Sino-Uzbek Economic and Energy Ties: A Growing Partnership

2012-10-19 by Richard Weitz

Energy security represents a major force driving Beijing’s increased interest and involvement in Uzbekistan.

A combination of a booming economy and declining domestic energy production has resulted in China’s importing an increasingly large percentage of its oil and natural gas. In particular, the PRC’s natural gas consumption will grow rapidly in line with the government’s plan to use more clean energy. According to some estimates, China’s natural gas consumption will increase from 4 percent today to 10 percent of China’s annual total primary energy consumption by 2020.

Although Kazakhstan has become the PRC’s lead energy partner in Central Asia, China has also been developing energy ties with Uzbekistan, one of the largest natural gas producers in the world. Uzbekistan’s gas production was about 65 billion cubic meters (bcm) in 2011, of which more than one quarter (some 18bcm) was exported, mainly to Russia.

For its part, Uzbekistan is eager to diversify its energy customers beyond Russia. Until recently, a lack of investment and export pipelines has resulted in most of Uzbekistan’s gas being used for domestic consumption. Uzbekistani economic planners, wary of allowing Russian companies to obtain even greater control of their energy resources, have seen Chinese investment as one way to break out of this situation.

BEIJING – MAY 08: Natural Gas Vehicle and station exhibition hold on May 08, 2012 in Beijing, China. Credit Image: Bigstock

According to its new contract with China in May 2012, Uzbekistan will export some 2-4bcm of gas to China this year via a pipeline the Central Asia-China transit pipeline that runs through Turkmenistan and Kazakhstan.

In December 2010, the Asia Trans Gas Uzbek-Chinese joint venture created by Uzbekneftegaz and the CNPC opened the second strand of Uzbekistan section of the Turkmenistan-to-China gas pipeline. It should allow the flow of LNG to the PRC through the pipeline to reach its expected annual level of 15 billion bcm.

PRC energy companies are helping explore and develop Uzbekistan’s oil and gas fields, including those in the Aral Sea, Ustyurt, Bukhara-Khiva and Ferghana Valley. A subsidiary of the China Guangdong Nuclear Power Corporation is prospecting for black-shale uranium in Uzbekistan’s Navoi Province.

Expanding the Envelope

Besides securing access to Uzbekistan’s energy resources, the Chinese also desire to expand bilateral commerce and increase PRC investment opportunities in Uzbekistan.

With approximately 30 million citizens, Uzbekistan offers Chinese traders and investors the largest number of potential consumers among the individual Central Asian countries. In recent years, Uzbekistan, though lagging behind regional leader Kazakhstan, has achieved rapid economic growth rates that have helped raise the country’s still low per capita gross national income.

Meanwhile, Uzbekistani political and business leaders see China as potentially the region’s most important engine of future economic growth, a belief that has led them to embrace the PRC’s growing presence and show respect for Beijing’s economic and security preferences.

Economic relations between China and Uzbekistan have dramatically increased since Uzbekistan joined the SCO in 2001. The PRC is Uzbekistan’s second largest foreign trade partner after Russia, with $2.6 billion in two-way trade in 2011.

The trade flows are fairly balanced in terms of value, with approximately one billion dollars’ worth of imports and of exports recorded for China with Uzbekistan in 2010. Uzbekistan has surpassed the United States as the main source of the PRC’s cotton imports. In addition to cotton fiber and energy products from the Caspian Basin, other Uzbekistani exports to China include metals, minerals, and food products. Uzbekistani customers turn to China for much of their imported machinery and equipment.

PRC enterprises have made substantial direct investments in Uzbekistan to help develop the country’s natural resources, including gold as well energy.

Expanded Presence

By the end of 2011, China’s total foreign direct investment in Uzbekistan had reached $4 billion. More than 400 Chinese enterprises have invested in Uzbekistan’s energy, transportation, telecommunications, petrochemistry, construction, agriculture and finance sectors.

In October 2011, the two countries established inter-government cooperation committee, to study how to increase bilateral trade and investment even further. It is chaired by Uzbekistan’s First Deputy Prime Minister and Chinese State Councilor. Its six sectoral subcommittees cover: trade and economy, energy, transportation, science and technology, humanitarian affairs, and mutual security. An early focus has been the expanded use of joint special economic zones, such as participation of leading PRC firms in creating a new Hi-Tech Industrial Park in Uzbekistan.

China offers the SCO’s Central Asian members billions of dollars in short-term credits and other loans. Uzbekistan has used these interest-free and long-term soft loans from the Export-Import Bank of China to support some twenty infrastructure projects worth more than $600 million. Beijing has also proposed establishing a new multi-billion dollar SCO Development Bank, with China initially lending the proposed institution most of its money.

According to the press service of the President of Uzbekistan, some 40 bilateral trade and economic, investment and financial agreements and contracts worth $5.2 billion were signed during Karimov’s visit to Beijing in June 2012.These projects encompass the energy, mining, transportation, electricty, chemical, and high-technology (IT, pharmaceuticals) sectors.

The Chinese government has been especially eager to help Uzbekistan develop its transportation and other economic infrastructure, which enhances the country’s capacity to serve as a transit state for Chinese economic activities in other Central Asian states and perhaps beyond.

At the time of their independence, the major roads, railways, and energy pipelines in the new states of Central Asia all flowed northward towards Russia rather than eastward toward the PRC. During the past decade, China and Uzbekistan have launched several initiatives to overcome the legacy of the Cold War and develop direct transportation links.

For example, they are implementing plans to launch cargo flights between Tianjin and Uzbekistan’s Navoi air hub as well as comemrcial flights between Navoi airport and Tashkent in Uzbekistan with China’s major industrial centers and Urumqi.

Substantial progress has already been realized in developing new east-west energy pipelines. In April 2007, the Chinese and Uzbekistani governments announced they would construct a 500-kilometer natural gas pipeline between their countries, with an initial annual capacity of 30 billion cubic meters (bcm) per year. Even before the pipeline opened, its announcement enhanced Uzbekistan’s leverage vis-à-vis Russia’s Gazprom and forced that giant energy company to pay higher prices for Uzbekistan’s natural gas.

China has been holding talks since the late 1990s with Uzbekistan and Kyrgyzstan on the construction of China-Kyrgyzstan-Uzbekistan railway, which would provide the shortest transport route from China to the countries of Central and South Asia. The proposed route would start in the Chinese city of Kashgar, enter Kyrgyzstan at the Torugart Pass, follow a route to Kara-Suu near Osh, and terminate at Andijan, near where the CNPC is developing oil and gas fields.

The parties are still discussing how to finance the project as well as the size of the rails. The Uzbekistani representatives are resisting meeting China’s demand to use a narrow rack gauge across the entire rail line. Nevertheless, Presidents Karimov and Hu reaffirmed their construction plans when they met in June 2012.

If constructed, China would be able to sell more of its goods in Central Asian markets, leading to enhanced PRC influence in the region.

It would also provide the PLA with more efficient transportation and logistics infrastructure should Beijing ever decide to intervene militarily in Central Asia.

Editor’s Note: Because of Chinese growing earnings off of the US debt, the US is de facto funding a part of the expanded Chinese global presence.

"If everyone is thinking alike, someone isn’t thinking."

—General George Patton Jr.

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