanbe agreed to hand over around 1 percent of its territory to Beijing in exchange for having some of its debts forgiven.” Considering China’s neighborhood policy toward Central Asia, it is safe to say that Beijing is interested in playing a central role in the security field in the region, which is a key part of China’s multi-billion dollar Silk Road project. Therefore, Beijing may be seeking to ensure that al-Qaeda or Taliban-affiliated Islamists and insurgents in Tajikistan do not pose a serious threat to national security (in particular to Xinjiang province). In that sense, the new China-Tajikistan-Afghanistan-Pakistan quadrilateral military alliance has a similar symbolic function as the Russian and Chinese co-led Shanghai Organization for Cooperation. Moreover, it should be underlined that the joint military drills in Tajikistan mostly aimed at demonstrating China’s capability. Nevertheless, Chinese economic investments are insufficient for further expansion in Central Asia due to important factors such as language barriers, religious differences, different doctrines, and so on. Considering this fact, China actively funds the establishment of Confucius Institutes and language centers in local universities in order to be able to overcome certain barriers. However, at this stage, China is mostly focused on arms exports, counterterrorism cooperation, border security issues, and joint military initiatives. The silence of most Eurasian countries in the shadow of growing influence of China in Tajikistan proves that there is no common consensus among them over the extent of Chinese influence in Central Asia.



What's New About Xi's "New Era" of China-Latin America Relations? Matt Ferchen

By now, we should be accustomed to annual, high-level visits and summits involving top Chinese officials and Latin American leaders at which ambitious trade, investment and financial targets, and deals are announced. Yet this year official Chinese media outlets are keen to stress that President Xi Jinping’s visit—which begins today and takes in Chile, Ecuador, and Peru over seven days around the APEC summit in Lima— will “usher in a new era” of China-Latin America relations. What should we make of renewed talk of a new period in China’s relations with Latin America and, in particular, what might this mean for the highly prized extractive and infrastructure ties between China and resource-rich South American countries? To begin, Chinese officials’ emphasis on a new era of relations with Latin America should be understood in the context of the end of the commodity boom. Depending on the commodity, the boom has now been over for at least two (oil) or three (iron ore) years or even longer (copper). The push by Chinese leaders and diplomats for a new phase of relations, especially with commodity-rich South America, is a belated response to the reality of dramatic drops in the demand and price for raw material exports from South America. This phenomenon is closely linked to changes in China’s own economy, which is switching toward a model of internal consumption. Yet even if official recognition of the end of the ‘boom’ phase of relations is playing catch-up with reality, Chinese officials, including premier Li Keqiang and Xi Jinping, have on recent visits in 2015 and 2014, respectively, emphasised that commercial relations should increasingly involve the expansion of trade beyond raw materials. Such discussions usually center on greater Chinese investment and financing in Latin American infrastructure and manufacturing. Similar themes will certainly be a focus of Xi’s upcoming visit, and given that he’s attending APEC, a trans-Pacific regional trade forum, not to mention two founding members of the Trans-Pacific Partnership (TPP) in Chile and Peru just as the United States seems set to abandon TPP, Xi may almost certainly promote alternative Chinese trade plans. Any discussion of a “new era” of China-Latin America (in this case, South America) relations must take into account this new context. On 53 China Watch · Watch China

Latin America-China relations will change following the commodity bust in the region, but China will need to apply lessons learned in the region to other overseas development initiatives. Chinese officials’ emphasis on a new era of relations with Latin America should be understood in the context of the end of the commodity b o o m . I n f r a s t r u c t u re and extractive industries will almost certainly continue to be at the heart of China-Latin America re l a t i o n s a n d a re a perfect starting point for a reinvigorated discussion with China about what would constitute a m o re e c o n o m i c a l l y a n d e n v i ro n m e n t a l l y sustainable relationship.


the South American side, the boom itself certainly increased anxieties about a return to historical patterns of commodity dependency and increased environmental stresses. The hangover from the bust, especially in countries like Venezuela, has been harsh. For Chinese buyers and investors on the other hand, the end of the boom largely means a dramatically reduced import bill and possible fire-sale deals on South American energy, mining and agricultural assets. Hype about the “winwin” potential of the China-Latin America relationship hit vertiginous levels at the inaugural China-CELAC ministerial forum almost two years ago. The current context is a more sober one and we’re unlikely to see the same levels again. China’s proposed alternative drivers of economic ties, including transportation and energy infrastructure investment and financing as well as the “export of industrial capacity” from China to Latin America, are part of a Chinese agenda designed to promote Chinese interests. Of course, government officials and party media in China have emphasised that such plans are part of an effort to “promote common development and build a community of shared destiny between China and Latin America,” yet the real question for Latin American countries both during this visit and in the years ahead is how, in their ties with China, to more effectively promote their own development principles and interests in a post-commodity boom environment. Infrastructure and extractive industries will almost certainly continue to be at the heart of China-Latin America relations and are a perfect starting point for a reinvigorated discussion with China about what would constitute a more economically and environmentally sustainable relationship—one that best accords with Latin American countries’ and citizens’ own development visions. Such discussions would benefit greatly from a less parochial and more comparative perspective than has largely been the case until now. Especially on such issues as environmental and social protocols, including engagement with local communities and non-governmental organizations, tied to Chinese investments in mining, energy, and dam projects, South America shares much in common with certain countries in Southeast Asia and Africa. Myanmar is a perfect case in point. Dam, oil and gas pipeline, and copper mine projects have all been the subject of contention, but also dialogue and engagement between Chinese officials, company executives and local communities, and the government. In turn, governments and citizens in Southeast Asian and African countries who share similar types of relationships and challenges in their



ties with China could learn from South American experiences, including in lessons about the benefits and costs of state-to-state and resourcedbacked lending. And if China is truly interested in forging a new era of relations with Latin America, but also with other developing countries in places like Africa, Southeast Asia and elsewhere, it would also do well to extend the lessons of experiences in each of these regions more broadly. For the countries on Xi’s latest overseas itinerary, especially Peru and Ecuador where Chinese investment in mining, oil and dam projects has been significant, it not only makes sense to look to engage China on issues and standards that are emerging from China’s ties to other regions, but also on development initiatives that China is sponsoring in its own neighborhood. Not only are Chinese government and company officials experimenting with new approaches and standards for corporate social responsibility, environmental impact assessments, and better political risk analysis in places like Cambodia and Myanmar, but some are also seeking to embed such practices in new institutions like the Asian Infrastructure Investment Bank. For Latin American governments, academics and citizens, learning more about such approaches, experiments and standards and seeking to ensure that they are also extended as best practice in investments and project finance, and to such new institutions as the New Development (or BRICS) Bank, would certainly mark the beginning of a regional strategy for a new era of ties with China. This article was originally published in Diálogo Chino. arnegietsinghua.org



How Important Is Latin America on China's Foreign Policy Agenda? Shaheli Das

In the light of the forthcoming visit of President Xi Jinping to the South American nations of Ecuador, Peru, and Chile, it’s timely to ask: how important is Latin America as a whole to China’s foreign policy agenda? Although trade ties between the two date back to the 1570s, bilateral relationships between China and regional countries remained considerably limited. Along with Beijing’s perception of the region as an integral part within the U.S. sphere of influence, factors such as geographical distance, cultural ignorance, and economic incompatibility had greatly restricted the relationship till the recent past. Previously, Chinese scholars and foreign policy analysts were of the opinion that the Monroe Doctrine prevailed in the region. The Monroe Doctrine, articulated by U.S. President James Monroe in 1823, asserted U.S. hegemony over its southern neighborhood by telling other powers of the time to stay out. Quite unlike the past, however, in recent years China’s presence in the U.S. “backyard” has profoundly increased due to a number of factors. First, China’s foreign policy has undergone a visible shift, from Deng Xiaoping’s dictum “lie low and bide your time” to a strategy of power projection and active engagement under President Xi Jinping. Although the region of Latin America is not strategically as important to China as South Asia or East Asia, bonhomie between the two sides has considerably increased in recent years along with China’s more active outreach. Second, the ongoing Sino-U.S. power transition and America’s close engagement with allies in Asia as well as new partners such as India and Vietnam has in a way driven China into Latin America in order to counterbalance the United States. Third, China seeks to fulfill its commercial interests. Latin America possesses a wealth of natural resources, which are crucial to China’s brisk economic development. China, for its part, seeks to obtain raw materials and diversify the source of such imports. In fact, the Chinese Ministry of Commerce has identified Latin America along with the Middle East/Africa and Russia/Central Asia as the three chief areas that are likely to become net energy suppliers for Beijing. Beijing also wants to sustain its access to overseas markets in order to secure the export of 56 China Watch · Watch China

“China’s rising bonhomie with Latin America has clearly altered the geopolitics of the region and tendered a strategic challenge to the United States. Above all, China’s inroads into the region have questioned the validity of the Monroe Doctrine there. Although there remains a significant question as to whether Sino-Latin American ties can be defined as a win-win relationship, the region will definitely e m e rg e a s a t e s t i n g ground between China and the United States in the forthcoming years.”


Chinese manufactured products. Bilateral trade between China and Latin America stood at $263.6 billion in 2014. Fourth, China has significant geopolitical interests in the region. Although the Chinese government articulates its will to establish a cooperative relationship with the region, the White Paper on Latin America and the Caribbean published in 2008 clearly states that “the one China principle is the political basis for the establishment and development of relations between China and Latin America.” Currently, of Taiwan’s 22 diplomatic allies, 12 are found in Latin America and the Caribbean, more than in any other region. Fifth, China adheres to the principle of multipolarity and the idea of multilateralism. To accomplish this objective, Beijing requires a network of allies from the Global South, including Latin American nations. In order to shore up the country’s bonhomie with the region, China has used the Global South or developing countries card. China claims that the country shares a common history with most developing nations, resulting in better understanding and shared demands and desires. Also, reinforcing solidarity on these grounds denotes that China combines patriotism with Marxist internationalism in its foreign policy. Apart from bilateral commercial and political engagements, Beijing also engages with Latin American countries in various multilateral platforms such as the China-Community of Latin American and Caribbean States (CELAC) Forum, United Nations, Organization of American States (OAS), G5 group (Brazil, China, India, Mexico, and South Africa), BRICS group (Brazil, Russia, India, China, and South Africa), and the BASIC group (Brazil, South Africa, India, and China). Further, the number of high-level bilateral visits evidently indicates the importance Latin America enjoys in China’s foreign policy agenda. Between 2000 and 2015, Chinese premiers and presidents visited the region as many as 31 times, with Brazil, Argentina, Chile, and Cuba figuring as the top destinations. China’s rising bonhomie with Latin America has clearly altered the geopolitics of the region and tendered a strategic challenge to the United States. Above all, China’s inroads into the region have questioned the validity of the Monroe Doctrine there. Although there remains a significant question as to whether Sino-Latin American ties can be defined as a win-win relationship, the region will definitely emerge as a testing ground between China and the United States in the forthcoming years.


Heading for Uncertainty: Possibility of Sino-US Financial-Trading Warfare

China Trade Realities for the Trump Administration Yukon Huang

In fact, there is no direct link between the emergence of American trade deficits and China’s trade surpluses. Moreover, there is little evidence that an undervalued yuan played a major role in driving China’s trade surpluses over the past decade. China’s success in becoming the world’s largest exporter was the consequence of joining the World Trade Organization and the evolution of the East Asian supply-chain network. The confusion comes from misreading the implications of China as the point of final assembly for Asia-produced parts into finished products for shipping to the U.S. This makes it difficult to determine which country is responsible for products that end up in American stores. Historical numbers clearly show that U.S. and China trade balances are not directly linked. America’s overall trade deficit became enormous around the late 1990s and only began to moderate around 2009. But China’s trade surplus did not become significant until around 2005. How could China be responsible for America’s trade deficits, when in fact, America’s deficits emerged long before China even became an export power? A trade deficit is often the result of excessive government deficits and/ or households consuming beyond their means—both of which have characterized the American economy over the past several decades. In such circumstances, a large trade deficit is inevitable and which countries report the offsetting trade surpluses is incidental. America’s bilateral trade deficits were concentrated among the more developed East Asian economies in the 1990s, notably Japan, South Korea and Taiwan. This then shifted to China after the latter became the center of the regional production sharing network following its WTO membership in 2001. U.S. manufactured imports from Pacific-Rim countries have remained at about 45% of total U.S. manufactured imports from 1990 to 2014, but China gradually captured an increasing share of Asia’s exports to the United States as the last stop in the global assembly chain. Thus the appearance that U.S. trade deficits are linked with China’s surpluses is misleading; it is really about deficits with East Asia more generally, with much of the higher value components being produced by other countries. 58 China Watch · Watch China

China trade issues f e a t u re d p ro m i n e n t l y i n D o n a l d T r u m p ’s campaign, as evidenced by his intention to declare China a currency manipulator and to levy a 45% tariff on its exports to the U.S. The rhetoric has considerable appeal, even if the logic is conceptually flawed. The fact that China accounts for the largest share of America’s trade deficit further lends credibility to the storyline that Beijing has kept the yuan undervalued for competitive reasons.


The other major source of tension is the perception that China’s export strength is due to its exchange rate being deliberately undervalued, giving it an unfair advantage. China unified its dual exchange rate system in 1994 at 8.27 yuan to the U.S. dollar and stayed pegged at this rate until 2005. Through the early 2000s, the yuan was widely seen as over not undervalued. Ironically, China was widely praised by U.S. officials during the Asian Financial Crisis for not devaluing its currency when many other Asian currencies had collapsed. What eventually helped China to generate significant trade surpluses had really nothing to do with its exchange rate. That boost came from easier access to Western markets through the WTO. Membership provided incentives to ratchet up productivity-enhancing infrastructure investments which caused labor productivity to soar. Structural shifts, not an undervalued exchange rate, were the major factors driving China’s export capabilities. Appreciating the exchange rate helped to moderate trade surpluses once they did emerge. When China’s trade surpluses increased to 5% of GDP by 2005, it moved away from a fixed peg to the U.S. dollar. Appreciation of its nominal exchange rate and increasing consumer prices contributed to China’s real effective exchange rate strengthening by about 50% by the end of 2015. While this rapid appreciation helped moderate China’s trade surplus, its impact was much less than expected. Much more important was the surge in China’s investment and rising imports coupled with slackening demand from the United States and Europe as their economies went into recession. China’s current account surplus fell to around 2% to 3% by 2012, where it has remained as of 2016, from a high of 10% of GDP in 2008. Studies show that adjustments in exchange rates now have a much smaller impact on trade balances because of the increasing reliance of manufacturers on imported inputs for production. As a consequence, if exchange rates appreciate, exports do not fall that much because the cost of imported inputs will decline. This is especially relevant for China given the very high share of imported inputs in its exports of finished products to the West. This article was originally published in the Wall Street Journal. carnegieendowment.org



Financial Warfare: China and the US T-Bills Marcel Baartman

The new President Trump appears to be making a confrontation with China the core of his trade policy. If China does not conduct trade in a fairer manner, the US will proceed to introduce import tariffs on Chinese products. This change to American trade policy is interesting in itself, but becomes even more interesting if we also consider American budget policy under Trump. As a result of lower taxes and extra expenditure for infrastructure, the American federal debt will increase by seven trillion (= 7,000 billion) dollars in the next ten years. This additional American financial demand will have to be met by the (international) capital markets. China is a major player in this and since 2000 has bought a vast fortune in American Treasury Bills (T-bills). The reserve is now almost 1.2 trillion dollars so that China possesses almost 8% of the American federal government reserves. What has led to China investing such a huge sum in T-bills? To answer this, we must go back to the trading relationship between the US and China. Since as far back as 1985, the US has had a trading deficit with China. This means that the Americans buy more Chinese products than vice versa. At present, the commodity trading deficit comes to around 30 billion dollars a month. Put simply, this comes down to the following: Chinese exporters receive 30 billion USD nett a month. They exchange these dollars for renminbi at the Chinese Central Bank. China’s Central Bank in this way gains control over large quantities of American dollars, and it does not offer these dollars on the foreign exchange markets. It keeps the dollars in its possession and by this means builds up its exchange reserves. The advantage for China is that, in this way, its own currency, the renminbi, remains low in value, while the dollar’s exchange rate stays high. By this means, Chinese import products remain cheap for the Americans and China can sell even more products. The Chinese Central Bank then invests the dollars to gain interest from them. The safest investment is in treasury bonds from the American government, because it underwrites these. This market is also secure, large and liquid. Due to this, China has now become owner of a mountain of 1.2 trillion dollars in T-bills. 60 China Watch · Watch China

China is a major player in this and since 2000 has bought a vast fortune in American Treasury Bills (T-bills). However, the Americans are not really afraid that the Chinese will actually use the financial weapon. The great mountain of American bonds has probably become more of a burden to the Chinese than a financial weapon.


The Americans are sometimes wary that the Chinese possess so many securities. There is a fear that China could employ these assets in economic and non-economic disputes. After all, if China should sell a large part of these financial obligations in the short term, then their value would fall rapidly and the American interest rate would rise. Also, the value of the dollar would drop rapidly – certainly if other investors follow. In this way, China could put a spanner in the US’s financial works. The question is whether China intends to use its accumulated exchange reserves for geopolitical purposes. The use of financial instruments for a country’s foreign policy is a regular topic of discussion. Some contend that exchange rates and financial assets can be employed effectively to achieve geopolitical objectives. A good example is the Chinese general Qiao Liang who made a public statement at the Chinese National University of Defense in Beijing in 2015. He contended that the US has been manipulating the dollar exchange rate ever since the inauguration of the Bretton Woods system in order to achieve its own aims. He also argued that China should use financial weapons against the US. And this hawk is not the only one in China arguing for this. For example, an editorial comment appeared in the People’s Daily Online in August 2011 entitled: ‘China must punish US for Taiwan arm sales with financial weapon’. Here, a direct link was made between geopolitical objectives and the use of ‘financial weapons’. However, the Americans are not really afraid that the Chinese will actually use the financial weapon. In the first place – as said earlier – rapid sale of the bonds would lead to a severe drop in the value of the remaining bonds. This would affect the Chinese badly because they are the greatest investor in these bonds. They would then be confronted with a sharp drop in the value of their investment portfolio. Also, ‘having the American economy seize up’ would have consequences for Chinese exports to the US and for economic growth in the rest of the world. If this led to reduced growth in China, this could threaten the political and social stability in China – a development that the Chinese leaders want to avoid at all costs. Finally, all this would not do China’s reputation as a responsible great world power any good. The great mountain of American bonds has probably become more of a burden to the Chinese than a financial weapon. They are afraid that an untenable American federal debt could lead to a rise in American interest rates and a drop in the value of the remaining bonds. This happened in 2011 when Standard & Poor reduced the rating of American long-term bonds from AAA to AA+. The Chinese Premier referred to this problem as early as 2009: ‘We’ve lent a huge amount of capital to the United 61 China Watch · Watch China


States, and of course we’re concerned about the security of our assets. And to speak truthfully, I am a little bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese Assets’. President Trump taking office with an associated possible increase in the federal debt by seven trillion dollars has caused alarm to the Chinese. Added to this was when Trump created unrest in June 2016 by stating that he intends to refinance the outstanding American federal debt. It is unclear whether he means actual restructuring or the purchase of outstanding government bonds – financed by new bonds. Such remarks naturally also make investors in American government bonds restless. In the escalating confrontations between the US and China, geopolitical use of the Chinese possession of US financial obligations will be argued for increasingly by Chinese hawks such as General Qiao Liang. There are still sufficient arguments for the Chinese not to use this financial weapon, though the situation is changing. Through China’s transformation from an export-oriented industrial economy to a service economy with its focus on domestic consumption, China can make good use of a rise in the renminbi and a fall in the dollar. Also, the trust of the Chinese in the tenability of the American national debt under Trump will diminish. They will then in any event want to reduce their possession of American government bonds. And if Trump opts for a tough confrontation with the Chinese, for example by introducing high import tariffs, it cannot be excluded that the world’s number two economy and America’s largest creditor will want to show its muscles. A slump in exports to the US would no longer matter – Trump would already have ensured that. www.clingendael.nl



Heading for Trade War with China Steve H. Hanke

The US has recorded a trade deficit in every year since 1975. This is not surprising — America spends more than it saves, and this deficit is financed by means of a virtually unlimited US line of credit with the rest of the world. Economies that save more than they spend, and which record corresponding trade surpluses, ship funds to the US to finance America’s insatiable spending. Japan and, more recently, China have been the primary creditors for the savings-deficient US. Rather than a straight-forward barter-like transaction, Asia’s exports to the US are paid for by credits to the US. The result is a huge trade surplus for Asia, largely in manufactured goods, and a build-up of dollar claims against the US. The US runs a trade deficit and a capital account surplus with these economies. China and Japan have been responsible for the lion’s share of the US trade deficit. Japan’s contribution has fallen from a peak of just under 60% in the early 1990s to around 10% today, while China’s contribution has steadily risen from around 20% in the early 1990s to 48% today. The US savings deficiency has contributed to the hollowing out of American manufacturing. This is one subject which President-elect Donald Trump has never mentioned. Instead, he claims that American manufacturing has been eaten alive by foreigners who adopt unfair trade practices and manipulate their currencies to artificially weak levels. This argument is nonsense. To appreciate why Trump — and many others in Washington, including Charles Schumer, the newly-elected Senate minority leader — are so misguided and dangerous, one should look to Japan. From the early 1970s until 1995, Japan was viewed as America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed US manufacturing. Washington also asserted that, were the yen to appreciate against the dollar, America’s problems would be solved. Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese caved into US pressure, and the yen appreciated. The currency moved from 360 yen to the dollar in 1971 to 80 in 1995. This massive appreciation didn’t put a dent in Japan’s exports to the US, with Japan contributing more than any 63 China Watch · Watch China

Trump’s spending and tax promised will widen the gap between America’s spending and savings. This will cause America’s trade deficit to balloon. When that happens, in v i e w o f C h i n a ’s h i g h contribution to the deficit, Trump will undoubedtly point an accusatory finger at China. A trade war between the world’s top two economies looks increasingly likely.


other country to the US trade deficit until 2000. In April 1995, Robert Rubin, then Treasury secretary, belatedly realised that the yen’s overdone rise was driving the Japanese economy into a deflationary quagmire. In consequence, the US stopped hounding the Japanese government about the value of the yen, and Rubin began to evoke his now-famous strong-dollar mantra. While this policy switch was welcome, it was too late. Even today, Japan continues to suffer from the mess created by the yen’s appreciation. Two decades later, China rather than Japan is America’s economic enemy. China-bashing is in vogue. Hardly a day goes by without Trump railing against China, accusing it of unfair trade practices and currency manipulation. Against the background of his threat to impose punitive tariffs on the Chinese, the spat over Trump’s Friday phone call with Taiwan President Tsai Ing-wen, breaking decades of diplomatic protocol, offers an uncomfortable foretaste of more squalls ahead. Trump’s spending and tax promised will widen the gap between America’s spending and savings. This will cause America’s trade deficit to balloon. When that happens, in view of China’s high contribution to the deficit, Trump will undoubedtly point an accusatory finger at China. A trade war between the world’s top two economies looks increasingly likely. www.cato.org


Inviting Contributions to China Watch 2017 To construct new-type think tanks, promote the conversion between research and policy-making advice, and provide more high-quality reports and advices, Fudan Development Institute and Centre for Think-tanks Research and Management in Shanghai decide to solicit contributions from Chinese and overseas scholars to China Watch. China Watch focuses on hot issues in various fields of China. In the first semimonthly, it selects the latest achievements of top foreign think tanks, themed by ‘International Perspectives and Forefront Issues’; in the second one, it collects the policy analysis of Chinese experts, themed by ‘Chinese Think Tanks and Contributions to Development’. Requirements 1. This contribution should be policy analysis or advice, reflecting author’s deep thinking of forwardlooking and comprehensive issues. Topics include but are not limited to Chinese domestic affairs, foreign policies, economy, society, education and other issues involving China’s development. 2. The English edition could be articles published by foreign think tanks or major media in English (if the article is in other foreign language, please attach a 200-word abstract), or English research achievements of yourself. If the contribution is accepted by editorial department, it will be translated by the referrer or editorial department. 3. The Chinese edition is open to all the institutions and individuals. The topic is decided by yourself and the language should be succinct and not academic. 3000 words are proper, and there should be an introduction of the author within 100 words in the end. If the contribution is involved in sensitive issues, please burn it onto disc and post it to the editorial department with paper edition instead of sending it by email. Notices 1. Email address: [email protected]. Please fill the title of your contribution in the email subject and attach the following information (very important): Article, Author, Referrer, Address, Email, and Telephone Number. 2. One contribution at a time. Please not deliver more than one contribution at a time, or deliver repeatedly. 3. The contribution could be delivered to other publications and we’ll reply in one month. If the contribution is accepted, the editorial department will reward it. Contact Information Contact: Hao Huang, Keli Wang Phone: 021-5566 5596 Email: [email protected] Address: Room 211, Think Tank Building, Fudan University, 220 Handan Rd., Yangpu District, Shanghai Post Code: 200433

Fudan Development Institute Fudan Development Institute (FDDI), founded on February 12th, 1993, is determined to build a first-class think-tank. Our research is directed towards issues of national development, striving to make contributions to make contributions to the development of society by through the integration of research resources and human talents of various disciplines. There are 7 domestic research institutes which Fudan Development Institute is incubating, including Financial Research Centre, Centre for BRICS Studies, Shanghai-Hong Kong Development Institute, Centre for Communication and State Governance Research, Contemporary China Social Life Data and Research Centre, Institute of Social Research, China Insurance and Social Security Research Centre; 3 overseas research institutes, including Fudan-UC Centre on Contemporary China (University of California), Fudan-European Centre for China Studies (University of Copenhagen), Fudan-Tec Monterrey Research Centre for Studies on China-Latin America (Monterrey Institute of Technology and Higher Education); China Financiers Club; 2 secretariats of major forum, including secretariat of China University Think Tank Forum and secretariat of Shanghai Forum.

Centre for Think-tanks Research and Management in Shanghai Centre for Think-tanks Research and Management in Shanghai, led by Shanghai municipal Party committee and relying on Fudan University, commits itself to incubating and promoting the capacity of Shanghai university think tanks, constructing a domestic and international known Shanghai university think tank system. It provides management through serving, seeks integration through internal communication, gathers impact through international talks, guards the quality through assessment, achieves status through contributions, and sets up a communicating, marketing and international talking platform founded in Shanghai, serving the whole nation and taking the whole world in view. The Centre aims to integrate the resources of Shanghai universities and think tanks, transfer the research into results, offer suggestions to the government, spread the ideas of think tanks to the mass, realize the social value of academic achievements, incubate composite scholars with consulting capacity, push forward the discipline construction of universities, and promote the development of new-type university think tanks.

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