Monica Ellena in Tbilisi -

A high-ranking Georgian delegation, headed by Prime Minister Irakli Garibashvili, has kicked off a five-day visit to China to strengthen economic ties and diversify the Caucasus nation’s trading partners.

Dignitaries’ visits from both sides have intensified over the last year and bilateral meetings have inked a string of memoranda of understanding, culminating in a cooperation agreement in the framework of the $40bn Silk Road Economic Belt, the project China initiated in 2013.

For Tbilisi the significance is clear. Slower growth, declining remittances, and shrinking foreign trade, coupled with a sharp devaluation of the national currency, the lari, against the dollar, have left the country cash-stripped, creating macroeconomic headwinds and a thirst for fresh, much-needed investment.

But the interest is mutual as the world’s second largest economy is clearly interested in Georgia’s strategic location and privileged relations with the EU. For a hundred years, Georgia played a key role in the old Silk Road as a gateway between Europe and Asia; today the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU unlocks new potential for Chinese companies.

Chinese Hualing Group, Georgia’s largest single investor with $500mn worth of investment, ranging from wood harvesting to banking, is developing a $40mn Free Industrial Zone (FIZ) in Kutaisi, the country’s second city. As Liu Bo, trade and commercial attaché at the Chinese embassy, explains to bne IntelliNews, “if a Chinese company… sets up a production line in the FIZ, it can put the label “produced in Georgia” onto its goods and can export to EU without customs.  That’s a great advantage for investors”.

Trading on the rise

In 2014 China grew to become Georgia’s fourth largest trading partner. The total $823mn (€735.7mn) accounted for 7.2% of total turnover of $11.4bn, marking a 200% increase in a decade. Imports still outpace exports, but that number is increasing as well: according to official data, last year it grew by 2% to $90.3mn, accounting for 3.2% of the total $2.8bn. China was FDI’s third largest provider, stumping up $195mn.

It was also the fifth largest export market for Georgian wine in the first half of 2015, purchasing almost 1mn bottles: eyeing the potential growth, the Georgian Wine Agency employs a permanent representative stationed in Beijing.

Low taxes, easy procedures, and little corruption are listed as the main reasons for investing. Alongside scores of small family-run enterprises crowding Lilo wholesale market on the outskirts of the capital, “22 medium and large companies are registered in Georgia, engaged in construction, infrastructure, banking, and energy”, added Liu Bo.

Not all is going smooth though. Changes to the visa code in September 2014 made life more difficult for Chinese entrepreneurs and on September 3 China’s ambassador to Georgia, Yue Bin, called for a free visa agreement.

Chinese investment looks set to grow further as the two countries agreed to look at the feasibility of a free trade agreement (FTA). According to a study by Tbilisi-based Policy and Management Consulting Group (PMCG) and China’s University of International Business and Economics, a FTA would boost Georgia’s annual exports to China by 9% and China’s by 1.7%.

Key infrastructure

Potentially, the key Chinese investment lies on the Black Sea coast, in Anaklia, where plans are underway to build a large, deep-water harbour, which, once completed, is set to handle 40mn tonnes of cargo per year. One of the seven bidders, Power China, aims to invest up to $5bn, a gargantuan investment for a country whose GDP in 2014 was $12.2bn. The government will announce the tender winner this autumn.

The port could be vital in helping China diversify land routes for its goods to Europe (most of which currently run through Russia) and would tie-in with the railway. On February 6, Tbilisi welcomed the first cargo of Chinese goods having left Beijing on January 29. According to Georgia’s Ministry of Economy, the Trans-Asian-Caucasian train reduces transit time by five times in comparison with carriage by sea. If in case of sea transport 40-45 days are required, in this case freight from China will arrive to Georgia within 9 days.

The government anticipated that two MOUs involving the railway system would be signed in China, between Dalian Locomotive and Rolling Stock Co. and Georgia’s Carriage Building company and between Georgian Railway and the Chinese Railway Construction Corporation.

Georgia is also among the founding members of the much anticipated, China-led Asian Infrastructure Investment Bank (AIIB), a new financial institution with an initial authorised capital of $50bn. The initial meeting to appoint the bank’s first president, resulting in the selection of China’s former deputy finance minister Jin Liqun, was held in Tbilisi, a sign that Georgia is indeed on the radar.

As Prime Minister Irakli Garibashvili said on July 14, “Georgia is not just looking west.”