Reading the comments of Russian lawmakers and the media on the report of the Ministry for development of Russian Far East about the possible transfer of Chinese enterprises in Russia, one can think that in the Urals is really no passage from Chinese investors. Appeared in early April on the website of Minnetoka short news that the Agency discussed the potential export production capacity from China to the far East, caused no less heated discussion than last year’s news of the surrender the Chinese out of 115 thousand hectares of wild steppes of Transbaikalia.
The head of the Duma Committee on regional policy, Nikolai Kharitonov said that to accommodate the Chinese enterprises in the far East “in no event it is impossible”. According to him, MPs will confront these malicious plans. At least out loud regarding “Chinese expansion” in favor of the Deputy of LDPR, the head of the Duma Committee on health protection Sergey Furgal: “it’s clear that in the case of this project, Russia can get dirty technologies, bad environment and negative population. And our neighbors at the same time – the profit and employment of its Chinese citizens. All taxes will go to China”.
Not stood aside from discussion and the media. Rare attempts to give the word to supporters and opponents of the initiative predictable drowned in the barrage of negativity about dirty manufacturing, Chinese colonization and the inevitable annexation in the end. As often happens in discussions about Chinese expansion in the Urals, the majority of participants did not bother to find out what and with whom in China agreed Investec.
Unsaid at the highest level
According to a senior staff Minnetoka, the idea is to discuss with Beijing the transfer of Chinese enterprises in the far East was born in September of 2015. Then Deputy Prime Minister Yuri Trutnev, who oversees the development of the far Eastern Federal district, visited Dalian in the framework of the Meeting of the new Champions, which is organized annually by the world economic forum (this area is often called the “summer Davos”). Trutnev spoke there together with the head of the state Committee for reforms and development of China (formerly the state planning Commission, which became the principal center for macroregulation of the Chinese economy) by Xu Shaoshi (徐绍史). Xu told on the adopted on the eve of the circular of the PRC state Council “On the promotion of international cooperation in the field of production facilities and manufacturing equipment”.
In this speech, the Vice Prime Minister first heard about the plans of China to stimulate the transfer abroad of production facilities in twelve industries. Then Trutnev instructed the staff Minnetoka as soon as possible to work through the issue with their Chinese counterparts. In November, the head of Department Alexander Galushka visited Beijing and met with leaders of the state Committee on reforms, proposing to fix the interest of both parties to the potential involvement of Chinese industries in the far East. And 17 December during the visit of Dmitry Medvedev to China, the two offices signed a Memorandum on cooperation in the far East, in which the transport industry has become one of the four themes for possible cooperation along with the development of the Northern sea route, transportation of cargoes of the North-East of China through the ports of Primorye and attract Chinese investors in the Torah and the Free port of Vladivostok). The April conversation the Director of the Department of Minnetoka to attract investment and support exports of Rustam Makarov Director of GRDC industry development in North-East China Zhou Sanipirol (周建平) was, in fact, the first working consultations, and not particularly substantive. According to those familiar with the negotiations officials at this meeting, the Chinese agreed to discuss specific proposals, when they will appear, and yet will seek the opinion of their regional authorities.
In the absence of large projects, which can boast, officials often boast declarations of intent (and the Russian and Chinese bureaucracy is no exception, there are two “strategic partner” are among the world leaders). Also received Menostar, obviously not expecting such a violent reaction from the public. The seventh of April, Rustam Makarov appeared in the TV channel RBC, to discuss the initiative with the experts and to discourage criticism. He said that 80% of workers will be citizens of the Russian Federation, to reduce the requirements on ecology of power will not, and to sell products it is supposed to “giant market” the Asia Pacific region. Menostar later made a further clarification: the Agency will negotiate with other countries, and China does not intend to transfer industry exclusively in Russia. The study data on why, where and how China intends to carry the industry, shows that Far East industrial expansion giant neighbor is generally not threatened.
Transfer rules
Historically, production transferred to other countries mainly for three reasons: low cost of resources (usually manpower), the development of new large markets and concern about the environment. The industrial expansion of Japan in Asian countries illustrates this mechanism. First production (for example, plants of the Japanese car industry giants like Toyota) moved to countries with cheap labour force and low environmental standards, strengthening the competitiveness of Japanese cars in global markets, as well as the health of Japanese citizens. Then, in the countries where postponed production is facing its own middle class: the former cheap labor and their descendants were turned into consumers. Accordingly, the transfer of production makes sense in countries with cheaper labor, capacious market potential and low environmental standards (or the stated high, but with the ability to solve the issue for a reasonable amount).
China has another important reason to think about the migration of enterprises – the problem of excess capacity in the industry, which in recent times increasingly says Premier Li Keqiang (李克强). The most complete study of this question prepared by the European chamber of Commerce in China at the beginning of the year, clearly indicates that in some industries the issue is not related to market demand for products. China produces a lot more cement, steel, paper, chemicals, and more than he actually needs. So, for two years, 2011-2012, China has produced more cement than the US did in the entire twentieth century. But for the Chinese this is not the occasion for an enthusiastic optimism and shapkozakidatelskih sentiment with which this fact is described in the Russian blogosphere. Uncompetitive enterprises are supported afloat at the expense of non-market loans to preserve social stability or for corrupt motives. The elimination of excess capacity has long been one of the strategic priorities of Beijing.
In the circular of the state Council, which so inspired Menostar, there are both logic and economic (new markets, where lower costs and there will be new consumers), and socio-political (elimination of excess capacity and environmental concerns). About mechanical “moving” nowhere in the document is not directly stated. There is only in a General way painted the priorities for international cooperation for twelve industries (steel industry, nonferrous metallurgy, building materials, railway equipment, electric power, chemical industry, textile, automotive, communication, construction machinery, aviation industry, shipbuilding), but in the case of each industry the recommendations of the state Council is different. For example, for light industry (the 13th paragraph of the circular) is recommended for the transfer of production to “countries with appropriate conditions”, the main of which are “a large labor force, low production costs, the proximity of the target market”. And, for example, manufacturers of energy equipment (11th paragraph) the Council advises to concentrate on the expansion of exports of products manufactured in China.
In General, Beijing is in favour of the construction of plants in new countries for industries with low margins and the level of required technology (construction materials, textiles), or with an eye on conquest large markets of mass production (automobile industry), and companies in more technologically advanced sectors recommends to limit the supply of Chinese equipment and accommodation there, if necessary, service centers and individual elements of the component base (R&D centres are recommended only in countries that have potential for that).
This approach manifests itself, for example, in a single running program, the transfer of Chinese enterprises in the former Soviet Union – Kazakhstan. In December 2014 during the visit of Premier Li Keqiang in Astana was reached in principle an agreement to launch the program, the parties announced the fifty-two projects totaling $24 billion In March 2015, before the forum in Boao, the Prime Minister of Kazakhstan Karim Massimov (professional sinologist, perfectly speaking in Chinese) was with Li Keqiang signed several agreements worth $14 billion, and in December, welcoming Massimov in Beijing, Li talked about the first results. In Kazakhstan will be transferred enterprises producing building materials (cement, glass, steel), agricultural products processing, ferrous metallurgy, the manufacture of textiles, as well as in the field of energy (nuclear fuel production, renewable energy, electricity). “Vehicle Assembly, manufacture of polypropylene is already running, the light metro in Astana should be launched before the end of the year,” said Li Keqiang (these statements, judging by the recent beginning of construction, is still not quite true).
More material for understanding how it functions “the transfer of enterprises in Chinese”, gives Africa, where entrepreneurs from China began to build factories long before the state Council attended to the regulation of this sector and issuance of related circulars. According to Chinese statistics, at the end of 2014 in Africa there were over three thousand of enterprises with Chinese capital, and twenty special trade and investment zones have attracted more than 360 industrial enterprises. In addition to the extraction of hydrocarbons and mineral development, the Chinese are building factories in Africa for the production of building materials, household appliances, machine building and light industry.
As shown in their studies the most authoritative specialist on Chinese presence in Africa, the University Professor. John Hopkins Deborah Brautigam, in the 2000s the business in the PRC with the choice of locations for the creation of industrial enterprises were guided by the same principles, cheap labor, the growth potential of the local market, and the ability not to pay attention to environmental standards. By the way, as shown by field studies Brautigam and her team, most of Chinese enterprises in Africa the bulk of the workers are local, so the rumors of “the yellow colonization” of Africa, it calls a myth.
The far East is in danger?
Armed with knowledge about the Chinese experience of creating plants overseas, as well as statistics, it is possible to evaluate if the far East for good-neighbourly industrial expansion.
First of all, you need to evaluate the existing experience – in fact in Africa, the Chinese began to build factories before any orders from Beijing. Due to the transmission of statistics on direct foreign investment from Rosstat, the Central Bank now considering regional data is a mess. However, available for earlier years statistics clearly show that the desire to invest in the far East, the Chinese do not burn. According to Rosstat, in 2013, the seven largest investors in the far East is as follows: Japan ($2.34 billion, mainly investments in gas projects on Sakhalin island), the Bahamas ($714,8 million), Netherlands ($525 million), Austria ($500 million), Cyprus ($495,7 million), India ($462 million), Germany ($440 million). The report on foreign investment in the far East, CEFIR released in 2013 by the canadian Kinross and the Advisory Council on foreign investments of the Russian Federation, States that in 2011 to 44% of foreign companies in the far East were Chinese, but we are talking mostly about small farms, trading companies or food service locations. No attempt to establish in the far East industrial businesses larger sawmills Chinese, judging by the available data, not taken.
What are the causes? The first and main – small domestic market in the far East. In the far Eastern Federal district, which occupies a third of the territory of the largest country in the world live less than 6.2 million people, and the population continues to decline due to migration outflow. Remoteness from the European part of Russia makes transportation of goods produced in the far East, is extremely expensive, and the production economically unjustified. That is why AVTOVAZ drove their car in the region at a special subsidized rate. Similarly, taxpayers are subsidizing the shipping back collected near Vladivostok plant “Sollers”. And that’s why he Menostar, luring investors in the Torah, is betting on exports.
From the point of view of cheap and plentiful labor force far East is also clearly not Africa. Economically active population – slightly less than 3,4 million people, and the unemployment rate is only 5.4%. Wages in the most populated constituent entity of the far Eastern Federal district, Primorsky Krai, in 2014, even after the devaluation only on par with the level of wages in Russia bordering Heilongjiang (黑龙江): 28 277 rubles per month ($426) vs 2278 yuan per month ($429). But in 2015, the average wages in Primor’e amounted to 33 811 rubles (about $509), the data for China has not yet been published, but because of the summer of the devaluation of the dollar equivalent of wages in the North-East of China, most likely, will again be more competitive.
Important and social aspects. In the North-East of China unemployment is relatively low. In 2014, the Heilongjiang (黑龙江) it was 4.5% in Jilin (吉林) and 3.4% in Liaoning (辽宁) – 3.4% and in the Autonomous region of Inner Mongolia (IMAR,内蒙古自治区) is 3.6%. In this case, as data show China Labor Bulletin, all four provinces in the last time are an important part of the rise in China of the strike movement. About the dangers of strikes in local government, I know firsthand: in March, the Heilongjiang provincial Governor Lu Hao (陆昊) has come under fire because of the unrest in the local coal mines. It is unlikely in this situation, the authorities in Northwest China will welcome the initiative of the Russian colleagues, which may deprive them of any jobs.
If we assume that Chinese enterprises that Investec plans to place in the far East, will work for export to the Asia-Pacific region, the production logic will have to focus on all countries in the region, except Russia and China (where the factories are, in fact, intended to carry). The trouble is that northeast China is one of the least export-oriented regions of China. Only Liaoning province is among the ten largest exporting Chinese provinces, while Heilongjiang is not higher than 21st place, Inner Mongolia – above the 24th, Jilin 25th.
Probably not long ago, Beijing could close my eyes, if someone from local chiefs has the courage to conquer the Russian neighbors plants for borrowed money of state institutions like China development Bank or the Export-import Bank. It is these two institutions, according to research Brautigam, played an important role in the process of industrial development of Africa. The significant role which it will play the “political banks”, referred to in last year’s circular GRDC (paragraph 32). The problem is that now both banks are located in the centre of the anti-corruption campaign and efforts by Beijing to make state banks more efficient and prevent the overgrowth of bad debts. That is why in Russia these banks can Finance projects of the friends of President Vladimir Putin’s kind of “Yamal LNG”, but we can hardly expect them massive loans to projects in the far East without regard to economic logic.
Thus, the defence industrial virginity the Far East to fear investcom announced by the initiative is not worth it. In terms of implementation, it is likely to go no further than signed in 2009 by Dmitry Medvedev and Hu Jintao cooperation program of far East and northeast China, which is now Moscow and Beijing prefer not to remember. If in the far East in a couple years there will be at least a few Chinese enterprises, it can already be considered a big success. Much more dangerous for the development of the region themselves anti-Chinese phobia, when people are ready to panic at the appearance of any Chimera, born in bureaucratic offices. Disturbing ringing scares real investors and drowns out the calls for radical improvement of the investment climate through structural reforms.
