A recent memorandum of cooperation signed by Moscow and Beijing has Russians worried about Chinese “colonization” of the Far East. However, a careful analysis of the situation suggests there is little reason for Russians to fear Chinese industrial expansionism.
After hearing Russian politicians and pundits react to Moscow and Beijing’s discussions on industrial cooperation, one would be forgiven for thinking the Far East is on the verge of Chinese colonization. The statement that caused the backlash was released by the Russian Far East Development Ministry in early April and outlined the potential relocation of Chinese factories to Russia. Since its release, doomsday forecasts of unsafe production practices and Chinese occupation—or outright annexation—have proliferated in the media.
As is often the case when Russians discuss Chinese expansion in the Far East, however, most critics didn’t bother to learn anything about the actual agreement.
The April statement was the culmination of a series of very general consultations between Russian and Chinese officials in Beijing. It came on the heels of a memorandum on cooperation in the Far East, signed during Dmitry Medvedev’s visit to China in December 2015, which listed the relocation of Chinese production facilities to the Far East as one of four opportunities for bilateral cooperation.
When they don’t have concrete projects to unveil, government officials often tout declarations of intent. That’s precisely what the Far East Ministry did, apparently not realizing that it would provoke such a negative response.
Factories are generally moved abroad for three reasons: cheaper resources (mostly labor), growing markets, and fewer environmental regulations. Accordingly, a 2015 Chinese State Council document, which outlines priorities for “international cooperation” in twelve industries, notes that relocating certain industries abroad will open up new low-cost markets and attract new consumers. It also focuses on eliminating overproduction and outlines measures for increased environmental protection.
Overproduction is a significant factor driving China to relocate its factories: China produces far more cement, steel, chemicals, paper, and other products than it can consume. Between 2011 and 2012 China produced more cement than the United States did in the entire twentieth century.
Beijing supports certain types of industries moving abroad. Those industries tend to be low-profit and less technology-intensive (like the building materials industry), or capable of conquering mass-production markets (like the automotive industry). Companies in technology-intensive sectors, on the other hand, are advised to limit their foreign involvement to exporting Chinese equipment, or setting up service centers and component-related facilities abroad.
This was the calculus behind China’s initiative to move some factories to Kazakhstan, the only program of its kind in the post-Soviet space. The Chinese have agreed to move textile, cement, glass, and metal works factories, as well as agro-processing, nuclear fuel, and renewable energy plants, to Kazakhstan. The initiative is substantial: China and Kazakhstan agreed to launch a $24 billion program in December 2014.
China’s experience in moving industries to Africa also sheds light on Beijing’s economic logic. The same incentives that drove Chinese investment in Africa are driving investment in the Russian Far East: cheap labor, potential for local market growth, and lax environmental standards. According to Chinese data, by the end of 2014 there were over 3,000 enterprises funded by Chinese capital in Africa. Twenty special trade and investment zones now house hundreds of industrial facilities on the continent.
Although there is certainly precedent elsewhere for China to expand into the Far East, it is unclear whether Beijing actually wants to do so. Existing data clearly show that the Chinese aren’t rushing to invest in the Far East: according to Rosstat’s 2013 data, China was not among the seven largest investors in the region.
Why not? First and foremost, the Far East market is quite small: less than 6.2 million people live in the region and the population is dwindling due to migration. The vast distance between the Far East and European Russia means that many industries would be unviable because of high transportation costs.
And the Far East isn’t exactly Africa when it comes to cheap and available labor. There are only 3.4 million people working in the region, and unemployment sits at just 5.4 percent. The average monthly salary in Primorsky Krai, the most populous territory in the Far East, fell to roughly that of the province of Heilongjiang across the border only after sharp ruble devaluation in 2014.
What’s more, unemployment in the Northeast of China (where factories would be moved from) is relatively low, and the region has recently played an important role in labor strikes that have been gaining momentum in China. In this context, authorities in the Northeastern provinces will likely be apprehensive about Russian initiatives, which could cause their regions to lose jobs and fuel unrest.
Financing operations in Russia might also prove tricky for Chinese investors. Not long ago, Beijing wouldn’t have minded if officials took out loans from the China Development Bank or the Export-Import Bank to move factories to Russia. Now, however, these two banks are being scrutinized as part of Beijing’s anti-corruption campaign, as well as its efforts to stem the tide of bad debts and to make state banks more efficient.
Those wary of Chinese economic expansionism into the Far East have nothing to fear. If only a handful of Chinese factories move into the Far East over the next couple of years, the initiative will be considered a success. Like the memorandum of cooperation between Russia’s Far East and China’s Northeast signed by Dmitry Medvedev and Hu Jintao in 2009, the Far East Ministry’s new initiative will probably not get far off the ground.
Ultimately, anti-Chinese sentiment is far more detrimental to the development of the Far East than the memorandum signed by Beijing and Moscow: alarmist rhetoric scares off real investors and silences calls for structural reforms aimed at improving Russia’s investment climate.
By Alexander Gabuev & Vita Spivak