Chinese companies have become a locomotive for change in Central Asia, says EDB

Chinese companies have become a locomotive for change in Central Asia, says EDB
Chinese companies have invested billions into Central Asia but a $40 trillion fund gap out to 2040 remains. The cooperation between multilateral development banks and leading Chinese companies will be key in raising the funding to close the gap, says Nikolai Podguzov, chairman EDB. / bne IntelliNews
By Ben Aris in Berlin March 28, 2024

Chinese companies are actively investing in the Eurasian countries and have become a locomotive for change as the world becomes smaller. Now they are building ties with the multilateral development banks in the region as they try to dovetail the commercial goals of the multinational corporations (MNCs) with the development goals of the development banks.

Nikolai Podguzov, chairman of the management board at the Eurasian Development Bank (EDB), the biggest development bank in Central Asia, has been working with Chinese companies for more than two decades with an investment portfolio of more than $15bn in Eurasia.

Ties between Eurasia and China are surging, with a mutual trade up 28.3% year on year in 2023 to $314.8bn. Within this trade Chinese exports to the region rose 46.6% in 2023 and a 12.7% uptick in imports.

“The EDB has conducted on annual basis an analytical study of mutual investments in the Eurasian region for more than 10 years. According to our analysis, Chinese foreign direct investment stock in Central Asia increased to $55.9bn. Half of that amount, or $29.3bn, (52.3%) is in the energy sector (oil and gas extraction, and electricity generation). Most of this investment ($41.9bn) is in Kazakhstan,” Podguzov at the BOAO Forum for Asia conference in Beijing this week, a leading investment forum covering the Asia and Eurasia region.

Podguzov points to the Xi’an Declaration, which emanated from a meeting of the five leaders of Central Asia in the “C5+1” format with Chinese President Xi Jinping last year during the first face-to-face meeting since the pandemic, as a testament to the elevated China-Central Asia collaboration.

“Paragraph 9 of the Xi’an Declaration, signed at the summit, sets out the priorities for cooperation in the power sector. The key areas are: broadening and deepening cooperation along the entire production chain, in the sphere of conventional energy sources (oil, natural gas and coal), hydropower, solar, wind and other renewable energy sources, in the peaceful use of atomic energy, etc. In 2023, meetings were held, agreements were signed and investment projects were launched in this respect,” Podguzov explained.

“China is keen to secure access to Central Asian resources – energy (oil, gas and coal), uranium raw material and renewable energy sources. Central Asia countries need foreign investment to develop their oil and gas resources. They also need to increase their power generation capacity, as well as to upgrade power transmission lines and build new ones,” Podguzov added.

The meeting was a milestone event as Central Asia moves closer to China, its main investor and trading partner, but at the same time attempts to maintain good relations with the West at a time of rising geopolitical tensions.

Investments into the energy sector play a central role in the expanding cooperation as the fast growing Central Asian economies seek more resource to power their countries. The strategic alliance aims at harnessing Central Asian resources, including critical materials pivotal for clean energy technologies.

“China may have more interest in Central Asia's critical materials. The proven reserves of critical materials in the Central Asian countries vary substantially. Central Asia holds 39% of global manganese ore reserves, 30% of chromium, 20% of lead, 13% of zinc, 9% of titanium, 6% of aluminium, 5% of copper, 5% of cobalt and 5% of molybdenum. All these critical materials are used across a wide range of clean energy technologies. For example, Kazakhstan has the world’s largest reserves and is the second-largest producer of chromium, used in wind turbines,” Podguzov said in his presentation at the BOAO event.

The cooperation of regional MDBs and MNCs, is a key element for promoting economic integration and expansion, says Podguzov.

“Regional multilateral development banks (MDBs) and multinational corporations (MNCs) have a lot in common. They are both important players. They both have to act in the context of global geopolitical uncertainty and increasing economic fragmentation. The efforts of MDBs and MNCs effectively complement each other. MDBs present significant opportunities form MNCs to expand cooperation and drive growth. Regional MDBs create favourable conditions for trade and investment through financing infrastructure and facilitating international cooperation,” says Podguzov.

The EDB's strategic goals, ranging from capital mobilisation to enhancing capital markets and promoting local currency financing, are instrumental in amplifying cross-border infrastructure projects, says Podguzov.

A good example is the Almaty Ring Road project (BAKAD) in Kazakhstan – the largest public-private partnership project in Kazakhstan and Central Asia – that involved the successful cooperation between EDB and its global counterparts like the European Bank for Reconstruction and Development (EBRD) and the Islamic Development Bank to complete the project that improves Kazakhstan’s links to the global markets.

However, there is a growing financing gap between investments needed to upgrade the economies of Central Asia and the amounts available: EDB estimate that the total financing gap is worth $40 trillion dollars in the period out to 2040.

“The persistent increase of the financing gap poses a significant challenge to achieving Sustainable Development Goals in EMDCs. To address this financing gap and build the necessary capacity to meet the growing needs of EMDCs, collaborative efforts are needed,” Podguzov told the delegates. EDB is playing a key role as the local development bank and has a leading role in raising this funding from the “MDBs family” of development banks, the EDB chairman said.

“Even a global MDB cannot finance a $3bn road or a $5bn hydropower plant alone. The way to go is to promote co-financing, fund-like arrangements, and loan guarantees,”  Podguzov added.

“MDBs’ cooperation could help finance large cross-border projects. We can increase the scale of cross-border infrastructure projects, such as railroads, automobile roads, bridges, and telecommunications links. We can attract commercial financing, boost trade and investment, and mitigate political risks. Public-private projects are difficult to implement but they yield much higher economic returns,” said Podguzov.

Podguzov also highlighted the subsidiary goals of promoting environmental, social and governance (ESG) principles, with China's ambitious dual carbon targets casting a long shadow over economic cooperation dynamics, according to Podguzov. The green transition heralds a paradigm shift that will see a total of $16 trillion of investment to achieve carbon neutrality by 2060, with MNCs playing a central role in this transformation and ready to dovetail their expertise with China's low-carbon aspirations.

“Effective MDB cooperation will help scale up financing and increasing the number of joint projects. Together, MDBs can do more for their member states than they can separately. By mobilising joint efforts, we contribute to narrowing the financing gap in developing countries and promoting sustainable development,” says Podguzov who has some specific recommendations for Chinese companies:

  • Global expansion of Chinese companies requires significant financing for the projects with Chinese interests in the other regions to materialise, especially in private sector;
  • Financing is required in dollars as well as in RMB and local currencies, depending on a project;
  • Getting the required financing from local sources is expensive and not always reliable, so involvement of Chinese financial institutions is a must to promote and support activities of the Chinese companies outside China;
  • On the other hand, Chinese banks lack sufficient knowledge of the local projects outside China to properly evaluate credit, project, financial and sovereign risks. Hence a reliable financial partner with deep local expertise is desirable;
  • Regional MDBs (such as Eurasian Development Bank in Central Asia) are right candidates for cooperation with Chinese banks in order to:
    • Become a transparent, independent and reliable local partner;
    • Cover up for the project risks, including KYC and compliance checks, credit analysis of a borrower, deep analysis of the project itself and careful monitoring on all stages of the project;
    • Cover up for the sovereign and political risks in emerging markets due to its Supra-national status and immunities; and
    • If required, to cover up for the local currency or RMB/USD forex risks.
  • Finally, regional MDBs can act as a co-financier with Chinese Banks of such projects.