The attractiveness of investing in Kazakhstan as a factor in the growth of chinese investment in the economy of the country

Abstract. The article provides an analytical overview of the main factors affecting the growth of Chinese investment in the Kazakhstani economy, the latter being characterized by a favorable investment climate, a competitive geographical location with good transport connections, as well as the low level of restrictions on investors. The improvement in the factors described above since the establishment of diplomatic relations has allowed bilateral trade to increase by more than fortyfold; while the total amount of gross accumulated investments has increased to more than $30 billion. Kazakhstan is now China’s largest trading partner in Central Asia and the largest investment target in the Eurasian region.

Introduction

In terms of modern economic realities, an important state goal of the Government of the Republic of Kazakhstan is the modernization of the economy, which in turn will create a new model of economic growth, thereby ensuring the country’s global competitiveness. One of the sources of finance for this process, in addition to private domestic and state capital, is foreign direct investment. The high investment potential of the Chinese economy and the growth of the investment attractiveness of Kazakhstan are predetermining factors for large investments in the economy of Kazakhstan.

Methodology: Methodologically, the research was based on the two methods of statistical and comparative analysis. In addition, classification, induction and deduction have been widely used. In general, a systematic approach was chosen, which makes it possible to comprehensively study the attractiveness of investment in Kazakhstan as a growth factor in Chinese investment in the country’s economy. Analytical calculations are based on the use of MS Excel spreadsheets.

Main part. Since gaining independence, the economy of Kazakhstan has attracted more than $260 billion in gross foreign direct investment. The top five main investing countries are the Netherlands (gross investments in 2005-2016 amounted to 71.6 billion US dollars), the United States (27 billion US dollars), Switzerland (17 billion US dollars), France (13 billion US dollars) and China (14 billion US dollars)^[10].

At the same time, despite the fact that China at the end of 2016 had a share of only 6% of the total investment, Chinese investors have rapidly increased their investments in Kazakhstan over the past three years. Thus, during 2005-2013, the Chinese side financed Kazakhstan’s projects for only $10.8 billion; following which, in 2016, agreements for a total of more than $27 billion were signed (it is also worth noting that 3.2 billion dollars has been actually invested over the past 3 years)^[11]. Namely, during a visit by the Head of State, N.A. Nazarbayev, to the People’s Republic of China, it was agreed to implement 51 joint ventures in the the following areas: the chemical industry; mining and metallurgy; engineering; infrastructure; energy; the agricultural sector; light manufacturing; oil refining; construction materials; and information technology.

In terms of industrial and investment cooperation in 42 projects, the Kazakhstan side acts as a majority shareholder; while the Chinese side acts as a contractor or equipment supplier for 23 projects; with the customer given the opportunity to purchase a service or equipment at reduced rates^[12].

Of the 51 projects, three are completed; five are under construction; and seven projects are still to be opened. Among the largest and most significant projects are:

— The plant belonging to Asia Steel Pipes Corp LLP in Almaty, producing steel-welded pipes of large diameter with a capacity of 150,000 tons. It will ensure the needs of not only the Kazakhstani oil and gas sector but also the markets of the Customs Union, Central Asia, Iran and the Caucasus.

— The copper-smelting plant belonging to JSC KazMinerals in the East Kazakhstan region, which has a capacity of up to 300,000 tons of copper per year. This project will help Kazakhstan become a large smelter of copper.

— The second stage of an electrolysis plant for the production of primary aluminum. This project will allow for the processing of up to 85% of all aluminum extracted in Kazakhstan. Currently, it is exported in the form of raw materials. It is also relevant here to mention the creation of an integrated gas chemical complex that will produce up to 500,000 tons of polypropylene per year.

— A plant for the SKD assembly of hybrid and electric JAC cars^[13].

In general, as of September 2016, out of 375 investment projects totalling $76.1 billion in Kazakhstan involving foreign investors, 79 projects (21% or $27.9 billion) are led by Chinese companies^[14].

The high growth of interest in this area on the part of Chinese investors is due to a number of factors.

First, there is the creation in the country of a favorable investment climate. In over 25 years of independence, the state policy has been aimed at ensuring transparency of the legal framework for economic activities at all levels, reducing investment risks, protecting the rights of investors and ultimately leading to the formation of one of the most favorable investment climates in the world. In general, the rapid development of a favorable investment climate in Kazakhstan can be linked to a change in the country’s position in international ratings.

Thus, according to the Doing Business rating, which analyzes those aspects of business regulation that affect small and medium business in ten areas in 189 countries, Kazakhstan ranked 35th in 2017, significantly improving the business environment (in 2006, Kazakhstan was ranked 119th). At the date of writing, Kazakhstan occupies a leading position in terms of both the Central Asian and CIS countries (Figure 1).

In 2014-2016, Kazakhstan improved its positions on virtually all the indicators which make up the Doing Business rating. Kazakhstan had the highest positions on such criteria as taxation, execution of contracts, registration of property rights and protection of the rights of minority investors (Table 1).

The reduction of the tax burden for doing business in Kazakhstan led to the country being allocated the position of “tax haven” - one of the lowest levels of tax burden. For example, the total tax burden (made up of corporate income tax, value-added tax, land tax and property tax) in Kazakhstan is lower (33.5%) than in neighboring countries: for example, the total tax burden for the People’s Republic of China is 43.5% and for the Russian Federation 40.2%.

The country occupies one of the best positions in the world as far as the protection of the rights of investors is concerned. Among 189 countries, according to the World Bank’s

Doing Business indicator for 2017⁸, Kazakhstan occupies third place in terms of protection of the rights of minority investors; and is 25th out of 140 countries regarding protection of investors according to the “Report on Global Competitiveness” for 2015-2016.⁹

At the same time, a necessary condition for improving the climate of the business environment is to reduce the cost of the main factors of production. The entrepreneurial environment in Kazakhstan is characterized by the lowest cost for such factors as water, gas, electricity, mobile communications and labor costs (Figure 2)

In 2016, Kazakhstan also improved its position in the global competitiveness index of the World Economic Forum, rising from 50th to 42nd position. This rating is calculated on twelve factors of competitiveness, which include the quality of institutions, infrastructure and macroeconomic stability. Thus, the efficiency of the work of institutions (the necessary time for starting a business) has been reduced from 19 days in 2010 to five in 2016. In addition, Kazakhstan has made significant improvements in the effectiveness of state regulation and support for investors,

improving the transparency of government decisions and now standing at 30th position out of 140; and in terms of investor protection improving its rating by 20 places to stand at number 25 out of 140.

According to the “Global Corruption Barometer, Transparency International”, the level of corruption decreased by 10.9% in Kazakhstan over the period 2012-2016 - 37% of respondents noted a reduction of corruption in the previous 4 years¹¹.

In addition to improvements aimed at strengthening the business environment, the

1. Doing Business 2017: Equal Opportunity for All, a World Bank Group flagship publication. Internet access: http://www. doingbusiness.org/reports/global-reports/doing-business-2017
2. World Economic Forum. The Global Competitiveness Report 2015–2016. Internet access: http://www3.weforum.org/docs/ gcr/2015-2016/Global_Competitiveness_Report_2015-2016.pdf
3. KAZAKH INVEST National Company JSC. Internet access: http://invest.gov.kz/
4. Transparency International. Global corruption barometer 2015/16. Internet access: https://www.transparency.org/research/ gcb/gcb_2015_16/0/

government is actively pursuing a policy of introducing incentives for foreign investors. Thus, to ensure the protection of rights and interests of investors at the legislative level, the Institute of Investment Ombudsman was created. For example, platforms for dialogue between state authorities and investors have been created. These include the Council of Foreign Investors, chaired by the President (on strategic issues); and the Council for Improving the Investment Climate, chaired by the Prime Minister (on systemic issues).

In addition to creating an infrastructure for supporting foreign investors, a number of investment incentives for foreign capital were created at the same time (Table 2).

Table 2. Incentives and benefits in Kazakhstan for foreign investors¹²

For a long period of time, the principle of “one window” for the investor and investment-support services has applied. This includes “assistance in obtaining the necessary agreements and permits”; “support of the investment project before the start of production”; “information, consulting, organizational and other support for the investor”; as well as “provision of services to foreign investors and representatives of Kazakhstani business”.

The improvement of the economic, social and cultural conditions and the political and legal environment can be confirmed by the improvement of Kazakhstan’s positions in the index of the International Business Compass, developed by the German office of the international network of audit and consulting companies BDO International in cooperation with the Hamburg Institute of World Economy. Thus, Kazakhstan strengthened its position by 9 points for the last year, having risen to 73rd place (higher than the countries of the EAEU and CA)^[15] [16].

All of this has enabled Kazakhstan to enter the top five among countries which have a transit economy and which are recipients of FDI; and to occupy third place among developing countries that do not have access to the sea.

Second, there is Kazakhstan’s competitive geographical position and potential for transport links, which give Chinese manufacturers access to a market of 500 million consumers as well as the possibility of delivering goods to Europe via land transport. In the Address of the President of the RK, N.A. Nazarbayev, to the people of Kazakhstan on the “Third Modernization of Kazakhstan: Global Competitiveness”^[17], the development of the Eurasian logistics infrastructure is seen as one of the engines of economic growth. The transition of the Kazakhstan transport complex to a qualitatively new level of functioning, its integration into the world transport system and compliance with world standards is also highlighted in the overridingly important policy document “Strategy Kazakhstan - 2050”. This fact will also be facilitated by the implementation of the “Nurly Zhol” state program for infrastructure development for 2015-2019, in conjunction with the Chinese “One Belt, One Way” initiative, financed by the Silk Road Fund ($40 billion) and the Asian Infrastructure Investment Bank.

Particular attention is being paid to the development of transport corridors and integrated transport hubs. Five international transport corridors pass through the territory of the country: the Northern Corridor of the TransAsian Railway (TAR); the Southern Corridor of TAR; the Central (Central Asian) Corridor, North-South and TRACECA. Kazakhstan is also an active participant in the implementation of the corridor project entitled “Western Europe - Western China”, the aim of which is to connect Europe and Asia by the shortest road.

In addition, an important transport hub for Kazakhstan is the Caspian region. Thus, participation in the Trans-Caspian International Transport Route (TITR), which is a multimodal corridor passing through China, Kazakhstan, Azerbaijan, Georgia and Turkey, is aimed at attracting transit and foreign trade cargoes, as well as developing integrated logistics products. In order to increase the volume of cargo flows, the construction of a ferry complex in the port of Kuryk is continuing, the completion of which, according to the Ministry of Investment and Development of the Republic of Kazakhstan, will bring the total throughput capacity of Kazakhstan’s seaports to 23.5 million tons. The capacity of the Aktau port has been increased: 13,000 vehicles passed through the port in 2016.

According to the LPI (Logistics Performance Index) international index, which assesses the level of logistics development, Kazakhstan moved up 56 positions (from 133 to 77) over the period 2007-2016. Improvement took place in the areas of efficiency of customs and border clearance; the quality of trade and transport infrastructure; tracking the passage of cargoes; and the quality and competence of logistics services.

The establishment of transport routes and communications allows Chinese producers to enter a market of 400 million consumers. This is made up of the Central Asian market, with 49 million people; the countries bordering the Caspian Sea, a population of 235 million people; and the market of the Eurasian Economic Union, with 180 million consumers. In 2016, the turnover of services, in particular freight-transport services, grew by 21% and amounted to 1.1 billion US dollars. In general, China is the main trade partner (in second place) of Kazakhstan. In 2016, the trade turnover between the countries amounted to more than 7 billion US dollars^[18].

Third, an important factor in attracting Chinese investment is the availability of mineral resources (Figure 3).

The bulk of Chinese investments for 20052016 (80%) were directed to the oil and gas sector. This was followed by the chemical industry (12.7%), metallurgy (5.7%) and 1% in real estate and transport.¹⁷

The high content of Chinese capital in certain industries is ensured by a low level of restrictiveness. This refers to the restrictive measures in place for foreign direct investment across 60 countries of the world.

The index takes into account four main types of restrictions: restrictions on foreign capital; discriminatory screening or reconciliation mechanisms; restrictions on foreign personnel; and operational restrictions. Implementation issues, as well as the degree of transparency or level of authority in issuing permits, are not taken into account. The restriction index combines a total of nine sectors that take values from 0 for less constrained in attracting FDI sectors and 1 for more constrained. In this ranking, Kazakhstan ranks 46th with a coefficient of 0.14. It should be noted that the restriction rate of FDI in Kazakhstan has remained unchanged for the past three years. In 2015, the most open country in attracting FDI was Luxembourg with a coefficient of 0.004, and the Philippines as the most closed (0.41). The average value of the OECD FDI restrictiveness index is 0.068.

¹⁶ Guide to Investment – 2016. KAZAKH INVEST National Company JSC. Internet access: http://invest.gov.kz/uploads/ files/2016/01/26/investora-2016.pdf

¹⁷ Tracker of Chinese direct investment https://www.aei.org/china-global-investment-tracker

The value of the FDI restriction index in the manufacturing industry of Kazakhstan in 2015 was 0.050, which is below the average index for the OECD (0.020). Among the branches of the economy of Kazakhstan, the most open sector for attracting FDI is the manufacturing sector (0.05). A similar value for the FDI restriction index is to be found in the sectors dealing with trade, electricity and business, as well as the resource sector (Figure 4).

In the last three years, there has been a gradual reorientation of Chinese investors from the extractive to the processing sectors. In general, over the period under review, there has been a decline in gross inflow of FDI from foreign investors by 28.6% in relative terms or $8.2 billion in absolute terms. At the same time, the most negative change is seen in the “professional, scientific and technical activity” sector (-3.8 billion dollars); “financial and insurance activity” (-2 billion dollars); “information and communication” (-1.6 billion dollars); “construction” (-477 million dollars); and the “mining industry” (-236 million dollars). It is noteworthy that the “manufacturing industry” sector and the sector dealing with “activities in the field of administrative and support services” are the only ones that have tended to increase ($331 million and $180 million, respectively).¹⁹

Nevertheless, today’s volume of investment is still insufficient. In Kazakhstan, the ratio of fixed assets (in real terms) to GDP is at the level of 1.5, while in the world a stable long-term coefficient of capital intensity is 1.9-2.1. This means that annual investments in the public and private sectors in the form of Kazakhstani and foreign

direct investments should be approximately $85 billion instead of the present $50-55 billion. In addition, most should come from foreign direct investors.

In addition to the factors described above, there is also macroeconomic and political stability. The sovereign credit ratings of Kazakhstan are at a stable level, as can be seen by the ratings for Standard & Poor’s (BBB-); Moody’s (Baa3); and Fitch Ratings (BBB).

Additionally, Kazakhstan is characterized by a high level of human development. Kazakhstan is the only country in the region that has high labor-market efficiency, ranking 20th among 138 countries of the world and 38th in terms of the ratio of wages and productivity in the cotext of the Global Competitiveness Index for 2016-2017.²⁰ According to the World Economic Forum, the country ranks 29th among 130 countries in terms of the level of human-capital development.²¹

Thus, against the background of bilateral cooperation, there is a gradual strengthening of economic ties between countries. Maintaining a favorable investment environment that reflects the stability of the national economy, in addition to the transit potential and a large market, allows

1. Kazakhstan Industry Development Institute. Investment Climate of Kazakhstan. Internet access: http://kidi.gov.kz/public/ publications/483
2. National Bank of the Republic of Kazakhstan. File “Gross inflow of foreign direct investments into the Republic of Kazakhstan from foreign direct investors by types of economic activities of residents. Internet access: http://www.nationalbank. kz/?docid=680&switch=russian.
3. Guide to Investment -2017. KAZAKH INVEST National Company JSC. Internet access: http://invest.gov.kz/uploads/ files/2017/02/24/investora-2017.pdf
4. World Economic Forum. Human-capital-report-2016. Internet access: http://reports.weforum.org/human-capital-report-2016/ economies/#economy=KAZ

for the creation of all the right conditions for Chinese investors.

The Head of State in his message, “The Third Modernization of Kazakhstan: Global Competitiveness” pointed out that it is necessary to effectively implement the joint investment program with China for the creation of production in Kazakhstan: “Agreements with the Chinese side have been reached. The objectives are set out. We need to work in a focussed way. It will be modern production with the creation of about 20,000 new jobs for the people of Kazakhstan”.

As a whole, the particular nature of Kazakhstan-Chinese economic cooperation means, first, the constant expansion of spheres of interaction already covering all the key financial and economic areas. From the implementation of individual joint projects, both countries have already moved to a systematic partnership in the economy, which allows for an orderly increase in the effectiveness of interaction, building the strategy. Second, another trend is a gradual shift of the emphasis towards joint working on promising high-tech industries that focus on high added value. This allows us to take into account and to seamlessly combine the goals and objectives of the two countries, promoting an upward trend in cooperation. For other countries and regions, this approach can serve as an example of mutually beneficial economic relations.

REFEREnCES:

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