The global financial crisis has not left China unscathed, but its recent actions in and around Central Asia show that it has the means to turn the crisis to its advantage.  Thus China’s “peaceful rise” is giving it hitherto undreamt of opportunities to secure strong commercial and economic linkages to Central Asian states and energy holdings. Neither is this program of action confined to Central Asia. Indeed, we see it in regard to Russia, Latin America, and Africa as well. Thus China’s actions bear all the earmarks of a strategic plan of action that is now being implemented globally as the opportunity for China to use its economic power to secure unchallengeable positions in Eurasia presents itself. 

BACKGROUND: Essentially China is taking advantage of its enormous cash reserves and still growing market that is a magnet for exporters to secure key positions in key economic areas. China is basically buying up major energy assets in distressed countries at knock-down prices for long-term contracts and secures for itself not just energy flows but key strategic advantages for years to come.

Furthermore, China has so much cash it can buy up distressed properties abroad or lend to states or state entities who are undergoing equal distress. For example, it has just been announced that China is lending Kazakhstan US$10 billion. More specifically, China National Petroleum Company (CNPC) is buying a minority holding in Kazakhstan’s company AO Mangistaumunaigas from state-run KazMunaiGaz National Co. Meanwhile, China’s total oil imports hit a one year high in March 2009, indicating continuing strong demand. This deal enables Kazakhstan to continue its robust pace of exploration for oil, having received an estimated investment of US$21.1 billion in 2008 for exploration and production and it needs to keep that up during this crisis to prevent an economic contraction. Thus its need plays into China’s strategy.

This strategy is clear. Although most of its energy imports still come from the Middle East, Beijing is rapidly seeking to diversify its suppliers on a global basis: Venezuela, other Latin American countries, Africa, and Russia, as well as Central Asia. China, like all major consumers, fears excessive dependence upon any one supplier and hence seeks to diversify suppliers. Second, it has well-known strategic anxieties that the Strait of Malacca or other Indian Ocean waters may be closed  to it during a time of crisis. Therefore, for geostrategic reasons, it also seeks to avoid excessive dependence upon Middle Eastern and African producers, seeking producers as far afield as Iran who can then ship gas and oil to it overland through new pipelines that China is helping to build in Kazakhstan, Turkmenistan, and Uzbekistan and which could ultimately connect to Iran. Beyond that, China is tying loans to energy because it not only gets the loans plus interest back: it can now tie up energy assets in long-term contracts at reduced prices for exclusive access.

IMPLICATIONS: This is neither taking place only with regard to Kazakhstan, nor only with regard to oil and gas. Apart from lending Kazakhstan money, China is also building power plants in Tajikistan and Kyrgyzstan and  pipelines in Turkmenistan that will then go on to Uzbekistan so that it can buy gas from these countries. Kyrgyz officials want China to import electricity from the Kambarata power station that Russia is building, to prevent surplus capacity and under-production. Buying hydropower makes sense for China, which has increasingly been pledging infrastructure assistance and cash to Central Asian states through the Shanghai Cooperation Organization, e.g.  helping Tajikistan build dams and roads. Moreover, China can become a handler or middleman, e.g.  wiring Central Asia into Pakistan and Afghanistan and picking up huge transit and construction fees, as suggested by Sebastien Peyrouse.

However, in energy the key targets are in Eurasia. CNPC, in its own words, has been making acquisitions non-stop. And other Chinese companies are equally active: PetroChina, which holds CNPC’s non-politically sensitive assets, is soon going to start building a pipeline from its terminal in Dqing to the Russian border that will link up with the pipeline Transneft is building to ship Rosneft’s oil to China. The pipeline will cost China 10 billion Yuan (US$). That pipeline from Dauqing represents China’s contribution to the Russo-Chinese oil project announced in February. In this deal China loaned Rosneft and Transneft, two immensely leveraged firms, US$25 billion to commit them to build the pipeline from Angara to Skovorodino in Eastern Siberia from whence the oil will then go to Daqing. Starting in 2011, China will receive an annual total of 15 million tons from Russia which is now tied, against its preference, to a single consumer at the end of its pipeline, a situation that it has successfully blocked  everywhere else. Beyond this, China will now have ample opportunity to gain equity assets not only in Kazakhs firms but also in Russian firms and influence state policy directly in these petro-states. Worse yet from Moscow’s viewpoint, it is actually selling the oil to China, when all the costs, including the loans and interests are calculated, at a price that is estimated as being between US$11.40 to US$ 22 a barrel. In other words, China is getting oil at rock-bottom prices, even below the US$ 52 per barrel that is today’s price. Moscow and Astana must accept not only Chinese equity positions in their energy firms, Russia also has to settle for outcomes that it has been able to reject everywhere else and get less for its products than the market is now charging.

CNPC’s program is not going to stop. It recently announced its intention to invest up to US$44 Billion in oil and gas projects in 2009, especially in core projects like the ongoing Kazakhstan-China oil pipeline that will send China 20 billion tons of oil a year starting in 2011. We can expect that other projects in Central Asia, e.g. the gas pipeline from Turkmenistan, will also be moved further to completion and that Chinese firms and the government will be looking to acquire other distressed energy firms at  cut-rate prices to gain global and regional leverage among suppliers and governments.

CONCLUSIONS: These cases, along with Chinese actions beyond Eurasia, exemplify China’s so called “peaceful rise”. There is no force or threat to this unless one wants to count the pressures of the market as force. Companies and governments who cannot meet their debts or are short of cash will generally look for lenders who offer the most favorable terms. And in the current climate China, sitting atop enormous cash reserves, is more than willing to offer such terms in return for exclusive access to the product, below-market prices, and opportunities for further equity access in those firms and countries. In this way, these borrowers get their cash but they also suffer, as debtors habitually do, from a loss of freedom of action. To a considerably greater degree than before, they are tied to China’s economic chariot and to its economic and political preferences. In this context, it is hardly a surprise that for years Russian leaders have been publicly warning that if Russia did not get its house in order, China would gain a commanding economic position in Russian Asia, or warning against the rise of China as exporter, importer, and now lender in Central Asia.

Neither is it surprising that China sees in this crisis an opportunity (as the Chinese characters for crisis suggest). In the last major economic crisis a decade ago, China acted not just to secure Southeast Asian stability but also benefited immensely from the perception of its role and from the emergence of its economic power as the anchor of Asian stability and one of the anchors of global stability as is now the case.  Much has been written about China’s economic policies in Asia and its global energy policies that have been devised to ensure its maximum energy security. But now we may begin to see the fruition of those policies in Central Asia and elsewhere. While many will undoubtedly benefit, somebody will lose and the results from that perspective will not be pretty.

AUTHOR’S BIO: Stephen Blank is Professor at Strategic Studies Institute, US Army War College. The views expressed here do not represent those of the US Army, Defense Department, or the US Government.