China and Kyrgyzstan: Bilateral Trade and Future Outlook

Posted by Written by China Briefing Team Reading Time: 8 minutes

China and Kyrgyzstan are close neighbors sharing a long tradition of friendship. After establishing diplomatic relations and solving border issues, China and Kyrgyzstan have maintained comparatively close ties in trade, investment, regional affairs, and culture communication. Kyrgyzstan has been among the earliest supporters and participants of China’s Belt and Road Initiative (BRI) and the two countries are expected to deepen their mutual cooperation in areas like agriculture, infrastructure development and connectivity, and trade and investment facilitation.

China-Kyrgyzstan relations

China shares a 1,063 km border with Kyrgyzstan in the western region of Xinjiang. The border is punctured by two border crossings: Erkeshtam, 230 km west of the southern Xinjiang city of Kashgar, and Torugart Pass, situated further to the northeast at 3,752 m above sea level in the Tian Shan mountain range. The European route E60, which starts in Brest on France’s western coast, ends in Erkeshtam, and the Asian Highway 65 running from Termez in Uzbekistan to Kashgar runs through it. The Torugart Pass is traversed by a road that runs from the Kyrgyz capital of Bishkek to the city of Kashgar.

China and Kyrgyzstan established diplomatic relations in 1992, a year after Kyrgyzstan declared independence from the Soviet Union following its collapse. Disputes over where to draw the border between the two countries were initially a point of contention during the early diplomatic discussions but were later resolved in a border deal formulated in 1999 and ratified in 2002.

Relations between China and Kyrgyzstan remained somewhat distant in the 1990s with little economic or cultural exchange between the two countries, and China didn’t begin showing an interest in its neighbor until toward the end of the decade. Kyrgyzstan was one of the ‘Shanghai Five’, a grouping created in 1996 and a forerunner to the Shanghai Cooperation Organization (SCO), a security and trade body established in 2001.

Economic activity has risen considerably in the decade since 2010, with China growing from a small player to Kyrgyzstan’s largest trade partner and main source of investment.

China’s interest in Kyrgyzstan was elevated with the unveiling of the BRI in 2013. Kyrgyzstan, which is flanked by China to the east and Uzbekistan to the west, is strategically important to the BRI. Its location separates China from the rest of Central Asia and further afield to West Asia and the easternmost borders of Europe, and thus is key to opening and securing trade routes to the region. Its two border crossings, though still relatively remote, are also preferable to China’s almost impassable border crossing with Tajikistan, which otherwise could similarly provide a pathway to central Asia. This makes Kyrgyzstan not just a potential trade corridor to Uzbekistan and beyond, but also Tajikistan.

China is therefore eager to invest in infrastructure that will improve transport connectivity and facilitate the trade of goods. Potential projects have included the China-Kyrgyz-Uzbek Railway, which would provide the first trans-Central Asian railway from east to west and link up with wider regional transport networks, and an expansive free trade zone and logistics center in the border province of Naryn. However, the railway project has thus far failed to get off the ground, while the free trade zone project was abandoned following protests. Cross-border trade still relies on road transport and crossings are often congested; a situation that has been exacerbated by border closures due to the Covid-19 pandemic.

Relations between the two countries have mostly remained stable and friendly over the last three decades but have not been without tensions. Kyrgyzstan’s domestic instability has threatened the safety of Chinese citizens and investments. A frequently changing government has also disrupted progress, and internal protests against foreign investment projects, most notably attacks on gold mines run by Chinese and Canadian companies, have given Chinese investors cause for concern. The government has also moved to nationalize some of these projects in response to public opinion.

Despite this, China has maintained a pragmatic stance on its relationship with Kyrgyzstan, asserting its support for the incumbent government – of which there have been three in the past five years – and remaining steadfast in its commitment to developing and investing in the region.

In February of 2021, Chinese President Xi Jinping spoke to the newly elected Kyrgyz President Sadyr Japarov, reiterating China’s support for the government and expressing his hope that the country can achieve stable development. He also stressed the need for the two countries to cooperate on the security and stability of the country, as well as in the economy, trade, connectivity, agriculture, and other areas.

Xi said that China would continue to encourage Chinese companies to invest in Kyrgyzstan and welcome the import of agricultural products into China. In May 2021, China granted Kyrgyzstan US$54 million to support its economy, and pledged 150,000 vaccine doses to help fight the Covid-19 pandemic.

Foreign investment in Kyrgyzstan

Kyrgyzstan’s economy is relatively open, ranking between Switzerland and Norway on the Foreign Direct Investment (FDI) Restrictiveness Index. It has a competitive corporate tax rate of 10 percent, low labor costs, and relatively cheap electricity as a result of its abundant hydroelectric resources. Major flows of FDI to Kyrgyzstan began in the 2000s, benefitting mainly the country’s gold industry, and FDI has since concentrated on mining industries.

In terms of the business environment, Kyrgyzstan ranks 80th in the World Bank’s 2020 Ease of Doing Business Report. A series of legislative reforms based on global best practices on tax administration, permits, technical regulations, and inspection have helped create a relatively strong regulatory environment; however, the government’s limited enforcement capacity and poor quality of infrastructure reduce Kyrgyzstan’s competitiveness. The country does relatively well on scores for registering property (7th) and access to credit (15th) but performs considerably worse on getting electricity (143rd) and enforcing contracts (134th).

According to the 2020 World Investment Report released by the United National Trade Conference UNCTAD), in 2019, Kyrgyzstan received US$209 million in FDI flows and by the end of 2019, the country attracted a total of US$5.59 billion of FDI stock. Data released by the National Statistical Commission of Kyrgyzstan showed that most foreign capital flows into manufacturing and processing, science, finance, and mineral exploitation sectors. By region, FDI is mainly concentrated in the capital Bishkek as well as Chuy Region, Issyk-Kul Region, and Jalal-Abad Region.

China is the largest source of investment to Kyrgyzstan, accounting for almost half of the FDI inflows. It is also Kyrgyzstan’s largest creditor, holding more than 40 percent of Kyrgyzstan’s large external public debt.

In 2019, China invested US$301 million in Kyrgyzstan, followed by Canada (US$115 million), Switzerland (US$103 million), and Turkey (US$75.31 million). China’s investment and economic cooperation projects in Kyrgyzstan cover transportation, communications, electricity, mineral resources development, and agriculture.

China-Kyrgyzstan bilateral trade

China is Kyrgyzstan’s largest trading partner for imports as well the fastest growing import market over the past 10 years. For exports, China is Kyrgyzstan’s sixth largest trading partner in 2019.

Since the establishment of diplomatic relations between China and Kyrgyzstan, bilateral trade between the two countries has been on the rise.

China Kyrgystan bilateral trade

In 2019, the trade volume between China and Kyrgyzstan reached US$6.37 billion, up by 13.15 percent year-on-year, according to the data from the General Administration of China Customs.

China exported US$6.31 billion worth of goods to Kyrgyzstan in 2019. The main categories of China’s exports include apparel and clothing accessories, shoes, boots, leg warmers, and their parts, cotton, chemical fiber filament, machinery tools and parts, etc.

In return, Kyrgyzstan exported US$65.96 million to China, mainly including goods like ore, slag and ash, copper, rawhide and leather, mineral fuels, mineral oil, wool and other animal hair, fruit, etc.

China-Kyrgyzstan trade agreements

Bilateral investment treaty (BIT)

China and Kyrgyzstan signed a bilateral investment agreement in May 1992, which came into force in September 1995.

As BITs set out terms and regulations for private investors in the partner country, an important function of BITs is providing protection and guarantees for both individuals and companies in the host country. These are provisioned in addition to protections already guaranteed under a host country’s domestic laws and include mechanisms for foreign investors to raise and settle disputes in a neutral court should the host country fail on its obligations to protect their rights.

The existence of the China-Kyrgyzstan BIT guarantees that investors and companies from both countries receive the same treatment by the host country as that awarded to domestic investors or investors from a third country.

Agreement on Avoidance of Double Taxation (DTA)

China and Kyrgyzstan concluded an agreement for the avoidance of double taxation and tax evasion on June 24, 2002, in Beijing, which came into effect on March 29, 2003.

From an investor’s perspective, confusion about international taxation can arise when investors are subject to two different and potentially conflicting tax systems.

The existence of China-Iran DTA not only provides certainty to investors regarding their potential tax liabilities but also acts as a tool to create tax-efficient bilateral investments where applicable.

The Conference on Interaction and Confidence Building Measures in Asia (CICA)

China and Kyrgyzstan are both members of the CICA, an inter-governmental forum for enhancing cooperation towards promoting peace, security and stability in Asia established in 1992.

The forum is based on the recognition that there is close link between peace, security, and stability in Asia and in the rest of the world. Currently CICA has 27 member countries.

Member country of Shanghai Cooperation Organization (SCO)

Kyrgyzstan was one of the six original member countries of the SCO, the security and trade body that was established in China in 2001. Actually, Kyrgyzstan is also one of the five member countries of the Shanghai Five, the predecessor of the SCO founded in 1996.

The SCO is the largest regional organization in the world in terms of geographical coverage and population. The SCO has prioritized cooperation in security, economy, people-to-people exchanges, and outreach to non-SCO members. It has taken tough measures to crack down on terrorism, separatism, and extremism. With a focus on deepening the synergy between Belt and Road cooperation, development strategies of individual countries, and regional cooperation initiatives, the SCO has kept scaling up cooperation in trade, investment, connectivity, energy, innovation, and people-to-people exchanges. It is a serious entity – the Council of Heads of State of the SCO includes the leaders of each of the participating countries.

Currently, the SCO has eight member countries: China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Uzbekistan, India, and Pakistan. Although the members are formed by both Asian countries and European countries, the SCO is wildly regarded as “the alliance of the East” or “Asian NATO”, due to its growing focus on the Asia-Pacific region.

In 2019, the SCO’s annual summit was held in Kyrgyz capital, Bishkek. Russian President Vladimir Putin, Chinese President Xi Jinping, then Kyrgyz President Sooronbai Jeenbekov, and the leaders of other SCO member states met behind closed doors for what Bishkek called “narrow format” talks.

China-Kyrgyzstan trade opportunities and future outlook

Kyrgyzstan’s strategic location between Europe and Asia, its business environment, its global presence, and its trade and investment conditions have enabled it to become a base for production, procession, and commodity distribution and transshipment.

Kyrgyzstan and China have already built strong trade and economic ties thanks to their shared land border. Under various ongoing BRI-related projects implemented in Kyrgyzstan in road and energy infrastructure rehabilitation, urban development, mining, manufacturing and other sectors of the economy, the collaboration between the two countries is likely to become even greater.

As Kyrgyzstan continues to increase its exports to China, green and quality Kyrgyz agricultural products like honey and fruits can be found more often in ordinary Chinese households. Similarly, many Kyrgyz people have taken to online shopping, as e-commerce platforms give them a shopping experience like never before.

According to a speech address by President Xi Jinping in 2019, China welcomes the active participation of Kyrgyz companies in the China International Import Expo and stands ready to buy more quality agricultural produce from Kyrgyzstan. In addition, China will continue to do what it can to help and support Kyrgyzstan in its effort to grow its economy and better the lives of its people.

For example, to help Kyrgyzstan improve its underdeveloped infrastructure that hinders its advantage as a potential transit hub for goods and visitors between Chinese and Western markets, China has supported the implementation of several major infrastructure projects in Kyrgyzstan, such as the road projects to improve connectivity inside Kyrgyzstan and better connect the region with China, South and West Asia, and Europe.

With China continuously betting big with its BRI, the outlook of cooperation between China and Kyrgyzstan is positive. Investors interested in this region may pay closer attention to areas related to transport, infrastructure, foreign trade, and agriculture, among others.

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