A Wary Mongolia Signs Infrastructure & Investment Deals with China

Op-Ed Commentary: Chris Devonshire-Ellis

Chinese President Xi Jinping has signed off on US$5 billion worth of trade deals with the country’s northern neighbor Mongolia, and pledged to assist with further opening up what remain important and potentially lucrative mineral deposits in the country. Bilateral trade, currently running at some US$6 billion per annum, accounts for close to 90 percent of all Mongolian exports. Yet Mongolian wariness as concerns China – which dates back centuries – means that both countries will need to tread carefully to hit future bilateral growth and development plans.

Mongolia has already made a strategic choice concerning its destiny once before, when in the 1920s they opted, in a no-win independence political struggle of the time, to side with the Russians when faced with imminent occupation by either Russia or China. Wary of Sinification and acutely realistic concerning contemporary Tibetan history, Mongolia has to play a careful strategic position with China in order not to become over dependent.

Prior to Xi’s visit, the Mongolian Government had signed off on security arrangements with both Russia and the United States to protect its sovereign interests. Increased trade with China will increasingly bring exactly what those agreements state, and the obligations of Russian and American military support for the country, into sharper focus. Mongolian wariness extends to its choosing not to permit Chinese standard rail gauge into the country – the Mongolians preferring instead to continue to use the wider Russian track that makes up the trans-Siberian railway that links Russia with China across Mongolia’s Gobi Desert.

RELATED: Russia’s Pragmatic Friendship with China

Rail bogies still need to be changed over at the Chinese border to Chinese standards, rendering the potential for any advancement of Chinese rolling stock in the opposite direction into Mongolian territory useless. A recent Mongolia Parliament decision to continue with this policy only upholds the Mongolian position, even though the Chinese complain it adds costs to their purchasing overheads of Mongolian commodities.

Nevertheless, Xi’s visit has ‘officially’ provided Mongolia, a landlocked nation, with access to Chinese port facilities, albeit those running through the trans-Siberian railway route, which passes through Russia prior to dropping down into North-East China. The Chinese media have played up that aspect of the Xi’s visit, although in reality this route has been operable for some time, and is only viable as long as Vladivostok Port remains relatively small, a situation that is beginning to change. Both Russia and North Korea also offer Mongolia Eastern Seaboard Port access, and China knows it is not the only game in town when it comes to North-East mainland Asia.

RELATED: Mongolia Attends ASEAN Regional Forum

Mongolia’s China problem is not just a wariness of being subsumed. The country – three times the size of France but with just 3 million inhabitants – sits on massive commodities reserves. Yet like Siberia to the North, there are simply not the people available to fully exploit them. That means valuable re-processing and added value are provided by the huge pool of available Chinese labor, which suppresses the Mongolian capacity to add any value to its own commodities. That largely suits China, which can therefore buy the raw materials at ‘out of the ground’ rates, and gives its own nationals both employment and added value profits.

Mongolia simply isn’t able to add value to its own products, as the long trains of Siberian timber winding their way across the Mongolian deserts to cities such as Manzhouli (home to China’s only timber futures exchange) attest. Chinese exploitation of Mongolia’s natural reserves creates resentment, and Chinese nationals are not especially welcome in Ulaanbaatar, the capital city, where Chinese language signage is still relatively rare, even just a 90-minute flight away from Beijing. Ulaanbaatar, it should be noted, is closer to Beijing than Shanghai is.

RELATED: China and Russia Sign Long-Awaited Natural Gas Deal

Mongolia plays host to another world leader with Vladimir Putin, Russia’s President, on a state visit next month. For Mongolia, whose infrastructure is still largely on the Russian system, this may be more comfortable political territory than dealing with China. Yet balancing the demands of your largest buyer against the practical realities of being a resource rich, yet sparsely populated nation caught between the two is going to require some deft footwork and patience on behalf of all concerned to avoid any sovereign deterioration of what after all, are fiercely patriotic sons of Genghis Khan.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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