February 3, 2014

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TSG IntelBrief: China’s Westward Economic Push Through Afghanistan

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Summary

The continuation of Chinese investments in Central Asia has broadened its economic footprint beyond key “stans” of the region to Southwest Asia. In China’s westward economic push, Afghanistan finds itself as a strategic destination for the Chinese investment. Though many countries are wary of investing in Afghanistan, it is an increasingly significant part of a Beijing-envisioned economic and security belt whose goal is to connect the Chinese economy to that of Western Europe.

This economic and security belt is, in fact, a mega economic zone that spans areas with massive untapped energy and mineral resources, with a backdrop that include seemingly insurmountable security challenges and volatile geopolitics. At present, a fundamental piece of this strategy would have to be reformulated and revisited upon withdrawal of NATO forces from Afghanistan and how the withdrawal would impact security dynamics in the region.

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Strategic Goals

China’s biggest strategic goal in Afghanistan is intimately tied to Beijing’s long term vision for its westernmost provinces, Xinjiang in particular. Xinjiang is home to most of China’s Uighur Muslims and its proximity to hotspots of Islamic extremism is a key security concern for Beijing. It is also the province that neighbors Central Asian states north of Afghanistan with abundant and yet-to-be developed hydrocarbon energy resources and with their own Islamic extremist groups. Therefore, it is imperative for China that Xinjiang become integrated into a primarily Chinese-led evolving energy network in Central Asia and that local populations prosper from the massive investments in infrastructure. Underlying the importance of economic prosperity and development of a dynamic employment market in Xinjiang is significant investment by Chinese state owned enterprises in telecom and IT infrastructure. Xinjiang’s capital of Urumqi has transformed into hotbed of telecom and internet growth. This picture underscores the significance of Afghanistan in the evolving Central Asian economic and security landscape.

China's investment in Afghanistan includes, foremost, extractive industries followed by basic municipal infrastructure, telecommunications (both wire and wireless), steel, construction material, and roads. It is part of a strategy to bring about prosperity for the locals that would lead to an improved security environment.

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Beijing’s Security Anchors

China’s grand strategy in Afghanistan is crystallized in two massive projects. The key objective of development is to integrate the country into a larger regional economic bloc in Central and South Asia:

• The multibillion-dollar investment in Mes Aynak copper deposits

• China National Petroleum Corporation (CNPC)’s oil extraction project in Sar-e-Pul province in north of the country.

The largest private investment in Afghanistan’s history, the massive copper mine at Mes Aynak—the world’s second largest copper deposit—is under development by the China Metallurgical Group Corporation (CMC) and Jiangxi Copper (JC). The three billion dollar investment in the mine involves a 30-year lease and is supported by other infrastructure investments such as railroad, a 400-megawatt power plant, and coal mine development. CMC and JC took over the mine in 2008, but since then have run into security challenges, which have manifested themselves primarily in the form of angry locals demanding proper compensation and a Taliban-led insurgency trying to undermine development efforts in the region. The project is also known for the challenges it’s posed to some of Afghanistan’s most cherished archeological sites, whereby their planned demolishment has been postponed until 2014.

The other key strategic Chinese investment is Sar-e-Pul oil extraction project in the Northern Amu River Basin with an estimated 87 million barrels of oil. The Karzai government awarded this project to CNCP. Amu River is part of the Afghan-Tajik basin, a geological zone in the northeast with an estimated 1.9 billion barrels of oil reserve that extends to Turkmenistan and Uzbekistan. The local partner for this project is Watan Group where some members of senior management are related by blood to President Karzai. Watan also provides logistics and security services, to US and NATO supply convoys between Kabul and Qandahar. It is important to note that Sar-e Pul province is considered to be within the sphere of influence of powerful Uzbek Afghan leader Rashid Dostum, whose leadership and militia played a key role in defeating the Taliban in the north of the country. Given Dostum’s influence and control in Sar-e-Pul, he is in position to approach Chinese executives and politicians for a share of the oil exploration revenue in exchange for greater security.

The crude oil from the Sar-e-Pul project is trucked to bordering Turkmenistan for refinery. However, CNCP plans to build a refinery on Afghan territory to avoid transport of raw products into Turkmenistan. With the completion of this project, Afghanistan will become integrated into the Eurasian energy network and play an expanding role in providing Beijing land access to Europe and the Middle East.

The Chinese investment in Afghanistan, particularly the country’s extractive industries, has fueled a debate in Washington regarding Beijing’s state-owned enterprises reaping the benefit of US and NATO-led post-Taliban operations. Moreover, the question remains whether Beijing would have the political dexterity to lead Afghanistan into economic stabilization after the withdrawal of NATO forces from Afghanistan. It is fair to assume that the Chinese leadership is contemplating its options for a post-NATO Afghanistan and how its role will evolve in the country’s economic and political scene.

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• A plausible scenario has China signing new contracts with Afghanistan to consolidate its position in the country in anticipation of competition from India and the United States
 
• The US could work with China to ensure Afghanistan will not return to chaos as both countries have high stakes in a stable Afghanistan secured from Islamic extremists
 
• China will most likely work with Iran to provide security in northern Afghanistan given Tehran’s long-standing cultural, political, and economic influence there
 
• China will face significant security challenges—and decisions—in post-2014 Afghanistan, if current Kabul policy remains that the Afghan Public Protection Force will be the sole security entity in the country.

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