Chinese Companies’ Central Asian Survival Strategy

Chinese investment into Central Asia has increased and diversified rapidly in recent years. Locals worry that these investments will lead to economic reliance on Beijing. But Chinese investors need Central Asia just as much as Central Asia needs them. Many Chinese companies operating in the region are investing overseas because they face desperately difficult business conditions at home.

This is particularly true in the region’s two poorest countries, Kyrgyzstan and Tajikistan. The largest Chinese investment in Kyrgyzstan is the Kara-Balta oil refinery. Shaanxi Coal and Chemical Group says it invested about $450 million in the project, mainly sourced from debt, since 2009.

So far the project is a dud. The original premise was to import crude oil from Kazakhstan and Russia to refine in Kyrgyzstan. This was an attempt to alleviate Kyrgyzstan’s reliance on Russian refined petroleum but the Russians wanted to maintain their dominance on supply. As of early 2018, oil refinery capacity in Kyrgyzstan was significantly more than output.

Li Yingdong, who heads the company’s Kyrgyz operation, describes the decision to go abroad: “Shaanxi Coal Group is mainly engaged in coal, the coal chemical industry, coal-powered electricity, and steel. These are all traditional industries which currently have surplus [capacity]. There is limited space for domestic development and new development space needs to be sought.”

Chinese miners, farmers, cement manufacturers, and others investing across Central Asia make similar arguments. Limited domestic opportunities are catalyzing overseas investment. Some of these companies are completely reliant on government assistance to prop them up. One of the most extreme examples is Xinjiang Zhongtai, which operates a textile complex in Tajikistan. It released a prospectus in 2017 to raise debt, which said:

Government subsidies account for a fairly large proportion of net profit, and have a significant impact on the company’s operating results. The company is reliant on tax benefits and government subsidies. If there was to be a sizable change to the issuer’s government subsidies or tax policies in the future, then it would produce a definite effect on the operating results of the issuer.

There is a logic, beyond desperation, for these companies choosing Central Asia. The region has cheap wages, low competition, decent resource deposits, high prices for certain products, and recipient states are willing to give tax breaks and other subsidies in industries they see as strategic. In fact, the two Chinese investors that have invested in Kyrgyz oil refineries both note that Kyrgyz government support factored in their investment decision. These firms are getting subsidized by both China and Kyrgyzstan while producing very little.

This goes to the heart of the problem Chinese investors in face in the region.

The reason the region has such little competition is that it is an incredibly difficult place to do business. Most of the “desperate” Chinese firms are first-time (or very new) overseas investors. When you couple inexperienced investors that are used to government largesse with Central Asia’s byzantine investment environment, you have a recipe for disaster.

And it has proved as such. Almost every major Chinese investment in Kyrgyzstan is in trouble.

It’s not just Kyrgyzstan where Chinese investments run into difficulties. The head of the Federation of Overseas Chinese in Tajikistan, Hu Feng, put it in artistic terms: “You know how Tajik shoot pigeons?” he asked. “They scatter some food on the ground and then wait around the corner with a shotgun. When pigeons come, they just blast away from a short distance. That’s the dire situation facing Chinese businessmen here.”    

Chinese firms have recognized as much. As the major investor into the Tokmok oil refinery in Kyrgyzstan (smaller than aforementioned Kara-Balta refinery) writes:

The company underestimated the difficulties in implementing the construction of a project overseas, especially in a Central Asian country like Kyrgyzstan. The entire industrial system is not ideal; all the materials for the project had to be imported from China or Russia which increased the cost of materials and also delayed the project timeline.

There are certainly exceptions to these companies. Huawei, ZTE, China National Petroleum Corporation, China Road and Bridge Corporation, as well as TBEA are globally successful companies, albeit underpinned by cheap Chinese government finance, which have offices across Central Asia.

But as financing conditions in China become increasingly unpredictable, more companies facing domestic ruin will turn to cheap Belt and Road financing. New investment rules streamline overseas investments in Belt and Road countries.   

Zhao Futang, chief accounting officer for Shaanxi Coal and Chemical, was paraphrased by Xinhua as saying that the financing costs are “great” for overseas projects now. According to Zhao, “the implementation of special construction funds has been spot on, along with the large sums of medium to long term capital provided by the policy banks.”

It is sometimes difficult to separate whether these firms are seeking profit or just financing. They would argue it’s both. So far, securing financing has proven easier than securing a profit for numerous Chinese investors. But that is still better than the conditions the companies face in China.