Foreign business wary of Xinjiang trade deals

July 18, 2013 by Raffaello Pantucci

BETWEEN 2-6th September China’s western-most megacity, Urumqi, opens its doors to host the third China Eurasia Expo. The event, upgraded to an annual international trade fair in the wake of the May 2010 work plan to help develop Xinjiang, aims to bring investment to the province to try to help mend roiling ethnic tensions that periodically erupt into lethal violence.

Founded in notions of redeveloping the old Silk Road, the Expo is – in the words of this year’s banner – all about “opening up, mutual trust, [and] co-development.”Last year’s Expo drew an impressive crowd from China and abroad. Headlined by Premier Wen Jiabao, the official Chinese representation was a step up from the previous year when Vice Premier Li Keqiang opened the ceremony. This year’s representative from Beijing has not been confirmed, but it would not be surprising if Premier Li stepped into the role – having both assumed the economic brief from outgoing Premier Wen, and played a prominent role in the post-2009 riots Xinjiang policy.

Wen has played a major role in steering the direction of the policy changes implemented subsequently, including chairing the meetings focused on ‘pairing assistance’ whereby 19 wealthier provinces in China take responsibility for specific parts of Xinjiang. A traditional Communist Party tool, the logic is that the wealthier parts of the country provide direct support to the less developed parts – by sending cadres and a proportion of their annual GDP and by helping develop policy ideas.

The most visible aspect of this assistance, however, is the direct investment into the province. Drive from southern capital Kashgar to Opal – a dusty village home to the mausoleum of the Turkic Samuel Johnson – Mohammed al-Kashgari – and the road is for the most part filled with Guangdong construction firms scrambling to build large malls and housing estates.

Up in Tashkurgan, a predominantly Tajik city of less than 30,000 that is the last major outpost on the Karakoram Highway to Pakistan, Shenzhen has taken on responsibility for providing investment – almost doubling the size of the city. Outside the capital Urumqi, VW and its Chinese joint venture partner SAIC are building a car factory that will put some 50,000 sedans per year on the road by 2015.

It is this last type of investment that the government would most like to foster and encourage – hence the fanfare of an international Expo aimed at bringing together Xinjiang businessmen and leaders with an array of foreign investors. Last year’s Expo was opened with speeches by regional government heads (Kazakhstan, Kyrgyzstan, Tajikistan and, oddly, the Maldives), as well as economics ministers from Russia, Turkey, Afghanistan and Chinese economics minister Chen Deming.

Providing colour on the sidelines were former British prime minister Tony Blair and Dutch PM Jan Peter Balkenende, as well as an array of senior leaders from around the world. The key message of the conference was delivered by Premier Wen in his opening remarks where he told the audience that it was “a new constructive platform to boost regional cooperation.”

Figures released subsequent to the event showed that total investment attracted from abroad during the Expo in 2012 was $6.24bn, a figure that was up on $5.5bn the previous year. Both of these figures, however, were dwarfed by the domestic investment drawn in by the show – $29.1bn in the first year and an unspecified amount the second year that was quoted as being as high as 6,602bn RMB.

It is far easier to persuade state-owned companies or domestic Chinese companies to invest in the province than it is foreigners. As one Guangdong electronics manufacturer told the author, “the provincial authorities in Guangdong encouraged us to invest in Xinjiang.”

This sort of gentle persuasion is something that the Xinjiang government has been eager to encourage, focusing on European governments as potential investors. Delegations from Xinjiang have visited Latvia, Finland, Denmark and the United Kingdom.

The UK in particular has cut a distinctive path with Xinjiang (in contrast to the overall politics around the UK-China relationship), with the Confederation of British Industry (CBI) coordinating the signing of a formal cooperation agreement with Xinjiang. An optimistic agreement, it stipulates that both will provide “public promotion, mutual visits, trade fairs and expositions, business travel, consultancy” and more.

The reality behind all this activity, however, can be found in the relatively limited number of foreign investments that are actualized in the province.

It is not true to say that Western companies have shunned the province, but the Expo itself seems unable to transform its fanfare into international investment. For foreign companies looking to invest in Xinjiang, a number of realities remain.

First, the province is far from any large body of water, meaning materials and products have to be transported by expensive air or slow road. Nearby markets in Central Asia remain relatively immature, and transport links to them are equally problematic. A second train line has now been opened to Kazakhstan, but the main station in Urumqi is described by regional tradesmen as a major obstacle.

The province itself is far better connected up than it used to be, but at a sixth of China’s entire landmass (about four times the size of California), it remains a challenge to get around.

And all of this is to ignore the fundamental ethnic troubles that periodically erupt in the province.

Uighurs, a Turkic people indigenous to Xinjiang who are closer linguistically, culturally and ethnically to Uzbeks or Turks rather than Han Chinese, chafe under what they see as an invading Chinese domination. This has led to violence across the years, culminating in riots in Urumqi, the provincial capital, in July 2009 that claimed some 200 lives.

Already this year, three large-scale clashes have been reported in the province and a number of smaller-scale lethal incidents (there are even more that simply go unreported). More than 60 people have been killed according to official figures, with reports of incidents involving Islamist radicals armed with homemade bombs and knives.

The point, however, is not so much that this presents a security problem from an investment perspective – though it is a consideration in certain counties in the province – but rather the local government’s reactions to these incidents. Fearful of images or violence spreading, the government tends to block telephone signals in the province in response to an incident.

In the wake of the 2009 riots, the internet was largely closed down for months, leaving the province isolated. Telephones are frequently blocked from sending images and tougher regulations about registering SIM cards are being implemented. If you try to use an out-of-province SIM card Xinjiang, for example, it can be hard to purchase credit.

All of which is toxic for foreign firms seeking to invest.

The thought of abruptly being shut off from the world for months is something that makes people stop and reconsider their investments, fearful of suddenly getting caught up in an electronic blackout in the wake of large-scale rioting something that looks increasingly likely given the uptick in violence this year.

For Beijing, however, this presents a vicious circle. Foreign investment is seen as one of the keys to soothing Xinjiang’s historical tensions, but it is not going to come while the province remains disconnected both literally and virtually. This circle is one that Beijing has yet to square. Expect this year’s Expo to be much the same as previous ones, bringing in more domestic investment than foreign.

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