Trade, investments, and technology: how China is transforming Kazakhstan's economy.

The analytical center Halyk Finance has presented a new overview of the prospects for mutually beneficial relations between Kazakhstan and China, as reported by inbusiness.kz.

China is a key investor and trade partner for Central Asian countries. The annual trade turnover between China and the region has already reached 90 billion dollars. In the published report, the Halyk Research team analyzed the relations between China and Kazakhstan across various sectors and prepared a series of recommendations based on China's experience applicable to Kazakhstan.

Summary

Over the past three decades, China has become Kazakhstan's largest economic partner. Bilateral economic relations cover a wide range of sectors, from agriculture to high technology and energy. The most significant changes in cooperation occurred after China launched its global initiative "One Belt, One Road" in 2013.

1. Trade Boom: Raw Material Exports and Machinery Imports

In 2023, the trade turnover between the two countries reached a record high of 41.1 billion dollars. For comparison, this figure was only 4.5 billion dollars in 2004. Kazakhstan's exports to China remain predominantly raw materials. In 2023, the share of raw materials in exports was about 60%. In recent years, the structure of non-raw material exports has shown some shifts, with an increase in the share of agro-industrial and chemical products. On the other hand, Kazakhstan's imports from China are almost entirely composed of non-raw and technological goods, such as machinery, equipment, and textiles.

2. China – A Key Investor in Raw Material Sectors

From 2005 to 2023, the volume of Chinese investments in Kazakhstan amounted to 24.8 billion dollars, making China the fourth largest investor. However, the primary interest of Chinese investors is focused on Kazakhstan's raw material sector. Of the 3019 enterprises with Chinese participation, over 40% operate in the mining and energy sectors. According to EDB estimates, in terms of accumulated FDI in Kazakhstan, China ranks among the top three leaders.

In recent years, Kazakhstan has been trying to attract Chinese investments into processing industries such as metallurgy, oil and gas refining, chemical industry, machine engineering, electric power, transport, construction materials manufacturing, healthcare, and agriculture.

Among the major implemented projects are the construction of an integrated gas chemical complex, the modernization of the Shymkent oil refinery, and the development of a multi-profile automobile assembly cluster in the Kostanay region.

3. Kazakhstan as a Food Base for China

Agriculture is one of the most promising areas of cooperation between Kazakhstan and China. In 2023, agricultural product exports to China reached 1 billion dollars, nearly 4.6 times more than in 2016 (217 million dollars). Kazakhstan has increased its exports of grains, oilseeds, and meat to China. With the growing demand for food products, Kazakhstan has every opportunity to further strengthen its presence in the Chinese market. A significant step could be the establishment of joint ventures for processing agricultural products.

4. Eurasian Transport Hub

Kazakhstan plays a key role in implementing the Chinese initiative "One Belt, One Road." Major infrastructure projects involving Kazakhstan include the Kazakhstan-China logistics center in Lianyungang, the transport and logistics terminal in Xi'an, the dry port "Khorgos Eastern Gate," the transit corridor West Europe – West China, and the railway corridor from China to Iran.

In 2023, over 23 million tons of transit cargo passed through Kazakhstan, which is a 15% increase compared to the previous year.

Kazakhstan plans to continue modernizing its transport infrastructure to increase capacity. By 2026, 1300 kilometers of new railway tracks will be constructed, a third railway checkpoint on the border with China is planned to be opened, and new dry ports "Bakhty" and "Kalzhat" will be built.

5. New Flagship Projects in Non-Raw Sectors

The Kazakh government is working on expanding the list of joint investment projects, which currently includes only 52 projects worth 21 billion dollars. At the same time, a connection between investments and export supplies must be ensured. Thus, enterprises with Chinese participation will have a guaranteed market for many years.

Jointly with the Chinese side, and with the participation of Kazakh medium and large businesses, it is proposed to supplement this list with new projects in promising sectors:

• food products and beverages;
• textiles, leather, footwear, and clothing;
• wood and wood products, paper, and paper products;
• chemical products;
• pharmaceuticals;
• metals and pipes (medium and upper processing);
• electrical equipment;
• automobiles, trailers, semi-trailers, and transport equipment.

6. "Green" Energy on the Path to Sustainable Development

China is actively developing projects in renewable energy sources (RES) and "green" technologies. Given the critical deterioration of energy infrastructure and capacity shortages, Kazakhstan's strategic partnership with China opens up opportunities for joint efforts to transition to sustainable energy and reduce carbon footprints.

In the development of energy infrastructure, the following areas may be relevant for Kazakhstan:

• development of RES projects already implemented together with Chinese investors;
• exploring the possibility of China National Nuclear Corporation's participation in the construction of a nuclear power plant in Kazakhstan;
• utilizing Chinese technologies in updating energy infrastructure and implementing the National Infrastructure Plan by 2029.

7. Chinese Technologies for Structural Economic Restructuring

Kazakhstan is heavily dependent on imports of machinery and equipment. Purchasing equipment from various countries and suppliers minimizes opportunities for localizing service and assembly processes. Therefore, in certain priority areas that significantly rely on government support, it is advisable to ensure the import of standardized equipment:

• equipment for upgrading the energy sector, including turbines and other energy equipment;
• service and localization of construction special equipment;
• service and localization of agricultural machinery;
• service and localization of railway transport.

8. The Chinese Development Model: What Can Kazakhstan Benefit From?

The Chinese economic development model is recognized by many experts as one of the most effective, as it combines elements of both state and market economies. Despite a multi-level and complex state planning system, China has clear development priorities across various sectors and regions.

Considering limited resources, China has focused on a comprehensive list of sectors that received priority state support. Under the Made in China 2025 program, this included 10 sectors. Additionally, at the provincial level, there was a clear understanding of the prospective sectoral structure of the regional economy based on each region's competitive advantages.

For Kazakhstan, it is also important to identify the most competitive sectors that can ensure growth and value creation in both the short and long term. Based on a wide range of criteria, 4-5 industries should be selected. These could include oil and gas chemistry, high-end metallurgy (hot-rolled steel for automotive manufacturing), automotive manufacturing and components, the construction industry (construction materials), localization of construction special equipment; high-performance agriculture, fertilizer production, feed production, localization of agricultural machinery, light industry, pharmaceuticals, and medical device manufacturing, transport and logistics, tourism, and others.

To support priority sectors, in addition to the banking system, China actively utilizes funding channels through state-owned funds. Approximately 800 state funds were established under the Made in China 2025 program. These funds employ various funding mechanisms, one of which is direct entry into capital. For example, the National Investment Fund for the Integrated Circuit Industry owns shares in the largest semiconductor manufacturing companies in China. Based on China's experience, it is proposed to reconsider the investment strategies and utilization of Kazakhstan's state funds.

In addition to direct financial support for industries, China has paid special attention to systematically improving the business climate and developing small and medium-sized enterprises (SMEs). This included aspects such as business registration and licensing, permits, regulatory oversight, bankruptcy, tax and customs administration, and others. Given the significance of the public sector, a specific focus area has been the reform of state ownership, including priority improvements in corporate governance, allowing state enterprises to concentrate on their core activities while also enhancing quality and productivity.

Currently, SMEs account for about 60% of GDP,