4 October 2013

China's Ambitions in Xinjiang and Central Asia: Part 2

Stratfor
October 1, 2013 

Editor's Note: This is a three-part series on China's evolving strategic interests in Central Asia and in its own far northwest, the Xinjiang Uighur Autonomous Region. Part 2 examines how Beijing is looking to Xinjiang and Central Asia for natural gas, oil, coal and other industrial inputs to help fuel future inland development in China. Read more in Part 1 and Part 3

For centuries, geography and an abundance of domestic resources limited China's need to seek material inputs and project power far beyond its borders. Over the past two decades, however, this dynamic began to break down as China's demand for energy and raw materials outstripped its existing production capacity. As a result, Chinese manufacturers, real estate developers and other businesses found themselves sourcing an increasing share of their energy supplies from overseas, dramatically expanding the Chinese economy's exposure to political and economic forces far beyond the government's control. China has never been more vulnerable -- economically, socially and politically -- to supply disruptions overseas.

At the same time, China's supply-demand imbalance has compelled radical changes in the geography and logistics of domestic Chinese resource industries. Most notable has been the rapid migration of energy and raw materials production bases from China's populous core provinces to underdeveloped,sparsely populated "buffer zones" as output from older coal and oil deposits stagnated or declined.
Xinjiang's Energy Promise

In many respects, Xinjiang represents the far frontier of this process. The Chinese government and outside observers alike have touted Xinjiang as the next Inner Mongolia -- a reference to that region'sunprecedented coal output growth between 2004 and 2012. Xinjiang is indeed blessed with some of the world's largest untapped reserves of thermal coal, and its coal output could reach 750 million metric tons by 2020 (up from 141 million metric tons in 2012). But compared with well-developed coalfields in western Inner Mongolia and northern Shaanxi province, much of Xinjiang's reserves remain untapped and understudied.

Prior to the mid-2000s, the logistical challenges of transporting coal from Xinjiang to coastal consumer bases overwhelmed whatever strategic or political rationale there might have been for its development. Now, stagnant and declining output in many parts of northern China, the prospect of rising coal demand from industrializing inland provinces, and Xinjiang's low production costs have tipped the balance in the region's favor.

Over the next five years, the Chinese government plans to invest some $196 billion on expanding power generation and ultra-high voltage transmissions lines linking Xinjiang coalfields to inland consumer bases. Xinjiang will also figure prominently in Beijing's planned $392 billion rail expansion over the next five years, especially as the government's focus shifts from high-speed rail to national freight transport networks.

Xinjiang has also seen a spike in investment in other mining- and energy-related sectors. Overall, fixed-asset investment in the region grew by more than 33 percent in both 2011 and 2012 (to 408.5 billion yuan, or about $66 billion, between January and September 2012), and national and provincial-level enterprises have been announcing new projects almost daily. Most recently, on July 30, Sinopec Group said it would lead a $32 billion project to develop synthetic natural gas -- just one of 35 such proposals currently awaiting approval from the Xinjiang regional government.

It remains to be seen whether Xinjiang's energy sector will live up to the most optimistic projections (many of the central government's targets will not likely be met within the stated 2015-2020 time frame). Regardless, these projections will underpin new investment into road, rail, pipeline and related infrastructure throughout the region.
A Gateway to Central Asian Energy

Building Xinjiang's energy infrastructure and binding it to consumer bases in China's Han core will go hand-in-hand with efforts to improve overland connections between China and Central Asia. The most important links will facilitate the transport of energy, virtually all of which will move through pipeline systems such as the West-East Pipeline Project, which extends from the Xinjiang-Kazakhstan border to cities in the Yangtze and Pearl River deltas.

China National Petroleum Corporation, one of China's "Big Three" state-owned energy firms, has led the way in oil and natural gas pipeline construction in Xinjiang and Central Asia. The company currently operates four oil and natural gas pipelines in cooperation with KazTransOil, a subsidiary of Kazakhstan's state-owned KazMunaiGas, including the 2,558-kilometer (1,589 mile) Kazakhstan-China Crude Oil Pipeline and the Kazakhstan-China Gas Pipeline (the second phase of which Chinese President Xi Jinping and Kazakh President Nursultan Nazarbayev commissioned during Xi's visit to Astana Sept. 7). These and future pipelines will link to the West-East Pipeline Project at Alashankou and Huocheng, in northern and central Xinjiang. 

Securing energy and natural resources is the bedrock of China's strategy in Central Asia and, by extension, Xinjiang. Already, China imports 235,000 barrels per day of crude oil from Kazakhstan, and Beijing plans to raise that figure to 1.5 million barrels per day in the next few years if Kazakhstan can bring the Kashagan oilfield up to planned production by the end of 2014 (while output will almost certainly grow substantially, this remains a highly optimistic target). By 2020, China expects to import as much as 60 billion to 65 billion cubic meters of natural gas annually from Turkmenistan.

China has signed agreements to purchase up to 10 billion cubic meters of natural gas from Uzbekistan (though internal difficulties within the Uzbek energy sector have stalled delivery) and invested in oil and copper projects in Afghanistan. China also relies heavily on the Kazakhstan-Xinjiang border as a transit corridor for oil from other former Soviet states, importing around 1 million barrels per day in 2012. Of all China's investments in Central Asia (including Afghanistan), energy and resources-related projects have the most potential to directly affect overall Chinese energy and economic security in the next decade.
Security Risks

But as critical as oil, natural gas and other industrial inputs are for China (and as important as such investments can be for China's partners), simply financing and building roads and pipelines for individual projects alone cannot ensure long-term supply security -- both from Central Asia and within Xinjiang. This is especially true in a region where political and infrastructure development was heavily hindered by 60 years of Soviet dominion -- and one where deep distrust of Chinese intentions (whether due to Russian influence or ethnic and religious reasons) is widespread.


Exerting the enduring political, economic, cultural and physical influence necessary to defend Chinese interests in Central Asia will require a multidimensional approach. Non-energy and resource-related infrastructure investment will help, as will investment in goodwill projects that lack direct, tangible benefits for China, such as Beijing's recent promise to repair a damaged pipeline in Kazakhstan. Butdevelopments like the China-Europe railway are only first steps, and such projects are highly vulnerable to attack or other disruptions.

The stakes of maintaining a stable, secure business environment in Xinjiang and Central Asia rise with every new investment, even as several factors in the coming years -- from ethnic tensions in Xinjiangover Han Chinese migration to the planned U.S. withdrawal from Afghanistan in 2014 -- will threaten to undermine the relative stability achieved during the 2000s. At the very least, such issues will increase volatility in the region. As Beijing's energy and mining interests throughout its western periphery increase, it will seek to buffer against such risks by enhancing regional security cooperation and tightening control over its borderlands.

Next: Part 3 will examine how ongoing civil unrest and security concerns in Xinjiang and throughout Central Asia will affect China's evolving interests in the region.

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