The decision makes geopolitical sense as Mongolia seeks to diversify its reliance on export to China. But the pertinent question that needs to be asked as always is: at what cost?
A Chinese broker’s estimate that the transport costs will be tripled is confirmed by a World Bank study. That study estimates that the ‘profit margins on exporting to the rest of Asia via a Russian port could be less than one-tenth of those earned by transit through China.’ A 90 per cent reduction in export revenue seems like quite a high price that Ulaanbaatar is prepared to pay for perceived economic and political threats from China.
Mongolia’s decision to build the railway connecting with Russian Pacific ports seems more heavily influenced by Russia than the consideration of ‘Third Neighbour’ policy. Moscow exerts influence on the railway project through its 50 per cent ownership of the Mongolian railway network. The legacy of Soviet Russian influence on the upper echelons of the Mongolian political elite might also have swayed support for a project that favours Russia over China.
Criticism of the railway decision is principally economic; it does not appear rational for Mongolia to forgo the significant cost advantage that it enjoys in exporting commodities with the burden of higher transport costs. The financial feasibility of the project is still in doubt as Mongolian leaders court potential backing in international financial centres, most interestingly in Hong Kong of all places. If Mongolia’s pursuit of a Third Neighbour strategy is the rationale for this self-imposed handicap, it is a strategy that pushes it further into the arms of its former imperial master, Russia, and the assessment that Mongolia’s national strategy is often a depressing choice between the lesser of two evils still stands.
Nowhere did I suggest that China should own major mines in Mongolia. Limitations on outright or even substantial Chinese ownership of major Mongolian mining assets may well be sound policy, even on economic grounds. But excluding China from any meaningful participation in major projects, such as Oyu Tolgoi, is a different story. There are well-known reasons for such linkages along the chain of resource supply to major customers. It is common practice for major consumers of resources to take equity stakes in supplier projects and equity investment is essential in developing resource sectors. Japanese investment in the Australian resource industry is a good example of that and companies such as Mitsui and Mitsubishi are major investors in Australia’s coal industry and also happen to be major buyers.
The semantics of racism I leave to others more qualified. But when Chinese construction workers are attacked by Mongolian neo-Nazis wearing swastikas, these attacks are difficult to describe as anything other than racially motivated ‘hate crimes,’ whether they express a sentiment that has been around for sometime or not.
Justin Li is Principal of the Institute of Chinese Economics and an associate of East Asia Forum.
Apart from the ‘third neighbour policy’ and Russian hypotheses discussed in the exchange there is another hypothesis that might explain why the Mongols are willing to bear costs. From the perspective of bargaining theory the Mongol strategy is not irrational. Bargaining theory suggests that delaying cooperation (in this case delaying mutually beneficial cooperation with resource hungry China) and creating outside options (starting work on improving connectivity with Russian ports, etc) can help a party to improve its bargaining power and does not necessarily imply that the concerned party is unwilling to jointly pursue mutually beneficial projects. So, the non-cooperative moves of the Mongols and the willingness to bear short term/some losses might be part of a rational strategy to obtain a better deal from their enormously powerful neighbor.
1. Japanese investment in Australian resources has tended to involve small (percentage) equity stakes, primarily to maintain some insider knowledge (as shareholders) to assist with price renegotiations and even perhaps dispute resolution. (See Paul Davis’s 2008 AMPLA conference presentation / article and also http://sydney.edu.au/law/anjel/documents/CLE_Davis_Nottage_Takahashi.pdf.) This might offer a nice political as well as economical compromise for Chinese investment in Mongolia – although it assumes of course things like a corporate law regime respecting shareholder rights.
2. A second novel perspective on Chinese investment in Mongolia is that it has generated already (one of only two, so far) arbitration claims under China’s investment treaties worldwide: see Appendix D of my paper at
http://sydney.edu.au/law/scil/documents/2010/SCILWP21_NottageWeeramantry_updated.pdf (further elaborated as a chapter for Bath/Nottage, eds, Foreign Investment and Dispute Resolution Law and Practice in Asia, Routledge, due out December 2011).
This is an ad hoc arbitration under UNCITRAL Rules, not under ICSID Rules even though both China and Mongolia are member states of the 1965 ICSID Convention – it could be speculated that this is to keep this dispute more confidential.
To quote another interesting aspect about this arbitration, reproduced from the chapter manuscript for our book written by Nils Eliasson (lawyer in Hong Kong):
“Heilongjiang International and Technical Cooperative Corp, Qinhuangdaoshi Qinlong International Industrial and Beijing Shougang Mining Investment v. Republic of Mongolia, is a case brought by three PRC companies concerning their investment in the Tumurtei iron ore mine in Mongolia.
What is particularly interesting with the Mongolia case is that, unlike Mr Shum [claimant under the China-Peru BIT[, who was a private investor with a relatively small investment in the fishing industry, the Mongolia case concerns a strategic Chinese investment in the mining industry, and two of the claimants, China Heilongjiang International and Technical Cooperative Corp and Beijing Shougang Mining Investment are state-owned enterprises. We have so-far seen relatively few investment claims brought by state-owned enterprises. Possibly, the Mongolia case could be the starting point for further investment claims by state-owned companies. With 90 per cent of Chinese outbound investments originating from state-owned enterprises, there is a clear potential for such cases.”
A number of points on this issue:
1. Who is the Chinese economist who calculated the cost of the railway expansion and what methodology did he use? The World Bank does not have a ready estimated cost of the railway expansion from Oyu Tolgoi to the Russian border. A World Bank representative in Ulan-Bator said in a couple of interviews about high costs but nothing concretely. If you want to argue about high costs, you have to prove it with accepted economic, project finance and accounting methodology. Of course, by definition, exporting coal or copper through Russia will be more expensive simply because the distance is much longer than to China. However, the main strategic goal of Mongolia is to diversify its mineral exports beyond China. This is the main strategy and Mongolia is determined to stick to it.
2. Mongolia will build two railways: one to Russian Far East and one to China from South Gobi. The question is just which one will be built first. Mongolia decided that the line to Russia will be first built and later on, a line to China will be built because it makes an economic sense. One of the key reasons why Mongolia chosen this strategy is that Mongolians do not trust China and Chinese intentions because Mongols feel that the Chinese will take advantage of Mongolia if they have upper hand in railways. China’s cut-off of rare earth exports (interestingly, 90 percent of China’s rare earth comes from one mine – Bayan-Ovoo in Inner Mongolia, just 100 km from the Mongolian-Chinese border) to Japan and other countries is a great example of how Chinese will use their economic advantages to gain political concessions from other countries. Therefore, the whole point of building two railways -one to Russia first and one to China later – is the part of country’s foreing policy strategy to reduce the dependence on China, a communist nation whose foreign policy is made by a few officials in the CPC Central Committee.
3. Regarding Hong Kong as a destiny for IPOs: One Mongolian private company (Mongolian mining) was partially listed in Hong Kong. It was neither a success nor disaster. Probably, a few smaller Mongolian private firms might be listed in HK in the future. However, regarding mega IPOs like Tavan Tolgoi – the largest coal deposit in the world, Mongolia will not quote it on HK for two reasons:
(a) In the just newly passed Mongolia’s foreign and security policy directions, Hong Kong is regarded as a territory (SAR) controlled by the Chinese Communist Party, and therefore, it is labelled as a “high political risk” destiny. Therefore, there is a powerful and quick shift away from Hong Kong, and LSE is emerging as a favorite destination for a couple of mega IPOs from Mongolia.
(b) Listing on Hong Kong SE would be a political suicide for any Mongolian government because Mongolian public opinion is strongly anti-China (opinion polls show consistently that 90 percent of Mongolian do not trust China and Chinese). These anti-Chinese sentiments also affect sentiments towards HK that is controlled by CPC. Already powerful politicians (cabinet minister, and deputy speaker of the parliament) publicly opposed to list Mongolian firms on HK stock exchange.
4. Regarding Oyu Tolgoi mine, prime minister Suh-baatar Bat-bold said in Australia a couple days ago that any involvement of Chinese firms must be approved by Mongolia’s Cabinet and Parliament. This means that the Chinese have no chance to own shares in both Oyu Tolgoi and Tavan Tolgoi. The main reason it is politically impossible for the Mongolian government to approve that because of the very strong anti-Chinese sentiments among the Mongolian population.
5. Regarding Russia’s influence: Yes, Russia still has some influence in Mongolia because the vast majority of Mongolians are grateful to Soviet Union/Russia who helped to restore its independence in 1911-1921 from the Manchu Qing and defended Mongolia from the Japanese aggression in 1939. Mongolia nowdays is a dynamic democracy (only former communist nation in Asia tha built a democracy) with very fast growing economy. Many Mongolians are forever grateful to Russians for their help.
6. This is in a sharp contrast to Inner Mongolia, a traditionally Mongolian land and peoples who are now exploited by 22 million Han Chinese immigrants. Inner Mongolia has 26 million people, and only 4 million are ethnic Mongolians. What is going on in Inner Mongolia (forced cultural assimilation, and resource colonization) is a powerful reminder for Mongolians in Mongolia that if you let in the Chinese in large numbers, you will vanish from earth like Manchus, the nation that founded the Qing dynasty, and by now disappeared from earth).
Ultimately, Mongolia’s policy goal is not to become a second Inner Mongolia. Therefore, this is not an economic or accounting question, but this is the question of survival of the Mongolian nation, one of the most influential nations in human history!
“When Chinese construction workers are attacked by Mongolian neo-Nazis wearing swastikas, these attacks are difficult to describe as anything other than racially motivated ‘hate crimes”
No one is defending hate crimes of any description. To understand the background of such attacks is not to condone outbreaks of violence.
But it’s not very helpful to make emotional accusations of racism without reference to the background. The root of all modern Chinese territorial disputes (not just the Mongolian question) is China’s claim to all territories of the Qing — this includes the South China Sea, Arunachal Pradesh, Taiwan, etc. Unfortunately, Chinese minds turn off when sensitivities related to this issue are raised. It appears to be easier to be ‘economically rational’ than ‘historically rational’.
While racism is not to be excused, it is useful to remember that:
* Mongolians, are afraid of their country being swamped by Chinese. Quite literally swamped. The examples of Tibet, Xinjiang, Inner Mongolia, all former Qing territories, are salient reminders of what could happen.
* Many Chinese companies illegally bring Chinese workers in on tourist visas so they can avoid paying the government fees for importing foreign labour. Unfortunately, this reinforces the impression that the Chinese are dishonest.
Personally, I dislike narrow-minded, vicious, ultra=nationalism. But Mongolia is such a blind spot for Chinese ethnic writers, whose history and ideology has conditioned them to simplistically see others as being ‘against them’, that it is useful to point out the historical background.
There is much that China is doing that is inimical to economic openness — the refusal to allow meaningful access to foreign banks, insurance companies, etc., government condonement of the pirating of foreign patents while jealously guarding Chinese intellectual property, policies designed to ensure a dominant role by SOEs, etc. No doubt this is ‘economically rational’, but it seems a little strange to ignore Chinese statism and single out small neighbours like Mongolia for not being ‘economically rational’ merely because they refuse to fall in with Chinese wishes.
About racism: Both the Mongolians and Chinese have racist attitudes towards each other.
Racism in Mongolian-Sino relations is as old as the relationship itself. The Chinese referred to northern Eurasian nomadic peoples as “barbarians”, and the Mongols referred to the Chinese as “southern slaves” for centuries. Therefore, racism is not new in the steppe-Sino relations. But now, because of the frequent contacts e.g. thousands of Chinese workers in Mongolia, all these hidden prejudices and racist attitudes are more visible.
One of the reasons of mutual racism is the cultural difference: the Chinese culture is a culture of rice peasants with strong influence of Confucianism, whereas the Mongolian culture is a culture of Eurasian horsemen and hunters with strong influences of shamanism and Tibetan Buddhism.
Racism in Sino-Mongolian relations will persist no matter how much two nations trade!
I don’t think simplistic historical analyses like ‘nomads vs rice cultivators’ are entirely apt. People forget that there are livestock-raising Mongols in Inner Mongolia, too. They don’t necessarily have great feelings of warmth for the Han Chinese, but there are plenty of them who feel happy to belong to China and proud to be “Chinese” (as in the nationality, not the ethnic group). The Mongols of both countries are authentic Mongols, but the way they have accommodated to China is quite different. Of course, this is also a source of great tension between the Mongols of (Outer) Mongolia and those of Inner Mongolia, with the (Outer) Mongolians going so far as to deny ‘Mongolness’ to their Inner Mongolian brethren. I think we need to keep in mind the complexities in the situation before arriving at grand historical generalisations.