As it scours the globe for dependable oil supplies and natural resources, no region is potentially more lucrative, or problematic, than China's own backyard in Central Asia, and further west to Iran. It is attractive because of abundant and easily transportable oil and gas, problematic because of rising Islamic militancy and security concerns in the region.
China's interests in Central Asia go beyond oil and gas: it seeks secure borders and stability in a region where conflicts could spread close to its own Central Asian predominantly Muslim Xinjiang region in the far northwest. Known as the pivot of Asia, Xinjiang has its own separatist and autonomy movements (not all of them violent) that China labels "terrorist." Beijing wants neighboring countries (in return for major investments and trade, though not so crudely put) to suppress Uyghur and Islamic nationalism lest they fuel discontent in Xinjiang. The resource-rich region is also the starting point of a pipeline to Shanghai and China's booming east coast, so stability in Xinjiang is crucial.
To show restive Uyghurs and other Central Asians – that China means business when it comes to crushing violent separatism, China and Pakistan conducted three days of live-fire military exercises last August in Xinjiang – code-named "Friendship 2004" – a friendly message lost on no one.
In search of stability
But China also flexes the velvet glove to achieve the stability necessary to do business with Central Asian states and to acquire a dependable flow of oil. Trade is increasing and China is making infrastructure investments and – music to the ears of Central Asian dictators – it doesn't lecture about democracy and pluralism. In Central Asia, China competes head-to-head with the US and India, which are also seeking oil and strategic partnerships. Therefore, for China, diminishing US influence in the region is a major objective, as it is of its new partner Moscow.
The Central Asian countries, grouped in the Sino-Russian-dominated Shanghai Cooperation Organization are China, Russia, Kazakhstan, Kyrgystan, Tajikistan and Uzbekistan. Xinjiang itself is bordered by Kazakhstan, Kyrgystan, Tajikistan, Afghanistan, Pakistan, India and Russia. To the far west in Eurasia lies Iran, a major energy target where China signed a mammoth liquefied petroleum gas (LPG) deal that alarmed the US and others trying to isolate Tehran.
The big deal
The jewel in the crown so far has been China's deal announced on August 24 in which state-owned China National Petroleum Corp, China's largest energy company, agreed to buy Canada's PetroKazakhstan Inc for US$4.18 billion in China's largest foreign takeover. The company produces 150,000 barrels of oil a day in Kazakhstan. It has strong assets, top-quality fields, a relatively new refinery, plus 13 older ones; it produces high-quality light, sweet crude; and it is close to China's border. Some analysts, however, say production probably has peaked and some fields are depleted.
The deal, if it goes through, is expected to consolidate China's economic presence in the energy-rich and geopolitically important region. The price for PetroKazakhstan is high, but it would reinforce the already substantial Chinese operations there, including a giant pipeline pumping crude to China from the oil and gas-rich former Soviet state.
Although China has been known to overpay for foreign assets, these acquisitions in Central Asia function as platforms for China's foreign policy objectives. China, too, is stepping up conventional trade with all Central Asian nations, setting up trade offices in those countries and transforming itself from a network of small-time merchants traveling across porous borders to a major supplier of consumer goods, electronics and appliances, with fixed outlets in the region.
Not all Central Asian countries are thrilled by China's rising influence, though most are willing to use it carefully. "We believe in Kazakhstan that there is no alternative to having a good, cooperative relationship with this country," Foreign Minister Kasymzhomart Toikayev told The Washington Times on August 23. "We don't have the choice of selecting our neighbors … Our credo is to maintain the balances of interests" of the big powers.
Beyond Central Asia, China has moved into Iran in Eurasia and signed a mega gas deal worth US$100 billion, likely to increase by another US$50-US$100 billion, raising the total to around US$200 billion. Under the deal, Iran will export about 10 million tons of Iranian liquefied natural gas for 25 years, while allowing China's state petroleum company to undertake exploration and drilling, invest in petrochemical and gas industries, pipeline services, and other activities.
China's Central Asian investments
Acquisition of oil producer Petrokazakhstan Inc for US$4.18 billion;
Financing construction of a US$850 million, 1,000-km oil pipeline from Kazakhstan's central Karanda region to China, capable of moving 400,000 barrels of crude oil a day; the pipeline will be a crucial link in a 3,000-kilometer project that will join China to the Caspian Sea and is due to come on line in December, taking oil to Xinjiang, which then will send it to China's oil-thirsty east coast;
China's offer of a US$900 million loan to the Central Asian countries of the SCO;
China National Petroleum signing a US$600 million oil development joint venture in Uzbekistan; China has offered to help Uzbekistan develop its oil fields in the Ferghana Valley;
Investment in hydroelectric projects in Tajikistan and Kyrgystan with more plans being discussed.
At the SCO summit in July, China pledged to commit US$4 billion to the Central Asian countries. It said it would pay the full cost of about US$1.5 billion to build a highway from China to Central Asia via Kyrgystan.
Establishment of trade missions in every Central Asian country, invested in local undertakings donated to aid projects and given new impetus to the Shanghai Cooperation Organization, which groups the countries.