China’s Afghan Investment: Brilliant Strategy or Expensive Gamble?

The December 31^st NYT had a great in-depth article on the US$2.9 billion Chinese investment in the Aynak mine in Afghanistan. While China’s Aynak investment is not a new story, it is certainly a fascinating case study in China’s bold mode of foreign engagement.

With this deal to extract the enormously rich copper reserves in Aynak, and build the huge infrastructure necessary to do so (apparently even promising to build mosques), Beijing has, in a “single move,”

strengthened its hold on a vital resource, engineered the single largest investment in Afghan history, promised to create thousands of new Afghan jobs and established itself as the Afghan government’s pre-eminent business partner and single largest source of tax payments.

And of course, the commercial and geopolitical benefits of this win-win-win-win all accrue to China thanks to the (relative) security offered by the U.S. military. All in all, the project is billed as an example of

how China’s leaders, flush with money and in control of both the government and major industries, meld strategy, business and statecraft into a seamless whole.

The jury is out on how successful this “melding” has been, in Afghanistan or elsewhere, and if such melding is a smart idea in the first place. The viability of the Aynak investment and other Chinese strategic ventures in risky countries, whether assessed on geopolitical, diplomatic, or commercial terms, will come into focus only over the course of this new decade. That said, I think China’s Afghanistan foray already does not bode well for Beijing’s insight.

First, it seems China’s leaders seriously miscalculated in predicting the security situation in Afghanistan. China signed the Aynak deal in late 2007, when Afghanistan was relatively peaceful but signs of renewed violence were already evident. They were awarded project in part because of their willingness to commence the project under politically unstable circumstances. To what extent did Beijing allow for the increase in violence and instability that has come to pass?

Even if one argues China is taking the long view and establishing a “strategic beachhead” in Afghanistan, it is difficult to believe Beijing did not anticipate the prospects for the country’s medium-term stability would get so bad so quickly. The marked deterioration in security since when the deal was signed has significantly affected the project’s progress, now a year to 18 months behind schedule.

Second, the economics of Aynak and other such deals may be good for government shareholders but they are not necessarily good for China. The nearly unlimited money implicitly pledged by the government to underwrite these risky foreign projects, which makes them viable in the first place, comes from various government policies that indirectly transfer wealth from Chinese households to state-owned corporations. The Beijing leadership as a result has way more money at its fingertips than it knows what to do with. Thus significantly distorts their economic calculus, making feasible otherwise impractical adventures. I think many Chinese economists would argue that investment projects like Aynak, for all the resources accumulated, come at enormous but hidden domestic costs.

China’s overseas resource spree then is not some brilliant strategic ploy formulated in a vacuum. It is heavily influenced by the need for a non-wasteful outlet for the vast stores of cash that has piled up in the Communist Party’s coffers due to massive imbalances in the Chinese economy. It is unfortunate then that these resources, obtained at great expense, will then only exacerbate distortions in China’s economy. China’s economic model is heavily imbalanced in favor of fixed-asset investment and rife with manufacturing overcapacity. Paying a premium to secure cheap resources well into the future will not help China make its much-needed transition towards a services and consumption economy.

In the end, making too much of Chinese state company’s “melding…of strategy, business and statecraft” exaggerates Beijing’s decision-making prowess and agency. Chinese state-owned corporations have enormous influence over policy-making in China, and regularly abuse their power in pursuit of profits. Remember, for every green energy industrial policy, there is a North-South Waterway or some other exorbitantly wasteful or misbegotten project. And while melding business and geopolitics can be good strategy in some situations, it can also create more problems than it solves. Take for example the U.S. strategic alliance with Saudi Arabia or other Middle Eastern petrol states; in exchange for a stable supply of oil, the U.S. supported brutal regimes, fueled Islamic terrorism and became addicted to cheap oil. What will projects like Aynak cost to China in the long run?