How Sinophobia Blocked a $485 Million Rail Project in Mongolia
September 6, 2018
By Maria Krol Sinclair
Mongolia’s election of President Khaltmaagiin Battulga, who gained political prominence for stirring up fear of Chinese influence in Mongolia, is the latest development in a historically fractured Sino-Mongolian relationship. Fear of Chinese investment and intervention in Mongolia has halted key Chinese investment projects, and in turn, played a role in precipitating Mongolia’s economic slump.
The case of Mongolia-China relations represents a crucial signpost in describing the Chinese leadership’s struggle to overcome Eurasia’s negative perceptions of China as it attempts to execute investment and infrastructure projects. Such Sinophobia can lead to both unanticipated hurdles that have the power to change these projects’ trajectory, and more importantly, salient issues that sometimes indirectly impact the political trajectory of the countries themselves. Relations between China and Mongolia have been complicated by nearly a millennium of territorial disputes. As recently as the early 1980s, Mongolia sought help from third party nations in protecting itself against Chinese invasion. Today, China buys more than 90 percent of Mongolian exports, mostly coal and copper, and in 2013, trade with China accounted for nearly half of Mongolia’s total foreign trade. From 2002 to 2013, trade rose from $324 million to $6 billion. Yet against this the backdrop, public opinion of China in Mongolia is the lowest of any country except for North Korea (they are equal). In a March 2016 survey conducted by the IRI’s Center for Insights in Survey, 53 percent of Mongolians polled said they had an unfavorable (33 percent) or extremely unfavorable (20 percent) opinion of China. Further, 43 percent of Mongolians were able to correctly identify China as Mongolia’s current greatest economic partner, but only 5 percent of Mongolians said that they preferred China to be Mongolia’s greatest economic partner.
China’s leadership has many reasons to engage in infrastructure development in Mongolia. Labor market pressures, desire to create links in the global supply chain, and access to Mongolia’s mineral resources are all major drivers of China’s rocket-speed infrastructure expansion in Mongolia and Eurasia generally. China has worked quickly and methodologically to build roads, rails, and bridges through large infrastructure investment programs such as One Belt One Road (OBOR) and the China-Pakistan Economic Road (CPEC), using Chinese-controlled funding vehicles like the newly enacted Asian Infrastructure Investment Bank (AIIB) to do so.
In China’s grand cost-benefit analysis of infrastructure investment, improving global public opinion of China factors high. At the same time, pre-existing political climate and public opinion heavily influence the outcome of infrastructure projects themselves. Flybjerg et al. found that “political explanations have been seen to be the most dominant explanations for cost overruns,” of large-scale infrastructure projects, especially in political systems where corruption is common. If true, then using infrastructure investment as a tool to increase soft power in countries such as Mongolia may be like throwing money into a black hole. Bilateral relations might simply be too fragile in some cases to support even mutually beneficial infrastructure projects.
Standard vs. Russian Gauge
One particularly political decision among rail projects in Eurasia using Chinese investments is whether to use standard (1435 mm) or Russian (1520 mm) rail gauge. The majority of the world (55 percent) uses standard gauge, including China and almost all of Europe. The majority of rails in Russia and the former Soviet Union) as well as Finland and Mongolia use Russian gauge. Politicians in Kyrgyzstan, Kazakhstan, Mongolia, and Russia have voiced disapproval of Chinese rail projects that fund standard gauge tracks. Anxieties around the Chinese of standard gauge almost always revolve around national security and, specifically, lack of safeguards against China bringing military equipment into the host country.
In the summer of 2014, a Mongolian television network aired a 30-minute talk show that sparked an outcry leading to the shutdown of a $483 million railroad deal with China. In his appearance on his self-produced TV show, member of the then-opposition Democratic Party and judo hero, Khaltmaagiin Battulga claimed:
“Tanks can easily penetrate Mongolia in no time if we build a railway with a [narrower] gauge track, the same used in China.”
Within a week, public pressure on politicians had halted the project. The move annoyed Chinese investor Shenhua Mining Corp., which was interested primarily in building a standard gauge rail, but it proved disastrous for Mongolia. After parliament formally blocked the deal, planners were forced to switch the standard, Chinese-fitting gauge out for the Russian gauge. This necessitated a costly change-of-gauge station at the Chinese border, and to the dismay of the international business community, increased the price of coal being transported from Tavan Tolgoi to China from $14 per ton to $17 per ton. There is no evidence that Chinese investors of the railway had any intention of using it for militaristic purposes. More troubling, in the midst of the dispute, commodity prices continued to plummet and with it, so did Chinese foreign direct investment in Mongolia.
Lasting Effects for the Mongolian Economy
The International Monetary Fund forecasted Mongolia’s growth at around 1 percent for 2017. From 2012 to 2015, national debt grew from $11.7 billion in 2012 to almost $23 billion making Mongolia “one of the most indebted frontier markets.” With mining holding 20 percent of the Mongolian gross domestic product, a more inclusive, modernized rail transport system is key in boosting economic growth in Mongolia today. In hindsight, a standard gauge rail linking the Tavan Tolgoi mine to the Chinese border could have significantly blunted the Mongolian economy’s drop. Now, a loan restructuring settlement of the Tavan Tolgoi mine could produce a government payout of nearly $2 billion in 2018, but such measures are short-term and do little to solve Mongolia’s pre-existing infrastructure paucity.
While sociohistorical precedent played a large role in the delay of the Tavan Tolgoi rail project, another more immediate factor was Mongolians’ impression of China as a job remover rather than a job producer. In the same poll conducted by IRI in 2016, Mongolians cited unemployment as the single most important problem facing Mongolia and 78 percent felt that the presence of foreign migrant workers presented a threat to Mongolia, many of whom are Chinese.
The case of the Tavan Tolgoi Rail highlights the need for more cohesive risk assessment for China’s infrastructure projects. China’s new Asian Infrastructure Investment Bank (AIIB) has been criticized for its risky deals, but few of those criticisms even account for the fragile relationship between China and many of the countries in which it funds infrastructure. Calculations of infrastructure projects’ risks, both by those analyzing China and by China itself, must also account for the added political risks of Sino-cooperation in countries with a history of Sinophobia.
In the case of Sino-Mongolia relations specifically, Sinophobia played a large role in determining the election of Khaltmaagiin Battula, who became president in July 2017. Despite his strongman stance, Mr. Battula has become friendlier to Chinese investment since becoming president. This month, for example, he announced that Mongolia would sell up to 30 percent of the mine’s deposits on foreign and international exchanges, a strong pivot from his nationalistic protection of the mine just last year, and one heralded by China.
It is not always clear how the powerful forces of anti-China sentiment and the allure of Chinese investment will interact with one another in a given country. At least in Mongolia, it seems that the more political issue — rail gauge — has been abandoned, while less visceral, but arguably more important aspects of China’s access to the mine — such as its ownership structure— have been allowed through. This dichotomy — between the public’s perception of China’s involvement and China’s actual control over key natural and economic resources — is still evolving in Mongolia. It is one that both countries’ political leaders will have to balance carefully in the coming years, as their economies become even more intertwined.