Roads, pipelines, coal-fired power plants: not so much anymore.
Beijing has changed course. It now rarely funds major infrastructure projects in Central Asia. Instead the People's Republic has shifted to manufacturing: a bus factory here, a cement plant there. When Beijing does lend, it is still from its policy banks (China Development Bank and China Eximbank), but preferably after securing joint funding from local partners or other countries.
This change, which has come into focus in the last two or three years, has had two drivers: Recipient states are demanding projects that provide jobs, exports and industrial capacity; and Chinese policy banks that historically funded infrastructure now want to spread their risk. This is playing out differently in each Central Asian state.
The first wave of Chinese investment in Kazakhstan, between 2007 and 2013, focused mainly on hydrocarbon extraction and the pipelines to move Central Asian oil and gas into the PRC.
Investments over the last three or four years, by contrast, have been more diversified - often described as "industrial capacity building."
The Kazakh government has worked closely with Beijing for years to prioritize joint-development projects. A 2019 list includes everything from chemical engineering to construction to agriculture to infrastructure.
Many of the projects are investments primarily funded by Chinese businesses with no obligation from Nur-Sultan. These include a new Chinese-Kazakh cement plant with designed daily production of 2,500 tons of clinker cement, the Orda glass plant, and a new Yutong bus factory under construction in Karaganda region. Manufacturing is now the backbone of Chinese economic engagement in Kazakhstan.
Meanwhile, Nur-Sultan is paying off its loans. The following graph shows all Kazakh government and state-owned entities' (SOE) debt to China. Government debt is dropping, while investment is increasing.
China Development Bank (CDB) still lends to Kazakh state-owned entities, but now tries to bring local sources of finance to the table. For example, a $2.6 billion polypropylene plant currently under construction in Atyrau is financed by a subsidiary of one of Kazakhstan's sovereign wealth funds, which has borrowed $2 billion from CDB and is funding the rest itself. State-owned KazMunayGas (majority owned by the same sovereign wealth fund) will operate the plant after it is built by China National Chemical Engineering Co.
Chinese firms also are getting better at winning contracts on European-financed projects in Kazakhstan, such as solar and wind farms.
With Chinese financing, Uzbekistan is looking to turn itself into a manufacturing and hydrocarbon-processing powerhouse.
Tashkent does not publish disaggregated statistics on FDI flows or external borrowing by country of origin. But the Ministry of Investment and Foreign Trade claims total FDI grew 3.2 times from $2.9 billion to $9.3 billion between 2018 and 2019, as the country opened up after the death of longtime President Islam Karimov.
CDB has reportedly promised $1 billion as part of an international consortium contributing $2.3 billion to the $3.6 billion Oltin Yo'l gas-to-liquid plant, which creates synthetic fuels. The plan, wherein China is working with third-country funders (in this case South Korea, Japan and Europe), assists Tashkent's goal to transition from being merely a source of hydrocarbons to one with the capacity to process these resources and add value.
Likewise, Tashkent has inked a $1 billion agreement with CITIC Group - a state-owned investment vehicle - and Huawei to build digital infrastructure for domestic use. The first $300 million is slated to build a manufacturing facility for surveillance equipment. If the deal is implemented, no longer will Uzbekistan just import tech equipment. It will make it.
Beyond this, China has built cement factories and spent over $250 million on textile plants since 2016; another $130 million is earmarked for the industry. As in Kazakhstan, manufacturing is now the backbone of Chinese economic engagement in the country.
Uzbekistan is the only country in Central Asia in which Chinese debt is possibly increasing (excluding perhaps Turkmenistan which is so opaque that no external observer knows the true extent of its borrowing). Prior to Karimov's death in late 2016, Uzbekistan only borrowed small amounts from overseas. Between 2017 and 2019 Eximbank reportedly disbursed $144 million to build new hydropower plants, with more planned. CDB also reportedly financed a $309 million purchase of three Boeing 787-8 Dreamliners by Uzbekistan Airways earlier this year.
Large-scale Chinese government lending to Tajikistan has dried up over the last five years.
While Beijing has hit the brakes, Chinese firms have steadily increased investments (sometimes in the form of joint ventures) in mining, cement, textiles and agriculture. Unlike loans from Eximbank, the Tajik government does not have to pay these back. For joint ventures the Chinese partner will typically make the majority capital investment, with the Tajik side organizing land and regulatory approval. Often the Tajik government provides tax benefits or free land for Chinese investments.
In select sectors, these Chinese investors have created an export industry. Gold production rose from 2.4 tons in 2012 to 8.1 tons in 2019, when one Chinese-Tajik joint venture reportedly accounted for over 70 percent of production. Similarly, in 2013 Tajikistan produced a mere 30,000 tons of cement and imported about 3 million tons. By 2018, the country produced 3.8 million tons and exported 1.4 million. Almost all of this was made by Chinese firms. A Chinese-owned textile firm claims to be Tajikistan's largest exporter in terms of foreign currency earnings. Silver production also increased by 17 percent in 2019.
But with Tajikistan's small market and hostile business conditions, major projects are harder to get off the ground.
Several Chinese investors have announced plans in recent years to modernize the Talco aluminum smelter, the country's largest industrial asset. The Soviet-era plant, which uses up to 40 percent of Tajikistan's limited energy supply, badly needs an upgrade. Dushanbe has changed legislation to allow foreigners an ownership stake, but Talco remains controlled by President Emomali Rahmon's family and his government has kept the terms of any agreements secret (if they exist at all).
The one exception that could put Dushanbe on the hook would be the $3.2 billion Tajik section of a mooted gas pipeline from Turkmenistan to China, Line D, which was agreed in 2013 and would see state-owned Tajiktransgaz operate as a joint-venture with China National Petroleum Corporation. If the project loses money, the Tajik side would possibly need to repay some of the debt. The economics of Line D seem less viable now than when first proposed, however, and little progress has been made.
If either of the Talco refitting or Line D were to go ahead, a Chinese firm would hold a major stake in projects producing a significant share of Tajik budgetary revenues.
In Kyrgyzstan too, Chinese government-to-government lending is dropping - here because of the Kyrgyz government's concerns about the debt burden. And as in Tajikistan, there has been a steady stream of Chinese private investments in the country for which the Kyrgyz government bears no responsibility.
The big investments are in oil refining and gold mining. But public mistrust of foreign businesses, particularly Chinese, is a drag on capital flows. Major investments in Kyrgyzstan face public protests that have stopped production, including the cancellation earlier this year of a $275 million logistics center.
Businesspeople were further horrified when local protestors took control of Chinese mines during political upheaval last month, a setback for the new president's hopes to attract foreign investment. Chinese investors in Kyrgyzstan and Tajikistan tend to be first-time overseas investors seeking markets with low competition. Pictures of a newly built ore-processing facility on fire in the Kyrgyz mountains will not inspire confidence.