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Dirk van der Kley:
Thank you for taking time out of your Tuesday afternoon to come and listen to this presentation. I'd like to thank Nargis for organizing the presentation and also to the Fairbank Center and the Davis Center as well for hosting me. I really appreciate it. As Nargis said, I completed my, just recently completed my PhD on economic statecraft in Central Asia. It finished up in this in terms of the cut off of the dates was 2016 so today's going to be sort of an updated version on that looking to sort of 2019, 2020 and it's going to focus on the changing economic activities of China in Central Asia. The game plan from my presentation is very straight forward. I'm just going to go through Tajikistan, Kyrgyzstan, Kazakhstan and Uzbekistan, and explain what changes are happening in each of those countries. I won't do Turkmenistan simply because it's so opaque and I didn't do any on the ground research there, so I won't be discussing that, but happy to take questions if necessary.
So I would basically argue that in the last three to four years we've seen three changes in the economic activities or the shape of economic activities that China undertakes in Central Asia. And now the first is very clear, we've seen a significant drop in government to government lending. So EXIM Bank lending to Tajikistan, to Kyrgyzstan has dropped off a cliff or is about to drop off a cliff. It's a little different in Kazakhstan and Uzbekistan, but in Kazakhstan we've seen a significant drop in government to government lending as well. Uzbekistan is a slight outlier. The second trend is we're seeing investments take the leading role, so investments that provide exports, that create budgetary revenues through tax end up creating jobs. They're now sort of taking the leading role instead of government to government lending and they really haven't dropped off in the same way. Even though Chinese investments around the world, particularly in developed countries have slowed down in the last few years. And then the third thing we're seeing, and this is very much in the early stages in the bigger countries, Kazakhstan and Uzbekistan, is we're seeing joint financing of projects. China is trying to bring other countries on board to do some of the financing work to try and get recipient states to be more involved and have skin in the game. So they're the three changes, dropping government to government lending, investments leading role and joint financing. We're starting to see some of that. So what's causing these changes? Now I'll pause that there's really three factors, they're weighted differently in different countries, but the first is there's pool factor from the recipient state themselves. Infrastructure is nice, but they'd really, really like to see jobs, GDP growth or budgetary revenue growth and sources of foreign currency.
So what that amounts to is they're trying to create exports, that's the simple part of that. Now that's why we're looking at industrial cooperation instead of building roads and rail. And at the moment, there are almost no roads and rail being financed by China anywhere in Central Asia. The second factor is the push factor from Beijing. And I think this one's pretty obvious. Lending from EXIM Bank has become tighter as Beijing has become a little bit more concerned about debt sustainability or the perceptions of debt sustainability, longer approval times for EXIM Bank loans and just less approvals moreover. And that's happening everywhere. And the third is coming from the companies themselves. So in an ideal world, they'd very much like... They like doing these large infrastructure projects. They're very profitable for these companies. They don't have to try and drum up business in difficult business environments in Central Asia.
But there are still a lot of companies in China, in certain industries that face very, very tough business conditions. And when I went and spoke to businesses in Kyrgyzstan, Tajikistan, Kazakhstan, during my PhD, they always said the same thing, "We're escaping awful business conditions in China and Tajikistan or Kyrgyzstan is attractive because labor costs are very cheap and there's low competition." So that's why we see investment staying on in these countries even while it has dropped elsewhere. So that's the basic background. Let's get into the details and let's just go straight to Tajikistan.
So if you look on the right hand slide, the right hand graph there, which is titled figure two, you'll see the percentage of external debt held by China. And what I'd point out there is if you look at 2008 and 2018 the percentage is not that different. It's around 40% so between 2008 and 2018 despite all the talk that China was the major lender to Tajikistan actually, their percentage of external debt remains pretty much the same. And one, obviously the big, one of the big components is that is 2016 if you look at 2016 there, there's a big drop. That is when there was a 500 million Euro bond issued by Tajikistan sold to Europe at 7.125% interest, much higher than the 2% usually offered by EXIM Bank.
And you'll see that that's sort of caused the drop off there. And at this point, those repayments are probably more onerous than the repayments to China. I'd now draw you to figure one on the left and I think a few things stand out here. One is that lending in 2007 and 2008 were really the bulk of lending from China to Tajikistan. Since then it's been much lower. Usually when there's a project signed, it takes a few years for the disbursements to happen and so the big loan projects were signed in both 2006 and 2009 and they'll dispersed in those following years. Then the period 2012 to 2014, Tajikistan actually wanted to have a project with EXIM Bank and EXIM bank said no because of debt concerns. That was called, it was the Dushanbe combined heat and power plant and that they didn't end up agreeing to it in those terms. It ended up being an investment.
2014 just after the Belt and Road Initiative got announced, all of a sudden EXIM Bank opened up its coffers again and you saw that they allowed basically two projects. So there was a combined heat and power plant and a small railway and that was dispersed in 2015, 2016, 2017. Now these are net disbursements, so it is the amount lent by China or by EXIM Bank minus the amount repaid. And if you look at 2018 you can't really make it out there, but that's actually a negative number.
So that's the first year where China is paid... Where Tajikistan has paid more back to EXIM Bank than the other way and we don't have the figures for 2019 but given that there's no major projects currently being funded via this method in Tajikistan I would imagine it would be something the order of maybe minus 50 to minus a hundred million dollars and I would expect that to continue over the next few years if there is no new loan signed. And just to reiterate the point, there has been no new major loan signed in Tajikistan since 2014, that's already six years. So we're well past the stage of investment for infrastructure funded by loans being the major form of finance in Tajikistan.
If we sort of have a look at investment flows, you'll notice you see a completely different story. A big jump after 2014 things go up and down as they always do with investment flows. But the reality is we see here a relatively high level and you see some of those values, 300 million, 190 million, they're much higher than we've seen for a long, long, long, long, long time on the disbursements. So, and I just, it's 2007 Q three 2018 Q three unfortunately Tajikistan's administrative finance only published Q three figures in their financial reports for both those years it's frustrating, but that's how it is. So those numbers for the entirety of the year will actually be a little higher. And what you'll notice there is the gap between total and between China has closed significantly. Now these days, China is not the major investor. It's basically the only investor in Tajikistan. In 2018 up to Q three, it was 82% of total foreign direct investment.
So what we're seeing is growth or at least strong investment and complete weakening in lending. Those loans have gone to a very small number of select industries that are attractive to Chinese firms, the ones that I sort of talked about at the start there. They are generally not very experienced international investors. They are looking for a place where they won't face large amounts of competition, Tajikistan fits that bill, low costs and certain conditions that suite with regards to certain industries. So those two industries that I think have been most prominent are gold. There's a number of untapped gold deposits. And so you can see Tajikistan gold production here. China started investing in 2009, got serious around 2013 and basically all that growth that you see has come from Chinese owned mines in the region. It's gone from 1.3 to 5.5 tons there. Not shown on that particular document is it actually goes up to 8.1 tons in 2019 so it continues to rise.
Gold is pretty attractive for the Tajik government because it's a product that does not change. So if Tajikistan doubles, triples, quadruples its output, it's not going to affect global gold prices and so it can produce as much as it possibly can and still export that. And if gold prices are high, it'll make a lot of money. The other industry, I don't have a graph for this one is cement. So same story around 2013, Huaxin was the biggest cement investor in Tajikistan once again, first time overseas investor, chose Tajikistan because cement prices were actually much higher there than they were in China, much higher than they were in Southeast Asia because of lack of competition. Cement is a different sort of product. You need to do everything locally. And what they found is... What they did was able to sort of turn basically zero production to 4.2 tons, 4.2 million tons per year of cement and now they export 1.5 million tons of that.
So they've gone from a sort of minus 3 million or 3 million imports a year to now 1.5 exports. The story, the reason that they're doing it is exactly the same as with gold. Well not exactly, but wages are so much cheaper than China and the competition is very, very low and so they found that a very profitable market. What the problem they are facing now is Huaxin and others is there's a lot of cement factories moving into Central Asia from China and prices are dropping because it's localized and so they're producing more than ever, but the profit that they're seeing from that is not the same.
Now all this export revenue that's being generated by those Chinese investments is great. It's all nice, but it doesn't make up for the loss of export revenue that Tajikistan has had from its loss of aluminum production. So Tajikistan Aluminum Company is the major aluminum producer in Tajikistan. It is also the largest export for a very, very long time. The problem is from 2007 to 2018 its production has gone from something like 400,000 tons a year down to 100,000 tons a year just because the lack of a upkeep, no money to oversee production, to up to upgrade production. It's also held by a very small coterie of family and friends of president Rahmon so there's not much appetite initially to open that up to foreign investment because it is a very nice source of crony capitalism for the family. But they're sort of facing the reality now where they kind of have to and last year a Chinese company or a few Chinese companies have offered to invest and it looks like the one that offered last year is a pretty good chance of seeing that happen.
And so this will become a joint venture operation quite probably. I won't say definitely you will see aluminum production absolutely skyrocket, but it'll be interesting to see how they divvy up the profits for that. That is very much a different thing to what we've seen previously with the roads and it's very much a case that this is an industry where China will now be a major investor in almost all the large export industries in Tajikistan. It will be the largest taxpayer across multiple companies and it will be a reasonably sizable employer or Chinese companies will be a reasonably sizable employer, so they'll be much more involved in the economy. It will give them leverage that they did not have before. Much different leverage to when you just lend. That's different. That's the Tajikistan aluminum investment. That's probably going to be about 545 millions and of course we've got line D, gas pipeline.
This is a bit of a rough map, but as you can see it goes from Turkmenistan, through Uzbekistan, Tajikistan, Kyrgyzstan, and into China. It like the TALCO one was slated many years ago, hasn't happened and the reasons being there have been sort of price demand and it's still unsure if it will happen, but this would be a project that would be much, much, much, much, much bigger than anything that's happened with China and Tajikistan in the past. It's about $3.2 billion investment and you'll notice that only 1.2 billion has been lent over the entirety of the time that China has been lending to Tajikistan, so this is much bigger and it's going to likely be a joint venture if it happens. I'll get to if it happens in a second. This is sort of very much a new style investment for Tajikistan. It's going to, the investment comes from CNPC Finance, which is a Hong Kong based financial arm of CNPC, which is the China National Petroleum Corporation.
It gets its money by raising bonds with say, American pension funds, things like that. That's 10 American wealth management funds, so it tends to raise bonds those ways. It's still very cheap form of financing. As far as I can tell having looked through the Chinese sources, it looks like a $3.2 billion loan, 1.6 billion of that or so will go to CNPC. 1.6 billion of that would potentially go to the Tajikistan government. That wouldn't be recorded in what I showed you at the start because that will be a loan to a joint venture which has a partial investment by a state owned enterprise. And this is the hidden debts that you often hear about in the Belt and Road for countries like Tajikistan that don't record their state owned enterprise debts as debt in government. So it was originally sort of meant to happen in 2019, there's been very little building.
There's been a few constructions in Tajikistan, nothing in Uzbekistan, nothing in Kyrgyzstan. A lot of people say they don't think it's going to happen. I personally believe it will. So if we look up on the graph here, you'll see this is natural gas supply into China. If you look between 2015 and 2030, the biggest gap is natural gas production is shale gas, which is domestic production in China, pipelines and LNG, which are the top two parts of that. Imports from overseas, everything else is domestic production.
China actually has a lot of natural gas that it can draw on. In this sort of scenario, it really requires huge boosts in shale gas production within China. If that doesn't happen, they will need to then import more from liquid natural gas or from pipelines. In that scenario where shale gas doesn't produce as quickly or as much as they would want, I would think that this pipeline would again become quite attractive and I think, I personally think it is likely to happen, it'll just take a little while for them to see what happens with shale gas and what happens with demand going forward in a slower growth economy that we have in China.
My personal gut feeling is it will go ahead. There are plenty of people who disagree with me. I think that's all I want to say about Tajikistan, but the key takeaways are government to government lending as we've seen has really dropped off and we're now seeing attempts at investments in key parts of the economy that will provide budgetary revenues and exports. In this particular project, if it goes ahead, will provide something in the order of one to $200 million a year in tax revenues, which would be something like five to 7% or five to 10% of total tax revenues in Tajikistan if it was to be done today. So that's a significant amount and something that wasn't previously done in Tajikistan. So now to sort of segue to Kyrgyzstan, there the second part of this, I don't have another graph for them online.
They've decided not to do a joint investment with CNPC. They're just going to lease the land and they're going to get about something in the order of $75 million a year, which is about 4% government revenue if it goes ahead. So once again, we asked it's a different way of getting there, but we're now seeing ways of Chinese firms creating budgetary revenue in a way that they didn't before directly. Okay, so this is exactly the same, not exactly, but a very similar set of graphs for EXIM Bank annual net disbursements to Kyrgyzstan.
What you'll see there is a big drop off from 2017 same as in Tajikistan. There has been no major project signed since 2015, not 2014 here. And the deal signed in 2014 were a coal power plant and a road. That road is still being built and that's why you still see up to 2018, 2019 significant or some disbursements. But at the same time there's significant repayments happening. So my sort of back of the napkin calculations is that, well, let me put it another way. In 2019, Kyrgyzstan paid $230 million in servicing its debts to all foreign organizations. Probably about half of them were to China. So something in the order of 115 million. So if we put that on 2019 and you add 115 million to that 50 million there, you end up with sort of 175 million. So what I think has happened is they've borrowed 175 million from China for debt repayments for the road and they've repaid back 125 million.
That road is going to be completed next year. And if they don't borrow anything more, we're going to see some very, very sharp declines in this and we'll be in negative territory. They will be paying back more than they've borrowed from China in the very near future. I would also add in 2018, we've already seen months and quarters where they were paying back more than they were borrowing from China. So it's already happened in certain quarters, just not over a whole year yet. And if you look to the right, you'll see that Kurdistan is just generally borrowing less. And I think that this is a different case to Tajikistan. I think that Kyrgyzstan has decided it doesn't want to borrow any more in the short term from China because of the political ramifications in a democratic country and also because its debt capacity is close to the limit but maybe not over. So it's a sort of different setup. This is much more of a pull factor from the recipient state side.
Now the question is can they actually repay it? I would say if nothing changes and we go ahead as we are now, I think they're pretty comfortably prepared. So, that's actually a different view to a lot of other people. So, that's debt to GDP ratio. As we saw in the previous slide, debts already slowly heading down. GDP is growing steadily but not exploding. So, that's something to consider. And what I would say is this, in the year of 2019 they paid $230 million in debt repayments. They had budgetary income of 2.1 billion. So it was about 10% of budgetary expenditure went to debt servicing. That's 2019, if we go forward to 2027 the debt servicing will be 400 million, so double basically. But in those eight years, essentially what the Kyrgyz government wants to happen is that its budgetary revenue will double. If you look back eight years between 2012 and 2020 it did that, so it would just require business as usual to be able to cover the debt repayments that it has now.
Now of course it depends on USD exchange rates. If there's a big fluctuation there, there'll be in trouble and also on that growth to continue as it was. I don't have a crystal ball. I don't know if that will happen, but that's certainly something to keep in mind. An opposite to the lending that I just talked about you see here once again, investment has had steady growth since 2014. It's a bit different to Tajikistan. We're not seeing it in key export areas and then the key exporter in Tajikistan is a Canadian gold mine, that hasn't changed. They have gold mines, they have oil refineries and other things like that. Chinese companies have not been quite as successful in Kyrgyzstan, but they certainly are investing more and the reasons are the same as Tajikistan, they're looking for places with low competition, low hanging fruit.
The gold mines, once again, I spoke to some guys from Zhong Ji who invested in the second largest gold mine in Kyrgyzstan, the biggest one is the Canadian one, and they said to me very simply, they couldn't find another piece of low hanging fruit anywhere. They understood very clearly what kind of business environment was but they kind of decided to go ahead and do it. They regretted it immediately because it took them five or six years to get anywhere near production because of constant protests and that's been a very, very, very, very common thing in Kyrgyzstan. I think basically every major investment has been delayed by months, if not years, because of protests over environmental things, over local hiring, practice of treatment of staff, wages, any other number of things as well. What we have seen among the investors is a willingness now to hire many, many, many more locals.
Part of it's been forced simply by the fact that they've been protested against so often. This has happened Tajikistan as well through government pressure instead of via protest pressure. But if you look at what union leaders were saying five years ago, they were complaining about lack of opportunities for local staff. They're not saying that now. They're complaining the conditions are different for Chinese workers now, for Kyrgyz workers, that's because they've hired so many more Kyrgyz workers and there's two reasons. One, pressure and the second one is just wages. I have a self promotion alert, I have a journal article coming out with the Problems of Post-communism. I basically went and asked how much people get paid in certain professions if they're Kyrgyz in investments in Kyrgyzstan and be somewhere in the order of somewhere between $300, $600 a month. If you go then and just check the job ads for people, for Chinese people going to Tajikistan and Kurdistan for similar jobs or higher level jobs sometimes the wages are higher and so every company you speak to in these two countries and even if you just look at their public comments, they're saying very clearly we need to hire more locals, it's just too expensive for us to have Chinese workers on the books. And the issue they face is there's just a lack of skilled workers where they are because wages are still so much higher in Russia. So they've gone about it by trying to train a lot of people up, they're sending people to China for training. But that's the trend line. The trend line is very clear across all of Central Asia. Localization is happening and particularly when you're dealing with investments and it's not a short term two year project, you need to be there five, 10, 15 years. You'll eventually need to localize. It's just unavoidable.
So Kazakhstan. Now Kazakhstan is a very different set up. One, you'll notice the values are much bigger. That's not surprise because Kazakhstan is a much bigger economy, but if you look at the lender, the lender is usually CDB, which is China Development Bank and they are lending to companies or to banks, not to directly to the Kazakh government itself, the ministry of finance, which is what happens in the other two countries. So what that ends up meaning the debt's a bit harder to count in Kazakhstan because you have it spread across a whole bunch of organizations and in many cases these are profit making projects so the government may never need to pay it back. It's only in the case where they don't, where that project doesn't make any profit. So it's a different set up. The reason I've chosen these entities, there's too many for me to list and a lot of them were double counting.
The announcements got made like three times, it was hard to keep up with what was real and what wasn't. But I chose these ones just to show before 2013 there was already a lot of this going on. It wasn't like we waited till Belt and Road started. It was already happening. And if anything, I would say it's dropped since 2013 and what we have here on the left is the Kazakhstan, National bank of Kazakhstan's measure of all types of debt to state owned entities in Kazakhstan. And you'll see that none of those are actually the Kazak government itself. They're all central banks. The central bank, state owned banks, other sectors and intercompany lending means lending to state owned enterprises. You'll notice that between 2015 and 2016, there was a bit of jump between other sectors and intercompany lending. That was just an accounting change by Kazakhstan, not something to change from the China end.
The point that I really want to make here though is the amount that Kazakhstan is indebted to China is going down, not up. I mean that's the key point here. You look on the right hand side I've actually recorded in terms of flows and you'll see very clearly that the amount of debt is going down. So that model that we've seen previously is just not being used as commonly now. I'm not saying that doesn't happen at all. Yes, CDB still occasionally gives money to the National Development Bank of Kazakhstan, but we're seeing a different model now.
One of the key questions you always get with Kazakhstan is what about the hidden debts. Is there five or 10 million that have been given to state owned enterprises that hasn't been recorded? My gut feeling is no. I think the recording mechanisms are now pretty good and you just don't see $5 billion or $10 billion projects sort of sitting out there that have happened in the last few years that haven't been recorded. There's just none of those projects kind of there at that size. So my gut feeling is that's probably about right. Even if it was off by an order of magnitude or two, it's not that big a deal. And the reason I'd say that is you look 2019 April, the total debt is $11 billion to China.
Kazakhstan's total debt is something that public debt is in the order of $160 billion. So it's relatively small fry in terms of the total things that are happening. Yes, maybe some of that comes through. There's some things that get moved through tax havens and things like that. It's possible some of that is Chinese, but the reality is the amount of total debt from China I think is not as high as people make out on the whole. Once again, there are detractors to that point of view. Whereas if you look at the FDI, you don't see the same trend lines since 2014. Once again, you see by in large increases in FDI into Kazakhstan. On the left you've got the total and the point there is Chinese FDI under Kazakhstan is not a major thing in the way it is and the other two countries.
It's still relatively small and I've blown it up on that right-hand graph so you can see it more closely. The point I would make here is all those things around 2010, 11, 12, 13 were energy investments. They're pretty much all energy investments, a small number of very large energy investments. What we see in 2017, 18, 19 is smaller investments spread across more industries. We're particularly seeing and where we see energy, electricity in investments, a lot of it's now in the renewable sector, not just in the energy intensive fossil fuels and hydrocarbons. And I wanted to put this one up here because this is often shown when you talk about Chinese investments in Kazakhstan. There's a list of 55 investments that people sort of like to point to when they say half those investments were in oil and gas but most of those have already been completed.
If you see this sort of list of projects that are coming in the near future, there's some mineral resources but there's very few hydrocarbon projects on the horizon that are of any large size. So that's all I'd point about Kazakhstan with regards to investments at the big end. There has been a change in the financing of these investments as well. I mentioned at the start, joint funds and so they haven't happened in Tajikistan and Kyrgyzstan but they are happening now in Kazakhstan where you have joint funds between what are described as quasi state owned funds and the most prominent one was between CITIC from the Chinese side and Kazyna Capital Management on the Kazakh side and there's a few others there. It was only $500 million but it was signed in late 2018 and it's already allocated $212 million. That's not nothing if you look at sort of annual flows, annual flows are about 1.5 billion.
So it is something, oh too far. It is something. We also see that China has invested in the Astana Stock Exchange, which is a new stock exchange that's invested alongside Goldman Sachs and NASDAQ and a few others, but it's taken a sizeable share and you see a lot of Chinese firm, Chinese banks opening up registered offices there. I called up my friends in the stock exchange to sort of get a sense how real are these investments. And they basically said to me, it's early days. The Chinese side is serious about it, but they haven't gone that far yet. So that's the takeaway there that that is the next step that China is pushing for is joint funds where Kazakhs and Chinese invest side by side in joint ventures that involve both Chinese and Kazakhstan. The idea that you get companies and financiers from both sides so they both have skin in the game.
That is a different model to what we sort of seen earlier with the sort of big infrastructure, just straight government to government lending. I'm probably going to just finish off my comments with Uzbekistan. So Uzbekistan is an outlier from everything that I've just said. This is Uzbekistan public debt by creditor and as you can see, debt to the PRC over the last five years has grown dramatically. It has so also for Japan. I don't have good time series data for ADB and World Bank there, but my understanding is they've also grown reasonably quickly over the last few years as well. And that's just an indication of where Uzbekistan's economy has been.
They've for a long time not been willing to take large external concessional debt. They now are because of changes in the economy in Uzbekistan itself. They are nowhere near the thresholds of debt sustainability issues and so EXIM Bank and others are happy to lend to them and are doing so quite, I mean between 2019 end of, start of 2019, the start of 2020 they lent $1 billion. That's quite significant. So we're seeing that and that is really an outlier. I would say that that goes against what I've said for the first three. I think we go forward another three, four or five years in Uzbekistan and we see the same trend lines provided everything else stays even in my opinion.
That's probably where I think we will be. And you go sort of another seven, eight, nine years. We're probably looking at a situation where Uzbekistan is starting to pay back more than it's borrowing. Oh, I just think we're a little bit behind the curve in Uzbekistan because of the way the country's been up until 2016. When it comes to joint financing as well, Uzbekistan has signed up for a $1 billion joint financing facility between the National Bank of Uzbekistan and CITIC which is a Chinese financial organization.
Same setup, looking at joint ventures on industrial corporation insider Uzbekistan. So we're looking at a very different sort of setup to what was happening before. And I would add that these funds that we see, they're popping up all over the place. I mean the Russia, China one was established in 2012 but that's now Russia, China, Saudi, UAE and CITIC one as well. And there's some in Africa too. So these funds, okay. Some of them are a bit earlier than they were in Central Asia, but we're now in a situation where we're seeing those funds sort of proliferate around the world, and that's probably the next step where China to would like to go and we'll see how it actually play out in practice now. Now, I think that's everything I want to say. I look forward to your comments and questions. I really look forward to it. Thank you.