Interview
“China offers huge opportunities but also high risks”
2016-04-29
Mongolia’s economic growth depends quite a lot on what happens in China. Dr. D.Shurkhuu of the Institute of International Studies at the Mongolian Academy of Science tells G.Iderkhangai how decisions taken at the recent meeting in Beijing of the National People’s Congress are likely to impact the Mongolian economy, especially its mining sector. Their conversation also explores the likely course Chinese politics and economy will take under Xi Jinping, who remains president until 2023.
The Mongolian Mining Journal /2016.march 003.088/
The past few years have seen a slowdown in the Chinese economy -- the world’s second largest. Do you think it will get worse, and lead to a global crisis?
We see how a small Greece has caused problems for the Europe. Surely, there will be a major impact on the global economy if “the world’s factory”, China, is in any kind of crisis. The world is very much an interlinked place now.
That is why developments in China are very carefully followed globally. China’s economic problems stem from internal factors rather than external, and their resolution depends on how the country deals with issues like bank loans, air and soil pollution and political reforms. Experts everywhere study what takes place in China’s politics and economy, its military and society, in order to get an idea of what lies ahead for their own countries.
Of course, some countries will be happy if China is forced to slow down, and they thus face less competition, but for several other countries, especially those in the region, there is great risk to fulfilment of their own hopes, if that were indeed to happen. Many countries see China as their major hope for huge discounted loans, investment or arrangements for receivables, all of which can be used to boost their economy. They would like a stable and strong economy in China.
Mongolia is one of these countries very much dependent on China for their economic development. What should we do now?
To be honest, Mongolia’s development in the past 20 years has had very little to do with Chinese support. We are yet to take full advantage of a huge market like China, but in a way this missed opportunity could turn out to be beneficial for us. If we had opened to China the way to all our minerals and allowed them to import huge amounts of them, if we had allowed massive Chinese investments in Mongolia, accepted loans when the timing was not right and we did not have the mechanism to properly utilise the money, we would have run a high risk of ultimately finding ourselves in a difficult situation. The clearest example of what I say is the $350-million loan taken from Chalco against coal from Tavan Tolgoi. The loan was misused and has caused extensive damage.
Our geographical proximity makes the Mongolia-China relationship different from that between China and, say, Hungary or Poland or with small countries in Latin America. China is an uncertain market; it offers huge opportunities but also high risks. In this, it is like electric power. You cannot store it for later use, but have to be careful in how you do use it, for any flaw in its application can be dangerous. A bit like a winter fire – you must be close enough to feel the warmth, but it could burn you if you moved too close.
Are there other countries in the world in a situation similar to ours, when the economy is so dependent on two much larger neighbours?
I can think of Poland in Europe, and Nepal and Bhutan in South Asia. The most interesting example could be Tagna Tuva, bordered by Mongolia, the Russian Federation and China. Our gest achievement is that we have protected our independence and saved our resources both above and under the ground. Our problem is how to exploit our unique situation to develop rapidly to reach the level of more prosperous countries.
Along with its political independence, Mongolia has also retained its intellectual culture. You may wonder why I bring in intellectual culture when we are talking about mining, minerals and markets, but that is what keeps us Mongolian even as we seek the best ways to make the most efficient use of our minerals, to have the right relationship with neighbours, and to allow all Mongolian citizens to share in our economic growth. We have tried for the past 20 years to maintain a balance between three giants, China with its economic power, Russia which remains important geopolitically, economically and militarily, and the US, that determines world policy.
China has had uninterrupted economic success since 1978 with a growth rate of no less than 9%-10%. It has started to falter only in the past two years. It cannot be denied that the drop in commodity prices was largely because of falling Chinese demand. Coincidentally or not, the global banking and financial system has also been in crisis. It is too early to say if China would overcome the crisis or continue to decline, with unpredictable results for the world.
Which scenario do you think is more likely?
US scholar Gordon Chang wrote a long time back that the Chinese nation would always run the risk of disintegration unless the leadership introduced serious political reforms and made proper use of the market mechanism. Others feel such fears are unfounded, as China, with its $3 trillion of FX reserve and huge domestic demand, can absorb shocks without any permanent damage.
Many put their faith on the fifth generation of leaders, with Xi Jinping at its head. Xi has indeed begun to change many important things. One is an assertion of China’s new nationalism. A strong nationalist pride was always there, but this time China has resolved that the 21st century will be China’s, when it will first reach the same level as the US, and then determine world policy. This is the present “Chinese Dream”.
Another issue raised by Xi Jinping is the fight against corruption. This will boost his standing and strengthen his position, as well as restore the fallen reputation of the Communist Party. The first will allow Xi to target his opponents and the second will bring back people’s trust in the one-party system.
According to practice, Xi Jinping will rule the country for 10 years, until 2023, and if he can successfully negotiate these two issues, he will be recognised as a strong leader like Deng Xiaoping and Mao Zedong. We do not know if he will have another term as President in case his programme remains incomplete in 2023.
What are the main issues in China now?
First is stability of the current political system. The middle class has expanded rapidly as hundreds of millions of rural people have seen a dramatic improvement in their lives. A large and prosperous middle class means a rise in consumption levels, improvement and spread of educational facilities. Both may give rise to criticism of the way things are run. That is why China has been very careful in governance as urbanisation spreads, the middle class is strengthened, reforms are put in place, and science and technology develop.
The Communist Party of China is convinced Western-style democracy, with a multi-party system, would take the country to anarchy, instability and domestic conflict. Thus China will not switch to multi party democracy, and will settle for limited democracy under Communist management. Not everybody agrees and a section of the people would prefer another governance and development model.
The economic model has changed in the last 30 years or so, but economic decisions are still centralised in Beijing and it is a Chinese-style market economy and not the Western model with Western-style entrepreneurship. China sees this as a successful innovation.
China adopted its 13th Five-year Plan at the last National People’s Congress. Which features of this, and what other decisions of the congress are likely to impact Mongolia?
Mongolia will benefit from a stable China, and that is what the Chinese leadership aims to have.
The congress reviews Government performance in the past year and adopts an action plan for the coming year, after analysing perspectives and trends. This plan tells the world in what direction China intends to move forward. The main job of this year’s congress was to adopt the new Five-year Plan. It will continue with structural changes, and will base economic development on domestic demand and growth of the service industry, instead of manufacturing solely for export.
Prime Minister Li Keqiang revealed that the Chinese economy grew 6.9% in 2015 and said the targeted minimum growth rate for 2016-2020 would be 6.5%. Measures will be taken to improve the lives of 70 million poor citizens and Li emphasized that China would reach the “syaokan” stage - basic level of life satisfaction.
It appears from reports in the Chinese State media that a large number of the speeches in the congress dwelt on issues of environmental pollution, unemployment, poverty and corruption. Is this significant?
The general view is that the congress was used to boost Xi Jinping’s reputation and position, implement his “Chinese Dream” policy, show unanimity in the political class, and reassert the role of ideology at the management level. The last is justification for tighter control on media and the Internet.
The congress was also informed of lower revenue receipts, increase in unpaid debts, difficulties of large industrial organisations and a fall in FX reserves in 2015. The annual increase in defence expenditure, kept at 10% for many years, will this year be 7.8%.
Minerals are our maIn strength in any economic partnership, but falling commodity prices in the Chinese market are directly affecting Mongolia’s state budget. What is the way out?
There is no doubt that the mining sector is the key to Mongolia’s development and that its growth depends on demand and prices in the Chinese market. Foreign investment inflow into Mongolia will be seen only when this huge market remains attractive and stable. Unfortunately China’s appetite for mineral commodities is declining, meaning we are exporting far less of these.
Foreign direct investment in Mongolia has decreased sharply because of the global economic and financial crisis along with the drop in Chinese demand, and not because, as many say, of Mongolia’s unstable policies, domestic politics and expressions of the so-called resource nationalism sentiments.
Large foreign investors often show interest in China or a large regional market, but not in a small market like Mongolia. I believe that if it was profitable for them to mine here, investors would be willing to do so even if Mongolia increased its tax rates and created a nationalistic environment.
We made mistakes while trying to increase our ownership share and to protect national rights in projects with foreign direct investment as we had no previous experience of negotiating on large mining projects. It is not an easy task for inexperienced Mongolians to protect their rights against mining companies with decades of experience of working in developing countries. Financial problems, including budget deficits, coupled with investors’ opposition, finally led to Mongolian authorities backing down from their determination to protect national rights over the mineral resources.
It is interesting that no large investment except in Oyu Tolgoi has come our way even after a favourable situation was provided in keeping with investors’ demands. China is also expected to tighten conditions for its expected investments and loans.
Are you saying that the main reasons why foreign investors have been shunning Mongolia are the global economic crisis and lower commodity prices in the Chinese market?
Exactly. Why else are investors still not coming even after we have liberalised investment regulations? The Mongolian domestic market is too small to make it profitable to invest here.
Only those targeting China and the Pacific Asia region market were coming to Mongolia. Some of us fell into the trap of large companies interested to invest in Mongolia and kept saying that these companies will not come unless we changed the investment law. In some cases, we overdid our opposition, but I’d say overall we were on the right path.
Coal export earnings have traditionally been a major source of our budget revenue. Now, of course, prices have fallen and there may be no quick recovery. But of more concern is the global move against burning coal. Is it likely that China will ban coal?
No. China will continue to be a large coal consumer and importer for the next 20-30 years, as 70% of their energy is produced from coal, and domestic supply is falling with time.
However, the Mongolian coal industry must realise that the days of digging coal out and loading it on lorries are gone forever. Forget exports to China, that will not do even for use at home. Mining can, and will, remain profitable if only done under professionally designed detailed business plans.
Coal mines and consumers are too far apart, leading to high transport costs. Modern and environment-friendly technology has to be used, again raising expenses. China has decided to increase imports not to have these problems at home.
Apart from nuclear power, competition will come from renewable energy sources, like the sun, wind, water etc. These are still too expensive for general use, but their day will come. Their use has led to a cut of 3%-4% in China’s coal consumption to produce energy, but it will take another 20-30 years to reduce it by 30%. So China will continue to have a huge demand for coal.
Coal prices have to be higher to allow Mongolia to pay for use of an integrated strategy and the proper technology in exploration, extraction, processing, transport and sales. Competitiveness will come with reduced operational costs. In my opinion we have to look at each mine and choose one as where the coal is to be processed, washed and exported, another which is to be used for electric energy, yet another for gasification etc. Large mines need to be used in such complex ways if we hope to enter the Chinese market.
We also need a comprehensive logistic network for reliable transport not just of coal but of other mineral resources also, as well as for importing raw materials and equipment needed in the sectors of mining, heavy industry and energy.
Several large projects with either Chinese investment or Chinese loan are to be set up, especially in the energy sector. What are your thoughts on this shift from Russia to China?
A thorough review of how much Chinese investment, loans and grants we should have and also of how these are to be best used is essential. Today, State revenue has sharply declined, foreign investment is almost zero, and all our hope is around Oyu Tolgoi. We can expect money only from China, and then Japan. Mongolia’s fuel and energy needs have traditionally been met almost exclusively by Russia, though we have been lowering our level of dependence step by step. But should we just bring in China in place of Russia, and in 20 years be too dependent on China, both for investment and as the market for our mineral products? Should we accept all offers of investment by China, or should we also seek investment from third countries and their participation in our development with use of modern technology?
In my opinion a three-way partnership would be the best: Mongolian resources, Chinese market and labor, management, technology and investment from a developed country. Not every project can be run this way, but an overall balance should be maintained. Some large energy projects can be given to experienced companies from countries such as Japan, France and Germany.
During a visit by the then Prime Minister, N.Altankhyag, an agreement was signed that Mongolia would export 1 billion tons of coal to China in 20 years. Coal export has now plummeted, so are such agreements of any worth?
Such general agreements are routine in international bilateral relations. Coal companies in Mongolia, both domestic and foreign, have competed to export their output to China for the past 20 years, but there has never been an integrated strategy to secure a permanent place in a market where the competition was from world class companies. Our companies only knew how to settle for lower prices. This meant chaos and the agreement can be seen as a move by the State to bring some order in the area.
But you are right. The agreement called for 50 million tons of coal to be exported annually, and nothing like this is happening. Even such general agreements on export of coal, iron ore, electric power, or meat should have some specifics.
There are unofficial reports that in its newly adopted five-year plan, China has mentioned the amount of coal and electricity it will import from Mongolia. Now, if we do sign an agreement on electricity, it should clearly indicate where the transmission line is to be put, its length and cost. Such details are very important in the long term. Without them, anyone on either side of the border can plan to build a railway or a road passing through the transmission line, or set up small electric plants and mines, affecting it.
If agreements are made according to a well thought out policy, many later problems can be pre-empted. The negotiators must analyse the market trends, and agree on a likely average price on which to base the agreement, and provide for guarantees to both sides. This agreement can be used as a benchmark when attracting investment from domestic and foreign companies and also when preparing business plans.
Will such an integrated plan help us get a better price for other mineral resources such as oil, copper and steel also?
Generally speaking, yes. Such general agreements at the regional level, bilateral or multilateral, on oil, supply of oil products, iron ore, copper, agriculture, tourism, transit etc. will be a boost for the Mongolian economy. Bilateral partnerships have been traditionally more common in North-East Asia and the Pacific Asia region, because of historical reasons and also because of the nature of politics here, but the time has come to involve others for better benefits to all.
We can learn from ASEAN, the Trans-Pacific Partnership initiated by the USA, and APEC. These indicate the success of the strategy. Another example is the general agreement among EU countries on supply of coal and iron ore.
The next stage for East Asia’s economy is a regional integrated market. If a large integrated network connecting Siberia, Asia Pacific and Central Asia can be established the economic recovery might come in 2030-2040.
Developed countries in East Asia have nearly exhausted their resources, so is there an opportunity now for Mongolia and countries in Central Asia to use their resources to ultimately become the development centre of the Asia Pacific region?
We need to look beyond tomorrow’s crisis and instead start developing our infrastructure with an eye on 2040 and 2050, working especially on construction of transit transport logistic centres. We lack experience and expertise in some areas and fail to grasp complexities. Many years have been lost in arguments over the gauge, direction and path of the much-needed railway.
We never understood that many such and other issues have to be resolved before building a railway. There are various regulations, standards and legal norms to be observed in international railway movement. One country cannot build a railway and ask the other to accept it as it is. Protracted negotiations would be needed to reach a bilateral agreement.
As an example, Mongolia and China have jointly planned the railway to connect Gashuunsukhait with Gantsmod port. Serious technical questions cropped up during the planning phase, delaying an agreement, something that could have been avoided had detailed studies been made beforehand, to facilitate coordination.