China wants its investments in Afghanistan to be safer than in Pakistan
Beijing Could Profit Handsomely From Afghan Resources And Exports, But New Ventures Risk Exposing Chinese Nationals To Violence.
On April 26, a suicide bomber killed Huang Guiping, the director of the Confucius Institute at the University of Karachi, as well as two Chinese teachers and a Pakistani driver. The attack, claimed by Baloch separatists, highlighted the tensions that China has stirred up with its massive China-Pakistan Economic Corridor investments in Pakistan—a lesson Beijing has learned and is keen not to repeat in Afghanistan. But China will struggle to entirely sidestep these problems, especially because the answer it often reaches for in these situations is economic investment—something that inevitably expands exposure on the ground.
The most prominent example of this tension can be found at the Mes Aynak copper mining project in Afghanistan. For years, the project was a byword for broken Chinese dreams. The Taliban, now returned to power in Afghanistan, have revived the project and are more generally trying to take advantage of the nation’s proximity to China. And Beijing seems willing to reciprocate.
The recent Tunxi Initiative endorsed by President Xi Jinping referenced the project, and Chinese executives have visited Kabul to discuss the project. Yet the problems they appear to be discussing are the same ones that were being raised under the old government. And the mining executives seem far less sure-footed than their colleagues at China National Petroleum Corp., which is seeking to restart oil production at its concession in northern Afghanistan under a new deal.
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It is doubtful either of these projects will move quickly. And ordinary Afghans won’t see the benefits for years in any case, no doubt stirring resentment toward China. It is lower-level activities such as artisanal mining and exports of gemstones, pine nuts, and saffron that could take off much more quickly. They could also have a real impact on the lives of ordinary Afghans, but they will also make China far more exposed to security risks.
Kabul is awash with Chinese businessmen. Walk out of Kabul International Airport, and you are greeted by a big billboard advertising Chinatown, a housing and business compound in the city that offers a range of services for Chinese (and other) entrepreneurs interested in taking advantage of Afghanistan’s opportunities. So many businessmen and random curiosity-seekers have been showing up that the Chinese Embassy has had to issue repeated warnings telling their citizens to report to the mission and not take unnecessary risks. The fear is that these Chinese nationals could become targets like the Confucius Institute director and his team in Pakistan.
Whereas in Pakistan China feels as if it has a reasonably stable counterpart to deal with, one of Beijing’s major concerns about Afghanistan is that the Taliban government might collapse. Beijing had hoped that the Taliban would bring in an inclusive government, which would help bring some stability to Kabul and unity to the country. In the absence of an inclusive government or much evidence the Taliban is planning to create one, Beijing has concluded that the only answer is to support the government and ensure it does not collapse chaotically. However, the challenge China faces is how to do this without assuming responsibility for everything that happens in Afghanistan.
While Afghanistan’s mineral potential is of significant interest to China in terms of its proximity, scale, and strategic importance to regional infrastructure development, Chinese firms are also aware of the complications that come with trying to exploit it. The Tunxi meeting and Foreign Minister Wang Yi’s subsequent speech and visit to Kabul are clear signals to any Chinese majors that are interested in exploiting Afghanistan that the political support is now there but it’s not yet clear how much these state owned enterprises will engage.
Economics plays an important part in Chinese considerations. When it comes to rare-earth minerals, China is already a market leader. It provides more than 85 percent of the world’s rare earths, and it is home to about 30 percent of the world’s total rare-earth reserves. China is not in a hurry to secure additional supplies, particularly when the value of worldwide rare-earth imports stood just at $8 billion in 2018—a fraction of the more than $1 trillion in global oil imports.
While dependence on rare earths enables China to leverage influence on the world stage, it is something that Beijing has in the past discovered limited utility in trying to exert. Following an attempt by China to choke Japan’s supply after a political dispute, Tokyo found alternative supplies and reduced its dependency on Beijing.
Similarly, according to reports from last November, Chinese miners were in talks to access Afghanistan’s vast lithium reserves. But big firms see little reason to endure the complexities of Afghanistan. Some opportunist mineral ore brokers may step in, including small-scale operations run by individuals or small companies that will use pumps and excavators to get at the brine lithium that can be found under dried salt lakes.
This requires none of the heavy industrial machinery or effort of a large firm, just access to the site, something that is now possible given the relative stability the Taliban government has brought to Afghanistan. There is evidence from contacts on the ground (and videos on Chinese social media) that Chinese prospectors are already exploring these opportunities.
But while lithium and rare earths may make catchy news headlines, politically overlooked but economically significant commodities are more likely to be of interest to China. Afghanistan has world-class deposits of iron ore. The Hajigak iron ore deposit, situated in the central province of Bamyan, is one of the several prospecting sites a Chinese delegation visited in November. It was previously won by an Indian consortium that decided not to proceed with the project for political and commercial reasons.
According to old Soviet and U.S. surveys, the deposit contains approximately 1.8 billion metric tons of ore at a concentration of 62 percent iron, which makes it the region’s largest known direct shipping ore deposit—the stuff that you can just dig up and ship. High-grade iron ore supply is already struggling to meet demand as China’s decarbonization efforts have boosted demand.
The S&P Global Platts index for 62 percent iron ore fines reached a record $233.1 per metric ton on May 12, 2021, driven by a resurgence in global demand and tightening supply. Although this has slightly eased, China’s increasingly ambitious emission reduction schemes; its efforts to diversify away from Australian supply in the wake of recent political disputes between Beijing and Canberra, which accounted for 61 percent of Chinese iron ore imports in 2020; and a COVID-induced shuttered capacity in Brazil will mean demand for alternative high-grade iron ore will remain robust. This is not to say Afghanistan is not a risky prospect, but it gives China an alternative option much closer to home.
By focusing on Afghanistan’s iron ore deposits, China can achieve several key objectives. First, it can secure access to an alternative high-grade iron ore deposit critical for the production of low-carbon steel. Second, with the current favorable market prices, it is economically viable to mine and ship the ore via Karachi without the need for investing in transport infrastructure. Third, it will demonstrate a quick win by generating the much-needed cash flow for the Taliban regime. Fourth, in the past 10 years, many small-scale steel mills, including ones run by Chinese companies, have popped up around Afghanistan, relying for the most part on a dwindling supply of scrap metals for the production of their steel products.
Unlike many other minerals for which no domestic consumption capacity exists in Afghanistan, iron ore can immediately utilize domestic steel industry capacity, perhaps with some help from China to improve quality and efficiency.
The other advantage provided by Afghanistan is an abundant supply of coal. This is crucial in the smelting process, which requires power that can be generated by coal to process the steel from the iron. Chinese producers have a long history of undertaking such projects regionally. In fact, those who designed the initial Mes Aynak copper project had intended to build a coal-fired power plant to help supply both the mining site and smelting plant, as well as the local region.
This model was one that had been proposed to the republic government before the fall of Kabul, when a Chinese delegation met former Afghan President Ashraf Ghani with a proposal to commission a 300-megawatt coal-fired power station at an approximate cost of $400 million just northeast of Kabul, where the Pul-e-Charkhi Industrial Park and most of the steel plants are located. Ghani had approved the proposal in principle and had given instructions to the relevant authorities to facilitate and expedite the project. This project is one that the Taliban is simply waiting to approve and could provide an easy win for the new authorities in Kabul.
The crucial question is the degree to which Beijing is going to orchestrate such projects in Afghanistan or allow enterprising entrepreneurs to go ahead and launch the projects with its tacit support. Industrial-scale lithium, rare earths, and copper mining require large outlays and substantial infrastructure as well as end users who tend to be important state-linked actors. Iron ore is easier to manage discretely and already has a substantial Chinese infrastructure under the surface in Afghanistan.
There is also substantial demand for iron ore around China and the wider region, which makes it an easy commodity to exploit without drawing too much attention. (Conveniently, this also means the polluting part of the process is shifted offshore, helping China with its climate-related goals as well.) In reaching out to China’s limitless consumer market, it could be similar to the pine nut exports that China has encouraged and that has seen around 40 planeloads of Afghan pine nuts go to China to be rapidly sold for a tidy sum online as a luxury product.
Iron ore and pine nuts (and similar products) offer China a way of engaging in Afghanistan with little direct state commitment. Getting big state-owned enterprises engaged is full of political and security risks and could lead to targeting of Chinese nationals working for these firms, as happened in Pakistan. This has knock-on effects in terms of getting the local authorities to provide protection and generates tensions at a state level. Focusing on smaller-scale projects and miners while allowing small traders and hardy entrepreneurs to try their hand costs Beijing little and has far less risk attached to it. And what risks are attached tend to be linked to the individuals rather than the Chinese state.
The lesson learned from Pakistan seems to be: engage—but at a lower level that commits you to less and therefore exposes you to less risk. Yet the web of economic activity that is spun is potentially just as substantial and might actually benefit a wider range of Afghans. By linking the Afghan economy to China’s at a lower level, Beijing would help support stability in Afghanistan at little cost to itself.
But as much as China might hope to avoid the same problems it is encountering in Pakistan, as the world’s second-largest economy that shares a direct border with both countries, it seems unlikely that China can do so without playing a role in resolving regional problems.
Beijing’s longer-term goal is to ensure Afghanistan does not destabilize the wider region or cause problems for itself. Taking a lower-profile approach to economic engagement will help China achieve this goal without attracting the same high-profile problems it is finding in Pakistan. But economic opportunity does not always translate into stability. Beijing need only look at what it has been trying to do in parts of the Pakistani region of Balochistan to see the anger it can provoke, with tragic consequences.